Outlook On Rwanda Revised To Stable From Positive On Donor Support Uncertainties; Ratings Affirmed At 'B/B'

In our view, the potential for a sovereign ratings upgrade for Rwanda is diminishing with the weakening in its external environment, as some donors have suspended or delayed aid to the country. We are therefore revising our outlook on Rwanda to stable from positive. At the same time we are affirming our 'B/B' long- and short-term sovereign credit ratings on Rwanda. The stable outlook reflects our view that aid suspension will be short term and that the government will take offsetting measures to ensure that the impact on fiscal performance is limited. DUBAI (Standard & Poor's) Oct. 29, 2012--Standard & Poor's Ratings Services today revised its outlook on the long-term sovereign credit rating on the Republic of Rwanda to stable from positive. At the same time we affirmed the long- and short-term sovereign credit ratings at 'B/B'. The transfer & convertibility (T&C) assessment for Rwanda is 'B'. The outlook revision reflects our view that there is less than a one-in-three likelihood that we would raise the ratings on Rwanda in 2012 and 2013. There has been a spike in regional tensions between Rwanda and the Congolese government over the possible role that the former may be playing to support a rebel group that separated from the Congolese army in April. Concern over Rwanda's possible role in supporting this group has prompted several donors, including the U.K., The Netherlands, and Germany, to suspend or delay some of their donor assistance to Rwanda. While the suspended amounts are not particularly large--we estimate them at around 15% of total grant support expected in the 2012/13 budget--there could potentially be more-severe political fallout between Rwanda and international donors over the situation in the eastern Congo. We expect the government will be able to manage the short-term effects of the aid suspensions by tapping domestic sources of funding, using its international reserves, and taking measures to defer non-priority expenditures. However, we believe such measures could derail the government's investment plans and the economy's growth outlook. The instability in the eastern Congo is long-standing and has been a source of contention between the Congolese and Rwandan governments for some time. It remains to be seen whether the international community and Rwanda's development partners will tie the continuation of their financial support to these governments finding a lasting solution to restoring stability in the eastern Congo. So far, the U.K. has disbursed some of the funds that had been initially suspended. It remains unclear whether other donors will follow suit or further delay or withhold aid disbursements. If suspensions translate to permanent cuts in aid, this will have serious consequences for the financing of Rwanda's fiscal and current account deficits. Permanent aid cuts would also highlight Rwanda's vulnerability to the external environment: the government depends on donor grants for about 40% of its budget. Our ratings on Rwanda are constrained by its low per capita income; its structural current account deficits reflecting mostly the narrow, albeit growing, export base; and political and security risks. The ratings are supported by its good economic growth performance (per capita GDP growth of about 5% annually over the last decade), decisive market–oriented reforms, and good macroeconomic management. On the basis of its sound macroeconomic framework, Rwanda has been able to effectively use the donor assistance that it has received over the last two decades. The economy performed well in 2011 and growth remained robust in the first half of 2012, on track to meet the 7.7% growth target for the year. We estimate real per capita GDP growth was 5.2% and we forecast 4.6% for 2012. Inflation declined in September 2012 to 5.6% from 8.4% at end-2011, mainly driven by lower commodity and food prices. The fiscal outturn in July 2011 to June 2012 has outperformed the 2011/2012 budget, with a deficit of about 1.2% of GDP. At end-June 2012, the country's international reserves covered 3.4 months of current account payments. The stable outlook reflects our view that aid suspension will be short term and that the government will take measures to ensure that the impact on fiscal performance is limited. We could lower the ratings if Rwanda's external liquidity were to deteriorate significantly, say as a result of an extended delay in aid disbursements. The ratings could also come under pressure if regional conflicts derail Rwanda's economic performance and if fiscal performance were to weaken. We could raise the ratings if we see that Rwanda's reform momentum translates to a tangible broadening in its growth and export base, and if the monetary policy framework is strengthened while safeguarding macroeconomic and financial sector stability.

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