Moody’s Downgrades Outlook on Rwanda to Negative
Moody’s Ratings has changed the outlook on the Government of Rwanda to negative from stable and affirmed the long-term local and foreign currency issuer ratings and foreign currency senior unsecured debt rating at B2.
According to the rating agency, the negative outlook reflects risks to Rwanda’s credit profile associated with the ongoing conflict in the eastern provinces of the Democratic Republic of Congo (DRC).
Notwithstanding renewed diplomatic efforts, including the meeting between the presidents of Rwanda and DRC in Qatar on 18 March, to de-escalate tensions and renewed calls for a ceasefire, the situation on the ground remains challenging with the territory taken and continued advances by the M23 rebels, Moody’s said.
“Even if, so far, there has been a limited impact on Rwanda from the conflict, the country is particularly exposed to a withdrawal of external financial support or a sharp decrease in tourism revenue.
“While these downside risks are not part of our baseline scenario, they have become more significant amid growing pressure from the international community, with some bilateral support to Rwanda recently suspended, albeit limited to-date.
“The government’s high foreign currency denominated debt burden exacerbates its vulnerability to a significant reduction in foreign exchange inflows; its ability to cope with a reduction in external funding and tourism revenue were such a scenario to occur – both significant sources of foreign exchange – would likely be constrained despite its history of effective policy management”.
Moody’s said the rating affirmation is supported by its baseline expectation that the hostilities in eastern DRC will not escalate significantly, diplomatic efforts to de-escalate tensions will continue, and that Rwanda will continue to receive support from development partners.
The B2 rating reflects Rwanda’s small and low-income economy, which is vulnerable to shocks, and its high government debt burden and exposure to challenging regional geopolitics.
Balanced against these challenges are its solid institutions and governance, which provide a degree of resilience, the country’s strong growth prospects, and limited liquidity risk due to its debt structure being skewed toward low-cost financing from the official sector.
Rwanda’s local and foreign currency country ceilings remain unchanged at Ba2 and B1, respectively.
The three-notch gap between the local currency ceiling and the sovereign rating balances relatively predictable and reliable institutions with a proven record of policy execution, against the government’s large footprint in the economy, the persistent regional geopolitical challenges it faces, and the country’s structural external vulnerability in the form of large current account deficits.
The two-notch gap between the foreign currency ceiling and local currency ceiling takes into consideration Rwanda’s reliance on external debt financing, albeit from stable sources, and the limited currency flexibility that raise the risk of transfer and convertibility restrictions being imposed.
Moody’s said the rationale behind the rating is the ongoing conflict in eastern DRC, which has sharply escalated over the past several weeks, poses significant risks to Rwanda’s credit profile as it could continue to intensify geopolitical tensions.
“While regional and international mediation efforts, including under the joint East African Community and Southern African Development Community process, have led to some diplomatic re-engagement and led to direct talks between the presidents of Rwanda and DRC in Qatar last week with renewed calls for a ceasefire, prospects for meaningful de-escalation or a long-term peace agreement remain bleak”.
On the ground, the M23 rebels are controlling the two largest cities in eastern DRC and making further advances. The underlying and longstanding issues of territorial integrity, national security and ethnic strife are also unlikely to be resolved without strong political will from all parties involved.
Pressure from the international community has been growing, including threats of financial support suspension to motivate negotiations.
For Rwanda, a significant withdrawal of financial support – particularly from multilateral development partners – is a key risk channel, although this is not part of Moody’s baseline scenario.
“Bilateral support has already tapered amid geopolitical tensions, in our view likely costing 0.7% of revenue or 0.2% of GDP in the coming fiscal year”.
However, Rwanda’s multilateral support is far more critical, accounting for about 60% of grants (or 0.6% of GDP) and 85% of low-cost loans from the official sector and 60% of total government debt.
For now, support from multilateral development financial institutions continues and there has been no indication of multilateral partners reviewing their relationship with Rwanda.
But were such a tapering or withdrawal of multilateral support to occur, it would heighten liquidity risk, Moody’s stated.
Indeed, in such a scenario, the government would need to rely on the domestic financial market, which is relatively small and can only provide funding in local currency at market costs.
The second risk channel for Rwanda’s credit profile is through a material reduction in tourism revenue, were the situation in eastern DRC to prompt tourism warnings in origin countries and deter tourist arrivals.
Tourism revenue represented around 5% of GDP in 2024, while the sector remains a key growth driver, jobs creator and foreign exchange generator. Significant investments with the new Bugesera airport are under way to leverage further the growth opportunity from the country’s attractiveness as a destination for ecotourism and large events requiring a safe and efficient operating environment.
However, the tourism sector remains confidence-sensitive and some of the tourist attractions such as Volcanoes National Park for gorilla trekking are located next to the border with DRC.
“While these downside risks are not part of our baseline scenario, they have become more significant as highlighted by the increasing pressure being exerted by the international community”, Moody’s said.
Rwanda’s high debt burden, which reached 77% of GDP at the end of 2024 and of which 82% is denominated in foreign currency, exacerbates its exposure to a significant reduction in foreign exchange inflows stemming from the downside risks.
Were such a reduction in multilateral financial support or tourism revenue to occur, the government’s ability to manage the resulting decrease in foreign exchange proceeds would likely be constrained.
Although the Rwandan authorities have demonstrated resilience in navigating external shocks through effective policies, sourcing new foreign exchange earnings and funding for the government would be challenging.
Specifically, while a reduction in the fiscal deficit through ongoing fiscal consolidation could limit government borrowing needs, the government still needs to finance approximately 2.5%-3% of GDP in external debt service. In addition, reliance on domestic funding in local currency at market rates would increase interest payments and likely undermine fiscal consolidation efforts. Seplat Energy Trades Flat Despite Price Sensitive Corporate Actions
