Rwanda: Downgrade from 6/7 to 7/7 for medium- to long-term political risk
The tourism sector, the dominant export revenues source prior to Covid-19, took a battering
The tourism sector, the dominant export revenue source prior to the Covid-19 (accounting for a fifth of total exports of goods and services in 2019) is heavily impacted by the pandemic. The sector is still in limbo as receipts tumbled by 75% in 2020 and hardly rose this year. Recovery is expected as of 2022, provided no new contagious Covid-19 variant spreads. Looking ahead, the tourism success also crucially relies on political stability in the country and on security in a very unstable region. In addition, food exports (e.g. coffee and tea), the dominant export revenue source since the Covid-19 pandemic, are very exposed to weather and natural shocks, locust infestations and volatile prices. President Kagame had begun the process of diversifying the economy already, by gradually making the country a regional hub for business and political events. However, this sector could also suffer, for an extended undetermined period, from the Covid-19 shock and the future new business behaviours.
Since 2019, Rwanda has seen a rapid deterioration of its financial risk
Rwanda has seen a rapid debt build-up over the past few years, fuelled by large public infrastructure investments under Rwanda’s “National Strategy for Transformation” (2017-2024) and more recently by the Covid-19 shock. As a result, external debt neared a record 80% of GDP in 2020 and is forecast to continue to increase in the following years. This negative trend is explained by the need to finance a structurally huge current account deficit. Current account deficits have been relatively elevated in the past years on the back of strong infrastructure-related imports, while the decreased current account receipts (explained by lower tourism revenues) are expected to keep its current account deficit elevated in the coming years (see graph 1). Rwanda is very reliant on external financial support to cover current account deficits, from foreign aid to debt, as the business-friendly country receives insufficient FDI inflows to cover its large current account deficit.
Public finances have weakened
As public debt is 60% external, it followed the rising path of the total external debt and accelerated in 2020-2021 due to the Covid-19 shock on public finances (weakened revenues) and fiscal stimuli (including health spending). As a result, the public debt-to-GDP ratio is expected to rise to 79% of GDP in fiscal year 2021, coming from a moderate 36% of GDP in the end of 2015. It is forecast to rise to 81% of GDP by 2023 – before slowly falling – as a result of increased National Strategy for Transformation (NST) investment spending in high-value sectors and economic diversification to raise potential growth. Faced also with a burden of interest payments, weighting more than 10% of public revenues as from next year, Rwanda is committing to fiscal consolidation, together with macroeconomic stability, in the frame of the IMF’s (non-financial) Policy Coordination Instrument (PCI). Approved in mid-2019, it has been extended by one year until mid-2023 to accompany its NST reform agenda. Although the public external debt stock is mainly concessional and owed to multilateral creditors, its commercial share is growing and expected to rise further in the MLT. In the summer, Rwanda tapped into the financial markets to refinance its sovereign debt. Given its large financing needs and heavy external debt, in the future Rwanda might have to borrow more actively at higher costs in the case of less favourable market conditions, making the country more vulnerable to rollover risks and to currency depreciation risks. In addition, deteriorating debt dynamics are explained by the Rwandan Franc’s steady depreciation, as it lost an annual 5% against the US dollar over the past decade (and 9% since the start of the pandemic by the end of October). Depreciating pressures are likely to persist on the back of a huge current account deficit and heavy external debt affecting investor sentiment.
Rwanda experiences political stability in part due to President Kagame’s political dominance
President Paul Kagame dominates Rwanda’s political landscape, with the ruling Rwandan Patriotic Front (RPF) largely subservient to him personally. President Kagame was re-elected for a third term in 2017, after changing the Constitution allowed him to run, with a whopping 98.8% of the vote. Rwanda currently experiences high levels of political stability and general security due to President Kagame’s political dominance. The Constitutional changes allow President Kagame (63 years old) to rule until 2034. Nevertheless, a clear successor will be important for political stability in the long term.
Slow vaccination rollout compared to advanced economies could hurt economic activity
In 2020, the Covid-19 and tourism shock led to Rwanda’s first real GDP contraction (-3.4%) in 25 years, after an impressive 8.7% average growth. The GDP growth rebound is currently expected to reach 5.1% this year before climbing to 7% and 8.1% in 2022 and 2023 respectively. That said, the ongoing global pandemic uncertainty and slow vaccination rollout compared to advanced economies are clouding the macroeconomic outlook. The country will remain vulnerable to Covid-19 waves, despite its rapid vaccination rate compared to other Sub-Saharan countries. Indeed, Rwanda has been a frontrunner in vaccination in Sub-Sahara Africa with 20% of its population fully vaccinated on 15 November. Nevertheless, the Rwandan population is not expected to reach herd immunity before 2023. More contagious variants of Covid-19 could mean that a greater proportion of the population needs to be vaccinated, moving the expected date to reach herd immunity well into the future. Hence, as long as Covid-19 waves could gain momentum both in Rwanda and globally, economic activity could be impacted in the future.
Political risk ratings
Rwanda has seen a rapid debt build-up over the past few years. Projections show a further rise in external borrowing – with a likely rising commercial share - to finance wide current account deficits. Hence, external debt dynamics are assessed to be unsustainable in the medium to long term. Therefore, Credendo has decided to downgrade the MLT political risk (which assesses the solvency risk) on Rwanda to category 7/7. For the ST political risk rating (which assesses the liquidity risk), Rwanda is in category 4/7 thanks to its relative low short-term external debt levels. Moreover, foreign exchange reserves remained adequate, around 6 months of import cover, during the past two years thanks to external financing and the recent 220 million USD from IMF’s extraordinary SDR allocation.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com