Sovereign Analysis / Rwanda

Rwanda: Less potential but more progress than regional peers

  • Ethiopia has more manufacturing potential, but Rwanda’s model is more sustainable and high growth will likely return
  • Transition to private sector model still required amid growing debt, but progress to this end has been substantial
  • Latent fiscal and political risks remain a concern
Rwanda: Less potential but more progress than regional peers

We recently published a “Manufacturing Scorecard” for Sub-Saharan Africa (SSA; here), and followed it with an analysis of Ethiopia’s growth model (here). Building on that work, this report analyses the growth model of Rwanda, which has made significant economic strides since its 1994 genocide.

Rwanda has averaged real GDP growth of 8.8% annually over the past 25 years and 7.4% over the past decade, the fifth-highest growth rate globally and second only to Ethiopia in SSA. Although the IMF has revised its 2020 growth forecast from 5.1% to 2%, Rwanda is expected to return to 8% over the medium term.

Like Ethiopia, Rwanda is pursuing a state-led growth model that requires a shift to the private sector to sustain it over time. And also like Ethiopia, Rwanda is attempting to industrialise from an incredibly low base (manufacturing is 6% and 8% of GDP, respectively – the lowest in SSA and compared with a 17% global average).

However, Rwanda’s model is distinct in several ways. First, it also has a young and cheap labour force, but manufacturing wages outstrip those in Ethiopia by c55% and surpass those in regional peers such as Uganda and the Democratic Republic of Congo (DRC). In addition, as a tiny nation of c12.5mn people, Rwanda does not have the domestic consumer base or labour force necessary to sustain large-scale manufacturing as Ethiopia does.

Second, Rwanda’s international competitiveness has vastly improved, with its ease of doing business ranking improving from 143 at inception in 2008 to 38 in 2019 (after becoming the first low-income country to crack the top 30 in 2018) and its corruption perceptions rank improving from 121 in 2006 to 51 in 2019.

Rwanda not only ranks well above Ethiopia on these indicators but is just behind Mauritius as SSA’s highest-ranking country on ease of doing business and economic freedom and behind only the Seychelles and Botswana on corruption perceptions. Rwanda also leads the way globally on gender equality, with the highest percentage of female MPs.

As a result, Rwanda scores highly on indicators of governance on our SSA manufacturing scorecard. However, its small size and low levels of human capital lead to low rankings on both “scaled and cheap” and “higher tech” manufacturing.

With a small labour force and low levels of human capital, Rwanda is simultaneously outboxed by larger regional manufacturers such as Ethiopia and Kenya and unable to pursue the higher-tech service-based model implemented successfully in smaller countries like Singapore.

State-led but with a strong focus on private sector shift

Rwanda has thus been forced to pursue a more targeted growth model. The government aims to turn Rwanda into a regional trade, logistics and conference hub, and has constructed several international hotels, a convention centre and an inland container terminal in Kigali to this end.

Construction of the new Bugesera International Airport is also underway at an estimated cost of US$1.3bn (financed 40% by the government and 60% by Qatar Airways) and is expected to begin operation in 2021. Along with Rwanda’s rock-solid reputation in the areas of crime and safety, the government hopes these efforts will turn Rwanda into a regional business services hub.

More generally, Rwanda’s tourism sector has been its main FX earner, reaching over US$400mn in 2019 (c4% of GDP). Aside from business travel, Rwanda’s mountain gorillas are a major attraction and contribute c15% of tourism revenue. In 2017, the government doubled the cost of permits to view the gorillas from US$750 to US$1,500 per person in a bid to reduce human exposure for the animals while boosting revenue.

Rwanda’s high reliance on tourism makes it particularly vulnerable to Covid. Although RwandAir resumed flights on 1 August after a month of suspension, the IMF forecasts a sharp 80% contraction in tourism revenue this year. Over the longer term, Rwanda’s high growth rates may be difficult to sustain if Covid brings about a structural shift in global trade, travel and tourism.

Beyond services, Rwanda is seeking to develop a manufacturing sector focusing on textiles and agro-processing. To promote local industry, the government has launched the “Made in Rwanda” initiative, a marketing campaign to raise awareness about locally manufactured goods. The government complemented this with a ban on second-hand garment imports, a move that has raised the ire of the US.

Unlike Ethiopia, which has seen stagnant export growth in nominal terms and a contraction relative to GDP, Rwanda’s model has so far yielded a steady uptick in exports.

However, like Ethiopia, growth has so far been driven largely by the state. In fact, private investment in Rwanda remains far below that of Ethiopia and has failed to increase relative to GDP over the past decade. Overall, public investment has directly accounted for c25-35% of growth over the past five years.

Twin deficits on the rise

Public investment has driven debt higher in recent years, rising from 20% to 58.5% of GDP over the past decade (including c6% of GDP of guaranteed debt). The IMF expects debt to continue rising to c68% of GDP this year and c76% of GDP over the medium term.

Although the government has made it a point to reduce reliance on grants (which fell from 10.4% of GDP in 2010/11 to 4.4% of GDP in 2019/20), the concessional nature of non-grant financing (with 80% of debt owed to multilateral and bilateral creditors) has kept the interest burden low, at only 1.6% of GDP (c7.5% of revenue). As such, the present value of Rwanda’s debt was only 48.2% in 2019 and the IMF assesses the risk of debt distress to be "moderate" (revised from "low" pre-Covid).

