Fitch Affirms Rwanda at B+, Projects 6.5% Economic Growth
Fitch Ratings has affirmed Rwanda’s credit rating at ‘B+’ with a stable outlook. In its latest update, Fitch stated that Rwanda’s ‘B+’ rating reflects its low level of gross domestic product (GDP) per capita and persistent twin budget and current account deficits.
It believes that these macroeconomic weaknesses have resulted in relatively high public and external indebtedness.
According to the ratings, these weaknesses are balanced by the highly concessional nature of the country’s debt, strong governance indicators relative to peers, high medium-term growth potential, and strong performance under its IMF’s Policy Coordination Instrument (PCI) and Resilience and Sustainability Facility (RSF).
Fitch expects Rwanda’s real GDP growth to remain robust in From 8.2% in 2023 to 6.5% and 6.4% in 2024 and 2025, respectively.
The country’s growth in 2023 was primarily driven by resilient household consumption, buoyed by an improving labour market and credit expansion, as well an improvement in investment.
Over the forecast horizon, Fitch analysts expect economic activity to be supported by stronger foreign investment, in particular construction of the Bugesera airport, but also improvement in net trade as well as a decline in inflation.
“Our forecasts imply that Rwanda’s growth will remain well above the forecast ‘B’ median average of 3.4% in 2024-2025. We project average inflation to fall to 6.6% in 2024 and 5.9% in 2025, from a multi-year high of 14.3% in 2023.
“This will be driven by base effects and stronger domestic food supply in 2024, and declining global Brent and food prices through 2025”, Fitch Ratings stated.
It noted that the country’s headline inflation already declined significantly to 5.0% in January 2024, from 20.7% in January 2023. Core inflation followed the same trajectory, falling to 5.4% in January 2024 from 15.3% in January 2023.
Meanwhile, Fitch forecasts Rwanda’s fiscal deficit to remain broadly unchanged at 6.3% of GDP in the fiscal year ending June 2024, from 6.4% in 2023, and to then narrow to 5.1% of GDP in 2025.
“We expect total government revenue to decline in 2024, due to lower grant disbursements and tax exemptions rolled-out to support the post-pandemic recovery. This will be offset by a decline in capital expenditure, as pressures will remain on expense from floods’ reconstruction costs and the 2024 presidential election”.
Increased revenue, driven by the end of exemptions and new policy measures (VAT on new products, increase in excises and higher fuel levy), and lower spending on reconstruction and elections will lower the deficit in 2025, Fitch said.
The global ratings agency forecasts the debt/GDP ratio to stabilise at 76.0% of GDP through 2024-2025, following an increase to 73.5% of GDP in 2023 from 67.5% in 2022.
The rise in debt in 2023 was primarily driven by the sharp depreciation of the Rwandan franc (18.0% year on year), given the high share of external debt (close to 77.0% of the total debt stock).
The increase in debt over the forecast horizon will reflect further exchange-rate depreciation and still wide fiscal deficits, partly offset by expected strong nominal GDP growth. Our forecasts imply that Rwanda’s public debt will remain well above the projected ‘B’ median of 52.3% of GDP in 2025. Naira Suffers Big, CBN Goes Ballistic Against FX Whale
Analysts said risks to Rwanda’s public finances are mitigated by the highly concessional nature of its external debt, translating into favourable debt-affordability metrics. The weighted-average interest rate of its external debt is 1.7%, with an average 15 years to maturity.
“We expect government external amortisations to remain low, at 1.2% and 1.0% of GDP in 2024 and 2025, respectively (from 1.5% in 2023). The country’s next Eurobond amortisation is due in 2031, following the repayment of its 2013 Eurobond in 2023”.
According to Fitch update, external financing commitments to Rwanda are high and mostly under concessional terms. Fitch estimates external disbursements at between USD800 million to USD900 million a year between FY2024 and FY2026, including budget and project loans.
Most of these loans are from multilateral lenders, in particular the World Bank and the African Development Bank. External support is further enhanced by Rwanda’s strong performance under its PCI and USD319 million RSF with the IMF in 2023.
In addition, Fitch expects Rwanda’s current account deficit (CAD) to narrow to around 10% of GDP over our forecast horizon, from 11.6% in 2023. The lower CAD will reflect a narrower trade deficit, after the sharp depreciation of the exchange rate in 2023 as well as lower food imports.
“We also expect financial account inflows to remain strong, namely net foreign direct investment and loans to the government. This will translate into an increase in international reserves to USD2.1 billion by 2025 from USD1.8 billion at end-2023”.
Fitch does not expect the outcome of the 2024 presidential election to have an impact on domestic political stability or materially alter the direction of economic policy. The security situation in neighbouring Democratic Republic of Congo has deteriorated since the end of 2023.
Fitch’s base case is that international inflows of grants and concessional financing will not be adversely affected by the role of forces linked to Rwanda in the escalation of the conflict.
