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

October 30, 2012 Standard & Poor's
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

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.
Company — Rwanda
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