Rwanda’s capital Kigali has been transformed into a business hub through rising debt levels that have caused concern in some quarters.
Rwanda raised only $620m from investors on Monday as it sold international bonds for only the second time, making it the latest of a flurry of African nations to take advantage of recent benign conditions in bond markets. The sale of new 10-year debt drew more than $1.6bn of orders, according to bankers arranging the deal.
Investors have been drawn to relatively high-yielding emerging market dollar bonds in recent weeks amid a plunge in developed country bond yields which has pushed the US and European borrowing costs to their lowest since February. Monday’s Rwandan bond follows a second visit to the international bond market by Benin last month, and dollar debt sales by Cameroon, Kenya, and Senegal in June.
“Yields for these countries are pretty low considering what’s happened in US Treasuries,” said Kevin Daly, a fund manager at Aberdeen Standard Investments who participated in Monday’s sale. “It makes sense for Rwanda to do this now.” The sale, which was handled by Deutsche Bank and Citigroup, priced the new debt at a yield of 5.5 percent.
Just over half of the proceeds will go towards refinancing the majority of the country’s other outstanding bonds, which raised $400m in 2013 and was due to mature in 2023, with the remainder destined for spending on “key priority projects” to bolster Rwanda’s economic recovery. The larger size of the new bond means it qualifies for “benchmark” status and will be included in widely followed bond indices. Paul Kagame — who has led the east African country since the aftermath of the Rwandan genocide in 1994 — has sought to develop the east African nation’s tourism sector while transforming the capital, Kigali, into a business hub.
The economy has grown rapidly in recent years, although it contracted last year due to the impact of the pandemic. Still, rising debt levels have raised concerns in some quarters. Fitch last week gave the new bond a B plus rating, four notches into “junk” territory, and revised Rwanda’s outlook to negative from stable.
The rating agency said a failure to stabilise the debt at current levels of roughly 70 percent of gross domestic product could lead to a downgrade in the future, even though much of the country’s debt is in the form of low-cost loans from international institutions such as the African Development Bank and IMF. Debt levels have leaped from about 50 percent of the gross domestic product in 2019 due to emergency funding to low-income countries to help them weather the pandemic.
“These kinds of sums are peanuts for the bond market but for Rwanda, it’s a lot of money,” said Gregory Smith, a fund manager and author of Where Credit Is Due, a book about Africa’s debt burden. “A yield in the 5 percent range is low for Rwanda so this kind of liability management is a good idea. But if they started to come back to the market regularly that could be a cause for concern.”