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RWANDIAN SNAPSHOT 2015 Quarter 1 Inflation – Price inflation remained largely stable in March, with the urban consumer price index (CPI) inflation rate (the headline index for monetary policy purposes) increasing marginally from 0.7% y-o-y in February to 0.8% y-o-y in March. The transport and fresh vegetables sub-indices continued to record deflation in March, decreasing by 3.9% y-o-y and 2.5% y-o-y, respectively. In turn, sub-indices that showed notable increases over the month include housing, water, electricity, gas & other fuels (3.8% y-o-y), and restaurant & hotels (2.9% y-o-y). Growth – The Rwandan economy expanded by 6.2% y-o-y in Q4 2014, lifting the annual GDP growth rate to 7% for 2014 from 4.6% in 2013. Economic growth in 2014 was driven by a 9% expansion in the services sector, while the industrial (+6%) and agricultural (+5%) sectors also recorded commendable growth. The services sector will continue to be the main driver behind economic growth, powered by strong consumption by both government and the private sector. National development plan – The International Monetary Fund (IMF) recently completed the third review of Rwanda’s economic performance under the country’s Policy Support Instrument (PSI) programme. The current PSI was approved by the Fund on 2 December 2013 and runs until 2016, with the primary aim of managing a successful transition from a public sector-led, aid-dependent economy to a more private sector-led economy. Overall, the IMF provided a generally positive report, commending prudent fiscal policy and effective monetary policy. OPPORTUNITIES STRENGTHS The rapidly expanding and well-diversified services sector supports domestic Significant progress in terms of economic reform. Rated as the world’s best business development. reformer since 2006 in the World Bank’s 2015 Doing Business report. Ongoing integration within the East African Community (EAC) offers Solid real GDP growth outlook. significant business opportunities. Fast-expanding mining sector (cassiterite, coltan, wolfram). Low external debt levels. Large-scale infrastructure projects (energy, transport) aimed at addressing the Favourable relationship with most donors, as well as transparency in the infrastructure shortfall. government’s handling of aid money. VULNERABILITIES WHAT IS BEING DONE? Economic structure: relatively narrow export base; heavy reliance on agricultural sector and global commodity prices. Significant infrastructure deficit and development needs. Sizeable twin deficits (fiscal and current accounts); lack of fiscal selfsufficiency. One of the poorest countries in the world in terms of GDP per capita. Solid progress is being made in terms of economic diversification, as seen by an improving business environment. The services sector continues to expand rapidly. Kigali is directing significant resources towards development of the energy sector in particular. Progress on this front is slow. The structural trade deficit results in a current account deficit. Although improving, external financing (donor support) accounts for approximately 40% of the budget. Although still low, GDP per capita has increased in recent years. Good economic growth prospects auger well for this indicator going forward. MEGA TRENDS Population 12,337,138 (July 2014 est.); Age 15 - 64: 55.4% Population growth rate (%) 2.63% (2014 est.) Life expectancy at birth Total population: 59.26 years; male: 57.73 years; female: 60.83 years (2014 est.) HIV/AIDS Adult prevalence rate: 2.85%; People living with HIV/AIDS: 195,352 (2013 est.) Adult literacy rate (age 15 and over can read Total population: 70.5%; male: 73.2%; female: 68.0% (2015 est.) and write) Urbanisation Urban population: 26.9% of total population (2013); Urban population growth: 6.4% (2013) Population below $1.25 (PPP) poverty line 63.0% (2011 est.) Unemployment rate 10.0% (2012 est.) Employment (% of total) Agriculture: 78.8%; Industry: 3.8%; Services: 16.6% (2005 est.) Labour participation rate (% of total population ages 15+) 85.9% (2013) Business languages Kinyarwanda, French, English Telephone & Internet users Main lines in use: 45,338; Mobile cellular: 6.69 million; Internet users: 1.07 million (2013) Sources: CIA World Factbook, World Bank, National Institute of Statistics Rwanda, UNESCO, ITU, UNAIDS & NKC Research 1 Total Corruption Perceptions Index 2014 (1 least, 175 most corrupt) Rwanda 175 55 Doing Business 2015 (1 best, 189 worst) 189 46 Global Competitiveness 2014-15 (1 most, 144 least competitive) 62 Economic Freedom 2015 (1 most, 178 least free) 65 144 178 HDI Ranking 2013 (1 most, 187 least developed) 0 Source: NKC Research 187 151 20 40 60 80 100 120 140 160 180 200 Risk environment / Risk outlook Sovereign Risk Ratings S&P Fitch Moody’s B+/Stable B+/Stable N/R In early March, Standard and Poor’s Ratings Services (S&P) revised Rwanda’s long-term foreign & local currency sovereign credit rating upwards by one notch from “B” to “B+” with a stable outlook. The outlook on the rating was previously revised from stable to positive in September last year. According to the agency, Rwanda’s external financing risks are decreasing due to stable donor flows and the government’s ability to access domestic and foreign capital markets. In addition, the agency has stated that economic growth has rebounded from the poor performance in 2013, while fiscal consolidation remains on