Moody’s: Coronavirus Shock Could Raise Rwanda’s Credit Risks

Moody’s Investors Service, (“Moody’s”) has this Thursday changed the outlook on the Government of Rwanda to negative from stable and affirmed the B2 long-term issuer rating, Chimp Corps report.

“Rwanda is vulnerable to persistently weak demand and changes in behavioral patterns in the aftermath of the pandemic. Rwanda’s investment in the transport and tourism sectors may see lower future returns should travel demand and international trade remain below pre-coronavirus expectations for a significant period of time,” said Moody’s in a statement this Thursday.

“Should these downside risks materialize, Rwanda will be left with a higher debt burden without realizing the higher value-added growth necessary to generate foreign exchange earnings and tax revenue to service the associated higher debt load.”

The internationally reputable Moody’s ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default.

The negative outlook reflects the risks the coronavirus pandemic may durably impair certain sectors of the economy, such as transportation and tourism, potentially lowering the returns on past government investment.

“Lower growth in turn would make fiscal consolidation more challenging, raising the credit risks associated with Rwanda’s relatively high debt burden, which had been rising before the coronavirus shock and is being exacerbated by it,” said Moody’s.

The coronavirus shock calls into question Rwanda’s largely debt-financed development model which focused on increasing trade and promoting Meetings, International Conferences, and Events (MICE) activities.

Prior government investment has driven strong growth of exports, such as tourism and transport services, while Rwanda has increasingly positioned itself as a transit hub and re-exports of goods from East Africa’s ports and Democratic Republic of the Congo.


The associated large upfront capital costs, which have been reflected in a growing debt burden before the pandemic, were to be absorbed by persistent high growth, foreign currency earnings and government revenue in the future.

Effect of Coronavirus

The coronavirus shock has exacerbated a trend of weakening fiscal strength, which was underway prior to the crisis.

Moody’s said lower growth together with fiscal stimulus in response to the crisis will widen the fiscal deficit, resulting in Rwanda’s debt burden rising to over 70% of GDP by fiscal 2021 (fiscal year ending June 30, 2021) compared with 52% of GDP in fiscal 2019.

“The higher debt burden leaves the sovereign with less fiscal space to absorb future shocks. Unless the deterioration in the fiscal balance is reversed, Rwanda’s liquidity risks will increase given its limited financing options,” said Moody’s.

“Immediate liquidity risks are contained as Rwanda’s larger financing needs will be met through concessional loans from international financial institutions. Given Rwanda’s limited financing options, larger financing needs would put pressure on the sovereign’s debt servicing capacity.”

A high share of foreign-currency-denominated debt (over three-quarters of total debt) also exposes the government’s fiscal strength to a marked depreciation of the currency.

Additionally, the stock of government guarantees represents a contingent liability to the government. Government guarantees stood at 4.5% of GDP at the end of 2019.

Some of these guarantees were provided to key state-owned enterprises (SOEs) like Rwandair, the Kigali Convention Center, and the Bugesera Airport, which are being severely negatively affected by the coronavirus shock. Given the strategic importance of these SOEs, Moody’s expects the government to provide support if necessary.

On a positive note, Moody’s said the affirmation of the B2 rating is supported by limited financing risks despite the increase in borrowing requirements.

“External financing provided by multilateral institutions and other development partners will help meet the government’s larger financing needs and limit immediate liquidity pressure,” said Moody’s.

“The B2 rating is also supported by the government’s track record of effective policymaking and macroeconomic management, leveraging support from international financial institutions. These credit strengths are set against Rwanda’s small size and low income levels, which severely constrain the sovereign’s shock absorption capacity despite its historically very high growth rates.”

The rating affirmation also takes into account Rwanda’s elevated susceptibility to event risk, mainly driven by political risks and external vulnerability risk.

Rwanda’s local-currency bond and deposit ceilings remain unchanged at Ba2. The foreign-currency bond and deposit ceilings also remain unchanged at B1 and B3, respectively.

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