That said, there is a risk that contingent liabilities will materialise and continue to push up the debt stock. Budget figures already include support of c1.2% of GDP to state airline RwandAir and a similar amount for the electricity sector, while the government recently provided a US$520mn (5% of GDP) guarantee for the Bugasera airport. Ongoing support for key state-owned enterprises like RwandAir is likely required, with the IMF forecasting transfers of 0.4% of GDP over the next two years.

Moreover, the IMF estimates that Covid has led to a 7.3% of GDP hit to the budget over the next two years, reflecting 3.3% of GDP of government spending and 4% of GDP of revenue losses. This will push the budget deficit from 6.3% of GDP in 2019/20 (already double the 2016/17 level) to 12.3% of GDP in 2020/21. Alongside increased outlays on the Bugasera airport and falling revenue from exports and tourism, Rwanda’s twin deficits will widen to unsustainable levels in 2020.

Rwanda’s existing IMF program says that the government’s “debt-creating deficit” (defined as the overall balance excluding contingent liabilities already in the DSA and UN peace-keeping operations) cannot exceed 5.5% of GDP on a five-year rolling average basis (consistent with Rwanda’s debt-stabilising primary deficit of c4% of GDP), but the rule is not legally binding. This implies a necessary consolidation of c1% of GDP relative to the 2019 outturn or c6% relative to the 2020 forecast.

To cover the 2020 financing gap, Rwanda has already received US$220mn of emergency funding from the IMF, is mobilising concessional resources and domestic bank financing, and could apply for participation in the G20 debt service suspension initiative (DSSI; which would save cUS$17mn). This should minimise the impact on reserves, which have recovered in recent years and sit at c6 months of goods and services imports. 

Private transition underway, but risks remain

Looking ahead, Rwanda appears to be well ahead of Ethiopia on its transition to a more private sector-driven growth model. First, it is clear that Rwanda’s progress on benchmarks of ease of business, economic freedom and governance makes for a more market-friendly environment. But the government has also put in place several concrete policies to promote private investment.

In 2009, the government established the Rwanda Development Board (RDB) with a mission to “Fast track economic development in Rwanda by enabling private sector growth.” The RDB provides useful information for investors, highlighting investment opportunities and available incentives (see here).

Incentives include a seven-year tax break for companies investing in key sectors like health care, education, manufacturing and tourism, a 0% corporate income tax (CIT) for companies that set their regional offices in Rwanda (versus 15% for others), and a five-year tax holiday for microfinance institutions, among others.

Rwanda’s private sector federation also recently launched a digital platform to provide useful information pertaining to financial advisory services, access to finance, access to business training and policies related to doing business.

Rwanda’s small size limits its manufacturing potential relative to Ethiopia, but it has clearly established a more conducive environment for private sector growth and investment. Moreover, it is not clear that Rwanda needs a large domestic market and labour force to become a manufacturing hub given its East African Community (EAC) membership, giving it access to a market of c160mn consumers and proximity to another c35mn consumer market in the eastern DRC.

Much like Ethiopia, Rwanda is a landlocked nation and needs reliable regional transport networks to unlock its manufacturing potential. Rwanda is a member of both the Northern Corridor (with Kenya, Uganda, South Sudan and Ethiopia) and Central Corridor initiatives (with Burundi, DRC, Tanzania and Uganda), with the successful completion of either likely to significantly reduce transit cost and time.

However, as we have previously reported (here), progress on regional railway projects has been limited, and it could be many years before Rwanda benefits. Kenya is struggling to finance the second phase of its railway (which will bring it to the Ugandan border) after accumulating cUS$200mn of losses over the first three years of operation and defaulting on cUS$370mn of payments to China’s Africa Star Railway Operation Company, while Tanzania’s railway is still in the early stages. If these projects fail to come to fruition, Rwanda will be left without a low-cost way to get its goods to port.

Rwanda also lacks a catalyst like Ethiopia’s GERD (see here) for a mass expansion of low-cost electricity, with generation and access remaining low, at 220MW and 30%, respectively. Although Rwanda has been a world leader in the adoption of off-grid generation and plans to reach universal access by 2024 (48% of which will be off-grid), it is unclear whether this approach will be sufficient to support industry at scale.

In addition, latent political risks remain in the wake of Rwanda’s 1994 genocide. Political stability under President Paul Kagame, who garnered a dubious 98.8% of the vote in the 2017 election, has come at the cost of stark limits on political freedom. Rwanda effectively remains a one-party state, and while Kagame is genuinely popular and enjoys widespread support (if not c99% as purported), he has kept a tight lid on dissent (illustrated by the recent arrest of the hero of the film “Hotel Rwanda” on charges of terrorism, sparking controversy).

On the one hand, Kagame has been described as a “benevolent dictator”. There is certainly a degree of truth to this characterisation, with his tight control of Rwandan politics paving the way for Rwanda’s whirlwind of reforms and remarkable levels of political stability and order just 25 years after one of history’s most horrific genocides.

Lawmakers recently endorsed this approach, outlining plans to give more powers to the president to create and disband public institutions and SOEs in a bid to improve efficiency and minimise waste. Kagame’s centralisation of power increases the likelihood of tough reforms being passed, in contrast to robust democracies like South Africa where SOE reform is blocked by perpetual political squabbling.

However, it isn’t clear what a post-Kagame Rwanda would look like. Although a 2015 constitutional amendment effectively gives Kagame the right to stay in office until 2034, it is unclear how long he can continue to sweep ethnic tensions under the rug. As such, there is an ever-present risk that tensions might boil over, throwing Rwanda’s political stability to the wind.


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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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