track. In turn, Fitch Ratings affirmed Rwanda’s long-term foreign & local currency Issuer Default Rating (IDR) and short-term IDR at “B+” on January 25, maintaining the outlook at stable. This follows a one-notch rating upgrade at the end of July 2014. According to the agency, the rating balances the strong economic growth performance and prudent economic policies on the one hand, and falling donor grants together with a modest deterioration in the country's external position on the other hand. Fitch notes that economic growth prospects are strong, supported by a recovery in the agricultural sector and accommodative monetary and fiscal policies. Furthermore, the country has a track record of prudent and coherent macroeconomic management, including maintaining moderate inflation, and a sound financial system. Rwanda is currently not rated by Moody's Investors Service. Infrastructure Diversity of the Economy Banking Sector Continuity of Economic Policy GDP Growth Improving; but still limited Dominated by agricultural sector Fair, and improving Generally stable Strong Key Balances Foreign Investment Socioeconomic Development Forex Reserves Twin deficits Fair Low Fair Daily Trading Volume Highly variable, some days no trading Stock Market Listed Companies Liquidity Market Cap Dominant Sector Rwanda Stock Exchange 6 (including cross-listed companies) Limited $4.1bn (RSE, April 10) Food & Beverages Capital Market Development Liquidity Maturity Range Municipal Bonds Corporate Bonds Yes Underdeveloped Limited 28-days to 364-days (T-bills); 1-Yr to 7-Yr (Govt. Bonds) N/a Yes Macro-economic overview Rwanda has made substantial progress on the economic front. Extreme poverty has been reduced significantly and the government has made great strides in improving the business environment. The government’s current economic strategy has the clear priority of removing impediments to private sector development and making the economy more attractive for potential investors. Authorities have made significant progress in this regard, with Rwanda being labelled as one of the most economically competitive economies in Africa, boasting one of the most accommodative business environments on the continent. Real GDP growth has shown a strong recovery from the 4.6% expansion in 2013 to reach 7% in 2014, and growth prospects remain positive. The country is in the process of becoming more self-reliant and export oriented, and is developing a vibrant private sector, albeit at a steady pace. Nevertheless, Rwanda continues to face numerous economic challenges. In addition to the country’s general development needs, notably infrastructure and basic services, Rwanda consistently records deficits in both the fiscal and current account balances. Moreover, donor dependence remains one of the country’s most salient sources of risk, and, while improving, further progress in this regard would significantly improve the country’s resilience against exogenous shocks. Furthermore, political risk is currently considered to be low, but any deterioration in political stability, either spawned domestically through the Rwandan Patriotic Front’s (RPF) authoritarian tendencies or externally through conflict in neighbouring Democratic Republic of Congo (DRC), would have detrimental effects on the country’s development prospects. 2 Economic Structure as % of GDP 2014 Estimate Source: NKC Research Agriculture/ GDP 34.6% Service/GDP 47.8% Industry/GDP 17.6% The services sector is the highest contributor to GDP in Rwanda, and has been a primary driver behind economic growth in recent years. The government’s focus on reforming the business climate and supportive policies to attract foreign investment have turned the country into a promising services hub, with sectors such as information and communication technology (ICT) and financial services showing strong growth prospects. However, while the services sector dominates formal economic activity, the majority of the population is engaged in the agricultural sector. The overall economy continues to be mainly agricultural-driven with semi-subsistence, rain-fed farming and animal husbandry as the dominant sources of economic activity. The sector is also a salient generator of foreign currency, particularly through coffee and tea exports. In turn, the industrial sector is driven by the construction and manufacturing subsectors, the former supported by public investment, the latter encouraged through accommodative economic policies. In addition, the mining & quarrying subsector has shown strong growth in recent years, and has become one of the country’s most important foreign currency generators. Real GDP Growth & Net FDI/GDP 10.0 8.0 Source: NKC Research 7.0 8.0 6.0 6.0 5.0 4.0 4.0 2.0 0.0 3.0 2009 2010 2011 2012 2013 2014E 2015F 2016F GDP Growth (y-o-y, %) (lhs) Net FDI/GDP (rhs) Strong performances in the services and agricultural sectors have lifted Rwanda’s GDP growth figures in recent quarters, signalling a recovery from the recent lows reached in H2 2013. Quarterly real GDP growth remained above 6% y-o-y for all four quarters of 2014, elevating the annual real GDP growth rate up to 7% from 4.6% in 2013. Furthermore, the World Bank recently revised its 2015 real GDP growth forecast for Rwanda upwards from 6.6% to 7.5%, and this is expected to increase to 7.7% in 2016. The Bank notes that falling international oil prices are expected to contribute to lower inflation, a more stable