(The following statement was released by the rating agency)
Dec 29 -
— We are assigning our ‘B/B’ long- and short-term foreign- and local-currency sovereign credit ratings to the Republic of Rwanda.
— The ratings balance our view of the challenges of a low income country with a troubled past, with low government debt and moderate fiscal deficits.
— The positive outlook reflects our view of the government’s reform agenda and its track record of implementing policies that have delivered about 5% per capita GDP growth over the past decade, and which we believe could improve its external position and monetary policy performance such that we could raise the ratings in 2012 or 2013.
— With this new rating, Standard & Poor’s now rates 128 sovereigns worldwide.
Standard & Poor’s Ratings Services today assigned its ‘B’ long-term foreign- and local-currency sovereign credit ratings to the Republic of Rwanda. At the same time, we assigned our ‘B’ short-term foreign- and local-currency ratings. The outlook is positive. We have assigned a transfer and convertibility assessment of ‘B’. With this new rating, Standard & Poor’s now rates 128 sovereigns worldwide.
The ratings are constrained by Rwanda’s per capita income, which, at US$540 in 2010, is still lower than peers’ despite having doubled since 1998. Rwanda’s structural current account deficits, mostly reflecting its narrow export base, further constrain the ratings. Rwanda relies on aid to finance its fiscal and current account deficits, and we expect donor inflows will remain stable given the government’s track record and pro-growth agenda. Despite the political stability achieved under President Paul Kagame and his leadership of the Rwandan Patriotic Front during the last 15 years, we see lingering risks from Rwanda’s tragic history, from possible unrest in the neighboring region, and from its population potentially becoming frustrated with the government’s top-down approach to economic management.
The ratings on Rwanda are supported by our assessment of its good economic performance over the last decade. Decisive market-oriented reforms, good macroeconomic management (anchored by the so-far-successful implementation of four consecutive IMF programs), and significant donor support (equivalent to about 13.5% of GDP on average over the decade) have delivered per capita GDP growth of about 5% over the last decade. The government’s goal, detailed in its “Vision 2020” roadmap, is to transform Rwanda into a service-based middle-income country by 2020. It has invested significantly in infrastructure and skills development and has made continuous reforms to improve the business climate. In the World Bank’s Ease of Doing Business index, Rwanda ranks as one of the most business-friendly countries in Africa.
Rwanda’s external balance sheet also improved significantly after it received substantial debt relief from official creditors in 2005 and 2006 through the Highly Indebted Poor Country and Multilateral Debt Relief initiatives. The ratings are further supported by our medium-term projections of moderate general government fiscal deficits over the medium term, which should keep net general government debt at less than 15% of GDP.
We attribute Rwanda’s structural current account deficits to its narrow export base and large investment needs. Tea and coffee account for about half of Rwanda’s exports, and total exports of goods were only about 5.5% of GDP in 2011. Conversely, transfers made up about half of current account revenues in 2010, and the current account deficit is largely financed by donor flows. We expect the current account deficit to deteriorate temporarily over the medium term because of large imports for public-sector infrastructure projects and private-sector investment. However, we believe the reserve coverage should remain comfortable. Overall, we estimate that gross external financing needs will remain in the range of other ‘B’ rated sovereigns at around 120% of current account receipts plus reserves.
We view Rwanda’s macroeconomic policy mix as broadly appropriate and we observe a good collaboration between fiscal and monetary institutions. We see monetary policy being conducted under the difficult twin mandate of price stability and supporting economic activity. Although inflation has mostly remained in single digits recently, it has fluctuated significantly. Furthermore, we note that the transmission of monetary policy is limited, partly because the financial system is in early stages of development. In that regard, we view positively the government’s efforts to increase access to finance but we are concerned that the recent establishment of a large number of credit cooperatives might be too quick to ensure their adequate management and supervision.
The ‘B’ transfer and convertibility assessment reflects our opinion that the likelihood of the government imposing exchange restrictions preventing nongovernment debt service is roughly equal to the likelihood of the government not servicing its own debt on time.
The positive outlook reflects our view that we could raise the ratings in 2012 or 2013 if the government’s efforts to diversify its export base begin to bear fruit and if the central bank can keep price inflation in check and preserve financial stability at a time when credit cooperatives are expanding, while maintaining Rwanda’s other credit metrics.
On the other hand, if the social contract begins to fray, regional conflicts hamper Rwanda’s economic performance, or the government’s fiscal performance deviates from past performance (possibly because of reduced aid flows), then we could affirm the ratings at the current level.
— Sovereign Government Rating Methodology and Assumptions, June 30, 2011
— Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009