Fitch Ratings, an American credit rating agency, has maintained Rwanda’s debt repayment capacity to a ‘low’ level, but observed that the country’s strong governance including the rule of law, and economic growth potential, boost its ability to meet its financial obligations.
On October 28, the credit rating firm said it reaffirmed Rwanda's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Negative Outlook, the same performance it gave on Jul 21 last year when it revised the country’s outlook score to ‘Negative’ from ‘Stable’ earlier.
‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
Talking about key rating drivers for the current score, Fitch Ratings indicated that Rwanda's 'B+' rating reflects its low level of Gross Domestic Product (GDP) per capita – or the average income per Rwandan based on the annual monetary value of all the country’s goods and services – and persistent twin budget and current account deficits, which have resulted in high and rising public and external indebtedness.
However, it stated that "these weaknesses are balanced by strong governance relative to peers, high medium-term growth potential and the highly concessional nature of the country's public sector debt”.
Concessional debts are loans which have more generous terms than market loans. These generally include below-market interest rates, grace periods in which the loan recipient is not required to pay interests for several years.
It indicated that Rwanda has a robust growth outlook, pointing out that it expects real GDP growth of 5.9 per cent in 2022 and 5.5 per cent in 2023. Though this implies a deceleration from the strong rebound of 10.9 per cent in 2021 – after the country’s economy fell by 3.4 per cent in 2020 due to Covid-19 pandemic impact, Fitch said it is well above the 'B' median five-year average of 2.3 per cent (for 2022).
On the Negative Outlook for Rwanda, it explained that this reflects downside risks to fiscal consolidation and government debt stabilisation, risks from the adverse global economic and financing environment, and risks to grants and concessional government financing related to conflict in the Democratic Republic of Congo, according to Fitch Ratings.
Fitch Ratings said that it publishes credit ratings that are forward-looking opinions on the relative ability of an entity or obligation to meet financial commitments. Credit ratings are indications of the likelihood of repayment in accordance with the terms of the issuance.
Issuer default ratings (IDRs) are assigned to corporations, sovereign entities, financial institutions such as banks, leasing companies and insurers, and public finance entities (local and regional governments).
Fitch’s credit rating scale for issuers and issues is expressed using the categories ‘AAA’ (the highest credit quality denoting the lowest expectation of default risk) to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade) with an additional +/- for AA through CCC levels indicating relative differences of probability of default or recovery for issues.
High Government debt, dominated by concessional (generous) loans
Fitch observed that it expects Rwanda's general government debt to peak at 74 per cent of GDP in 22 before declining to 71 per cent by 24, mostly driven by strong nominal GDP growth.
"Our forecasts imply that Rwanda's government debt will remain well above the 'B' median of 56 per cent of GDP, but this is mitigated by the highly concessional nature of the debt stock,” it commented.
Still, it indicated that close to 88 per cent of external debt (75 per cent of the total stock) is concessional.