Renaissance Capital Publish Bullish Rwanda Assessment

Posted: April 17, 2011 in News
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Friday, 15 April 2011

A visit to Rwanda on 6 April provided the greatest positive shock in this analyst’s professional career.

If you have any doubt that an African country can emulate the best performance seen in emerging Europe or Asia over the past few decades, then please allow us to take you to Kigali to challenge these assumptions. From the ease of visa-free travel and a well organised and hassle-free airport, to the reassuring presence of police and security forces, streetlights, low crime, good roads and broadband (due from the end of this month), we suspect there will be much to impress you. A side trip to see the gorillas would be helpful for the country’s strong tourism revenues, too.

To be a Singapore of Africa is Rwanda’s ambition – and in our view, it is succeeding. The country is politically stable, with the next presidential elections due in 2017. There is a zero-tolerance attitude to corruption, and we heard this is effective. It was the world’s best reformer, according to the World Bank’s 2010 Doing Business survey; in 2010, 6,000 companies were registered in this country of 11mn people, about equal to the number registered over the previous five years. Keen to dispense with foreign aid by 2020, the country is a darling of the aid agencies, with highly effective implementation and use of foreign inflows. We saw clear evidence of forward planning and a strategy for the country. With access to a market of 130mn people in the East African Community (Kenya, Uganda, Tanzania, Rwanda and Burundi), Rwanda aims to be a hub for investment for both East and Central Africa. Lastly, and much to the distress of any macro/strategist, we failed to find significant macro risks for the economy.

How is this happening? Undoubtedly, President Paul Kagame has played a very significant role, and we’d not be surprised if Lee Kuan Yew’s book From Third World to First has as well. Singapore in the 1960s had per capita GDP of around $400, was vulnerable to ethnic and ideological conflict in a region beset by wars, was excessively dependent on foreign aid (UK military bases), and most CEOs could not find it on a map – but it was transformed by vision, infrastructure planning, the creation of an economic development bank, industrial parks to attract investment, and even beautification of the airport and city to give foreign investors a positive first impression, all underpinned by sound macro policies. The Rwandan Development Bank, the use of privatisation proceeds to roll out a fibre-optic broadband network, and the recent launch of a Special Economic Zone for industry/technology and warehousing just a kilometre from the airport might all be seen as following Singapore’s example. Like Singapore at first, Rwanda is keen to attract any investors and is changing its requirement that investors export 80% of production, though an Indian pharmaceuticals company’s USD60m investment (worth 1% of GDP) is targeted at exports to the region. We believe the concentration of GDP in a small area –Kigali, the capital – could be a significant advantage.

What’s next? The government intends to turn Rwanda into a service economy and a conference hub. The ongoing construction of a USD300m conference centre, a planned new airport and the privately funded Marriott hotel under construction will allow continued expansion of the roughly USD100m earned through business tourism (roughly the same value as tea and coffee, or all mining exports). Roads have been upgraded across the country, including to Burundi and Tanzania, with a route to northern Congo to be finished in mid-2012. The next transport projects include extending the rail line from Tanzania to Rwanda by 2015. The government intends to boost power generation from a sufficient85 MW to 100MW in 2012, and as much as 1,000MW by 2017 through tapping methane gas in Lake Kivu and using peat. It plans to improve energy supplies through extending a 1,200-km oil pipeline from Kenya. Access to Uganda’s oil production is possible from 2015-2016. At present, all petrol is trucked from Mombasa, which is one reason why a litre of gasoline costs USD1.67 in Kigali (vs about USD1 in the US); improved access to energy could dramatically improve Rwanda’s competitiveness. On the fiscal side, the cabinet just approved plans to introduce a flat 15% income tax rate, for individuals and corporations, to take effect in 2012. To improve the country’s skill levels, free schooling has been extended from age 12 to 15, and a German company has been brought in to continue the roll-out of colleges, which will focus on vocational skills. In the meantime, Rwanda is open to immigration to provide the skills the country needs.

The economy today is quite different from where Rwanda expects to be in 5-10 years. Services are expected to rise from 40% to 60% of GDP. Today agriculture represents a third of GDP, half of merchandise goods exports and 35% of the CPI basket, and it employs 80% of the population in largely subsistence farming, with high dependence on the short and long rainy seasons that do so much to drive inflation – in December, inflation ended the year at zero, due to ideal weather in 2010. Recent value-added developments include fully washed coffee beans that sell at twice the normal price, and a move into horticulture that may challenge other exporters, from Kenya to Colombia. Land reform, the application of fertilisers and allowing land titles to be used as collateral might all support the country’s ambitions to become a regional exporter of agricultural products.


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