Rwanda’s economic outlook has taken a hit as Moody’s Ratings downgraded the country’s outlook from stable to negative, citing heightened risks from regional conflicts, in a move likely to impact the broader East Africa region.

The New York-based credit rating agency affirmed Rwanda’s long-term local and foreign currency issuer ratings and foreign currency senior unsecured debt rating at B2 but expressed concerns over escalating tensions in the eastern provinces of the Democratic Republic of Congo (DRC).

Despite ongoing diplomatic interventions, including a recent high-level meeting in Qatar between Rwandan President Paul Kagame and his Congolese counterpart Félix Tshisekedi, the conflict remains volatile.

“The rating affirmation is supported by our baseline expectation that the hostilities in eastern DRC will not escalate significantly, diplomatic efforts to de-escalate tensions will continue, and that Rwanda will continue to receive support from development partners,” Moody’s said.

The M23 rebel group continues to gain ground, defying calls for a ceasefire and fuelling uncertainty in the region. While the direct economic impact on Rwanda has been limited so far, the country remains highly vulnerable to potential disruptions in external financial support and a downturn in tourism—both crucial sources of foreign exchange.

The risk of international funding withdrawals has grown as global scrutiny over Rwanda’s alleged involvement in the DRC conflict intensifies. Some bilateral donors have already suspended financial aid, though on a limited scale. If more development partners follow suit, Rwanda’s reliance on foreign currency-denominated debt could exacerbate its economic vulnerabilities.

A sharp decline in foreign inflows would not only weaken its fiscal resilience but also strain the government’s ability to maintain macroeconomic stability despite its historically strong policy management.

Rwanda’s downgraded outlook by Moody’s to negative has broader implications beyond its borders, with Kenya likely to feel the ripple effects. As East Africa’s largest economy and a key trade partner, Kenya is closely intertwined with Rwanda through regional trade, investment, and financial flows.

Any economic distress in Rwanda could disrupt cross-border business activity, weaken investor confidence in the region, and put additional strain on Kenya’s already fragile fiscal position.

Kenyan businesses operating in Rwanda, particularly in banking, retail, and logistics, may face increased risks. Lenders such as KCB Group and Equity Bank, both of which have significant operations in Rwanda, could see a slowdown in loan growth if economic uncertainty dampens business activity.

Similarly, companies like NCBA, which has expanded its financial services across East Africa, may need to reassess their exposure to Rwandan markets. A potential withdrawal of donor funds from Rwanda could tighten liquidity, making it harder for businesses to access credit and sustain growth.

The rating downgrade also raises concerns for regional trade. Rwanda is a key transit hub for goods moving between Kenya, Uganda, and the Democratic Republic of Congo (DRC). If tensions between Rwanda and the DRC escalate further, it could disrupt trade routes, affecting Kenyan exporters who rely on Rwanda as a passage to the wider Great Lakes region.

This comes at a time when Kenya is already dealing with balance of payments pressures, making any additional shocks from a slowdown in regional trade particularly concerning.

Ultimately, while Rwanda’s economic fundamentals remain strong, Moody’s downgrade serves as a warning for Kenya. Regional stability and investor confidence are critical, and any deterioration in Rwanda’s economic standing could add to the financial headwinds Kenya is already facing.

Rwanda’s situation echoes challenges faced by other regional economies navigating geopolitical uncertainty. Ethiopia, for instance, saw its economic growth slow following the Tigray conflict, as foreign investors hesitated and donor support dwindled. Similarly, Sudan’s ongoing political instability has resulted in international aid suspensions, worsening its economic crisis. These cases underline the financial risks that prolonged conflicts can impose on nations dependent on external assistance.

Moody’s decision to maintain Rwanda’s B2 rating is a cautious optimism that the situation will not deteriorate significantly. The agency assumes that diplomatic engagements will continue, preventing large-scale escalation, and that Rwanda will still receive support from development partners. However, the rating reflects broader vulnerabilities—Rwanda’s small, low-income economy remains susceptible to external shocks, its debt burden is high, and its regional geopolitical exposure is a persistent challenge. Balancing these risks are Rwanda’s solid governance frameworks, which have historically underpinned economic resilience.

– The writer is a Business Lead at People Daily