exchange rate, an improvement in the country’s external balances, and smaller electricity subsidies, which will in turn provide policymakers with more flexibility. Turning to foreign direct investment (FDI), the Buffet Foundation recently committed to invest $500m to transform agricultural production in Rwanda. Under the new 10-year investment project, the foundation will develop irrigation systems on nearly 1,000 km2 of farmland to benefit domestic farmers, while an agricultural training institute will also be established in the country. The foundation plans to invest around $100m this year. Exports ($ bn) Imports ($ bn) 2014E 2015F Main Imports: % share of total 2016F Fuel Industrial products Food products 2014E 2015F 2016F Fuel 15.13 12.91 13.42 Industrial products 13.84 17.29 17.79 Food products 10.04 11.29 11.14 Construction materials 9.50 12.18 11.23 2014E 2015F 2016F Construction materials Main Exports: % share of total Coltan Tin Coffee Coltan 17.46 12.31 12.78 Tin 11.99 10.49 10.68 Coffee 9.95 7.94 7.93 Tea 8.63 7.68 7.86 Tea Source: NKC Research 0.0 0.1 0.2 0.3 0.4 0.5 Rwandan exports disappointed in 2014, largely due to adverse price developments affecting the country’s most important export commodities. The country generated just under $600m in merchandise exports in 2014, reflecting a 14.7% decrease compared to the 2013 figure. Prices of tea (-13.5%), cassiterite (3.1%), coltan (-16.6%), and wolfram (-11.4%) decreased on an annual basis. Coffee was the only principal export that recorded an increase in the average price received, with the cost per kg increasing by 36% on an annual basis. The country’s largest exports over the year were coltan ($105m, down 22.1% y-oy), cassiterite ($72m, up 17.8% y-o-y), and coffee ($60m, up 8.7% y-o-y). In turn, total imports increased by 3.7% in 2014, reaching $1.9bn. Capital goods dominated imports over the period, indicative of the government’s investment programme. The largest import categories over the year were petroleum products ($291m), industrial products ($266m), and food products ($193m). Overall, this resulted in a trade deficit of just over $1.3bn for the year, which is 14.8% wider than the 2013 deficit. 3 Current Account & Budget Balance (% of GDP) 0.0 0.0 -5.0 -2.0 -10.0 -4.0 Source: NKC Research -15.0 -6.0 2009 2010 2011 2012 2013 2014E 2015F 2016F Current Account/GDP (lhs) Budget Balance/GDP (rhs) The Rwandan government has put forward financing adjustments to its budget for the current fiscal year (ending June) to ensure that the implementation of the second Economic Development and Poverty Reduction Strategy (EDPRS2) remains on track. The government proposed an expenditure increase of RWfr6.4bn (around $9m), bringing the total budget to RWfr1.76trn (around $2.51bn). According to the Rwandan minister of finance, the initial budget had partly been affected by the delayed disbursements of foreign loans and grants, while there is also a possibility that tax revenues will not meet targets. Overall, the revised budget proposes a RWfr117.9bn increase in the fiscal deficit to RWfr295.6bn (equivalent to around 5.5% of GDP according to our calculations, notably wider than the original budget forecast of around 3.1% of GDP). Turning to the external balances, we have adjusted our current account forecasts to incorporate the recent drop in international energy prices. Petroleum products are the country’s largest imports category, and the reduction in oil prices will directly be reflected in Rwanda’s imports bill. Rwanda is expected to record a current account deficit equivalent to 7.8% of GDP this year, notably narrower than our previous forecast of an 11.4% of GDP deficit. Average CPI (% change, y-o-y) 12.0 Source: NKC Research 10.0 8.0 6.0 4.0 2.0 0.0 2009 2010 2011 2012 2013 2014E 2015F 2016F Following the March Monetary Policy Committee (MPC) meeting, the National Bank of Rwanda (NBR) decided to maintain the current accommodative monetary policy stance for the second quarter of the year, with the objective of continuing to support the financing of the economy. The country’s key policy rate was maintained at 6.5%, a level at which it has been since June 2014. According to NBR figures, the accommodative monetary policy stance had notable effects in the second half of 2014. More specifically, credit to the private sector increased by 19.6% in 2014, compared to a growth rate of 11.1% in 2013. In addition, over the January - February period this year, credit to the private sector expanded by 19.2% y-o-y, compared to a 13.1% y-o-y increase a year earlier. Furthermore, following the recent Financial Stability Committee (FSC) meeting, it was observed that the financial sector remains sound and resilient. Banks and microfinance institutions registered adequate capital ratios, while both asset quality and return on assets have improved between September and December 2014. CONTACT DETAILS KPMG NKC NKC Independent Economists CC Stephen Ineget – designation is Partner Tel +250 25 25 7970 Email [email protected] 12 Cecilia Street Paarl, 7646, South Africa P O Box 3020, Paarl, 7620 Tel: +27(0)21 863-6200 Fax: +27(0)21 863-2728 Email: [email protected] GPS coordinates S33°45.379' E018°58.015' The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon such information or opinions. © 2015 KPMG East Africa Limited, a Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. MC7204 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 4