The revision of Rwanda’s sovereign credit outlook to positive from stable will have multiple benefits to the nation as well as individual companies operating in the country, financial experts have said.
Fitch Ratings Ltd., the third largest rating agency in the world, this week upgraded Rwanda’s credit outlook and placed it at B, citing strong economic growth over the past years and prospects for stronger growth.
According to analysts, financial markets use ratings from reputable agencies such as Fitch, Standard and Poor’s (SP) and Moody’s Investor Service as safeguards when assessing risks.
Just like is the practice in commercial banks, borrowers who are considered less risky because of their clean credit record and their perceived ability to repay loans, often pay less interest.
Those, whose risk of default is perceived to be high, are charged high interest as lenders factor in the probability of failure to pay and the high cost of administration.
Standard and Poors has also rated Rwanda at B.
“Positive rating [will] build confidence among foreign and international investors,” said Andrew Kipruto, a dealer at BK Securities, a brokerage firm owned by Bank of Kigali.
According to experts, a high or positive rating for Rwanda means that the country’s credit worthiness is high because the likelihood of defaulting on its debt obligations is almost not there.
This means that the next time Rwanda returns to the international finance markets to issue a sovereign bond, the country is well positioned to push for lower interest on the loans.
In April, Rwanda issued its first $400 million Eurobond, which because of a robust economy at home, attracted a lot of the interest from foreign investors and was subsequently oversubscribed.
Rwanda’s improving image among financiers has not come on a silver plate. It is a result of rigorous scrutiny of the current economic indicators and the country’s long term economic outlook.
For example, in upgrading Rwanda’s rating, Fitch considered the country’s sustained high growth rate of annual gross domestic product (the total value of goods and services produced in a country).
Figures by independent organisations such as the World Bank and the International Monetary Fund (IMF), show the country’s gross domestic product (GDP) has grown at an average of 8.3 since 2005.
The most outstanding of all was last year’s growth rate of 8 per cent, the highest in the region despite challenges associated with a more than 20 per cent reduction in donor budget support and delay in releasing aid.
The message this sent out there was that although more than 40 per cent of the national budget is donor-supported, Rwanda is capable of good growth even with aid cuts or delays.
The economy is projected to grow at 7.5 per cent this year, well above sub-Saharan average of about 5 per cent, according to figures from the central bank.
The service sector (transport, hotel/restaurants, telecommunications etc) performed beyond projections to give the economy the much needed boost in the wake of a challenging global and regional economic environment.
Rwanda’s international rating is also being lifted by the ability to attract large investments by virtue of being the third-best place to do business in Africa, according to the World Bank’s Doing Business Report.
According to a statement released by Fitch, continued improvement in GDP growth, expansion of the revenue base, growth in exports, and reduction of deficits could lead to another upgrade.
At B rating, Rwanda is at the same level with countries that recently discovered oil such as Ghana and Uganda that has been upgraded from negative.
Local companies such as banks, that source for lines of credit to fund their operations also have reason to be happy about the country’s improved credit rating.
“Because companies operate in a country, their credit worthiness too can to a large extent be determined by the environment they operate in,” said a Ugandan financial analyst.
This means that improved country rating can enable companies to source cheaper loans.