Rwanda ready to be rated

An average 8 percent yearly economic growth rate, a controlled inflation rate: Rwanda seems to have it all. By the end of 2011, the country wants to cash in on the trust that these numbers generate amongst foreign investors. But before Rwanda can do business on the international financial markets, it is in desperate need of good ratings.

Credit ratings are issued by companies like Standard and Poor’s, Fitch or Moody’ and are comparable to report cards that judge the credit ratings of nations and multi-national companies. The financial market uses these ratings as a safeguard. If a country like Rwanda gets a high rating it will have to pay less interest on the loans it wants to attract.

Rwanda currently holds a B-rating from Fitch Ratings Ltd., the third largest rating agency in the world. On the scale of ratings (AAA to D), B is still considered to be a speculative grade. Some financial institutions only invest in bonds rated BBB or higher.

Financial beauty contest
“We are looking forward to do business on the money markets; it makes me proud that Rwanda is ready for it,” says Ms Kampeta Sayinzoga, Permanent Secretary at the Rwandan Ministry of Finance. “By issuing these bonds we want to generate money for the next two to five years, money we need for pipelines, the railways and the airport. This money can’t be generated internally.”

A recent report on African economics by the authoritative assurance and tax consultant Ernst &Young praises Rwanda for creating an “extremely friendly” business environment, despite a poorly educated population. Reports like these come in handy, because Rwanda is presenting itself as if it were a financial beauty contest.

Creating competitiveness
According to Bob van der Bijl, managing director of the Netherlands Africa Business Council, the credit rating of a country like Rwanda is not a far-away macro-economic story. “Companies can never score a higher credit rating than the country they are located in. An improved country rating should lead to a lower interest on loans to companies.” On top of that, a country rating gives another incentive to countries to improve their macroeconomic framework. It becomes more transparent how they are doing compared to other countries.”

Van der Bijl also believes that ratings create competitiveness amongst African economies, challenging each other to do better. “Certainly, there is peer pressure! African countries want end up as high as possible on the lists that the World Bank publishes.” In 2010, Rwanda ranked number one in the World Bank ‘Doing Business’ report.

Donor aid not a bad thing
Associate professor Dennis Vink, director of the Center of Finance at Nyenrode Business University in the Netherlands, explains how the credit agencies rate countries like Rwanda. “First of all, it has to be examined if a country can pay its debts. But they also look at the legal system in a country. Do creditors have enough rights and is there a decent court system to settle disputes?”

Bob van der Bijl hopes that Rwanda will receive a better rating soon. But there might be a problem, because 40 percent of the Rwandan 2011-12 national budget is funded by donor countries. “I think that this is the Achilles heel of Rwanda. The country needs a solution for this dependence as soon as possible.”

But professor Vink does not believe that receiving donor aid is necessarily bad for a country’s reputation on the international money market. “If you have been receiving aid for ten years, and it’s plausible that the budget will be funded for another ten years, it’s a perfectly legitimate source of stability to prove your solvency.”

‘Free money’
This seems to be conflicting with the Rwandan president Paul Kagame’s promise to lower his country’s dependency on foreign aid. Vink disagrees. “Lending money on the international financial markets while enjoying budget support means that you create money now, money that has been promised to you on the long term anyway. This speeds up internal spending and economic growth. I don’t see the problem.”

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Mrs Kampeta Sayinzoga at the Rwandan Finance Department names another benefit. “Free money is never free. When we lend money on the international market, we know what we sign up for and we can use the money without any strings attached.”

Good benchmark
Mrs Kodeidja Diallo is the Director of Financial and Risk Management at the African Development Bank. “Uganda is an example of how a country can benefit from a rating. And although Rwanda does not have any oil like their neighbours, they created a great business environment, put a good economic governance structure in place and committed to poverty reduction.” Diallo can’t predict what rating Rwanda will receive in the next few months, but she foresees a bright future. “The B-rating by Fitch is a good benchmark; Rwanda will probably have something above that, because the country has improved significantly since receiving the Fitch rating in 2010.”