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Fitch Affirms Seychelles at 'BB-'; Outlook Stable
July 29, 2016 / 12:56 PM / a year ago

Fitch Affirms Seychelles at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG/LONDON, July 29 (Fitch) Fitch Ratings has affirmed Seychelles' Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. The issue rating on Seychelles' unsecured foreign-currency bond has also been affirmed at 'BB-'. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'B' and the Country Ceiling at 'BB'. KEY RATING DRIVERS The ratings reflect ongoing progress under the country's IMF Extended Fund Facility programmes since 2010 when Seychelles was cured of default on its external debt. Seychelles has consistently over-performed on its primary budget surplus targets. Timely implementation and strong willingness to execute the structural reforms in the programmes have resulted in more robust and coherent fiscal and monetary policy frameworks. Seychelles' public debt remains on a downward path, but the authorities have pushed back their target for reducing this to 50% of GDP by two years, to 2020 from 2018. The new target came as the authorities announced reforms to reduce the income tax burden and to boost pensions. The IMF has suggested these measures could cost 3% of GDP on a full-year basis. The Ministry of Finance is planning some offsetting measures, but is now targeting primary surpluses of 3% of GDP in 2017-2020, compared with above 4% in 2014-2015. Total public debt excluding guarantees and IMF debt was SCR11,833m (USD900m) at end-2015, according to MoF figures, which equates to 64.5% of GDP, down from 69.5% in 2014. These figures include debt (T-bills and T-bonds) issued for monetary purposes. Fitch excludes this debt issued for monetary purposes from its calculation, and on this basis estimates that public debt had fallen to 54.6% of GDP by end-2015 (from 80.7% in 2010). Fitch expects debt/GDP to continue to trend down in the next few years. Seychelles has a large structural current account deficit, which reflects the economy's dependence on imports for basic foods and products. The deficit moderated to 17.7% of GDP in 2015 from 23% in 2014, helped by lower average oil prices and a bigger services surplus. The latter was due partly to record numbers of tourist arrivals in 2015 as the market benefited from increasing flight connections. Roughly two-thirds of the current account deficit is financed by net flows of foreign direct investment (FDI), reflecting the large import-content of foreign investment in the tourism and hotel sectors. Gross external debt (which includes private sector debt) at more than 110% of GDP is high compared with the 'BB' peer median of around 60% of GDP; net external debt at 38% of GDP is double the peer median. This reflects the high share of public foreign-currency debt and debt-financed investments by the non-bank private sector. However, sovereign external debt at around 35% of GDP is more in line with peers, following the government's restructuring of its external debt in 2010. The authorities have increased the size of buffers to mitigate these external vulnerabilities. Gross international reserves cover rose to four months of current external payments (CXP) in 2015 - up from 3.2 months in 2014, and 2.1 months in 2009. The exchange-rate regime has been liberalised since November 2008. It has functioned relatively well recently, with banks and market participants adjusting to the Central Bank of Seychelles' (CBS) commitment to a forward-looking money-targeting monetary policy framework and avoidance of direct interventions in the foreign-currency market. GDP per capita (USD15,252 in 2015) was three times the 'BB' median and closer to the 'A' median, reflecting Seychelles' high-value-added economy and its export market's concentration in wealthy western European countries. The World Bank reclassified Seychelles as a 'high income' country in July 2015, although the UN reports that income inequality is high - with an income Gini coefficient of 65.8 in 2013. Seychelles also outperforms the 'BB' median in the UN human development indicators and World Bank governance indicators. Five-year average real GDP growth is above the peer median at 4.7%, while the five-year average inflation rate is below the peer median, at 3.2%. Fitch forecasts real GDP growth to trend in a range of 3%-4% in the next few years as growth in the tourism sector becomes harder to achieve and as the offshore financial sector shrinks. Seychelles has taken concerted action to improve its compliance with international financial standards, including regarding tax reporting. Seychelles benefits from political stability, but tensions have risen during the current election cycle. The opposition petitioned the Constitutional Court to annul the result after the incumbent president, James Michel, won a narrow victory in the second round of the presidential election in December 2015. The court upheld the vote, but the closely fought election sets the scene for the next parliamentary vote which is scheduled for September 8-10. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Seychelles a score equivalent to a rating of 'BB' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch to reflect the Seychelles' large and persistent current account deficits which have contributed to high levels of gross external debt; net external debt is higher than peers. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. However, the main factors that could lead to positive rating action are: - Continued improvement of external buffers through accumulation of foreign-exchange reserves, narrowing of the current account deficit after FDI, and reduction in gross external indebtedness. - Reduction in public-sector debt in line with the government's new medium-term fiscal plan. - Sustained GDP growth and value-retention in the economy, underpinned by structural reforms to improve the business environment. - Sustained track record of moderate inflation and greater confidence in the flexible exchange-rate regime to absorb shocks without threatening price and financial stability. The main factors that could lead to negative rating action are: - Balance-of-payment pressures leading to falls in foreign-exchange reserves and increases in external debt ratios. - Reversal of fiscal reform, relaxation of expenditure control, or unexpected recapitalisation required to support the state-owned enterprises, leading to a significant deviation from the authorities' debt-reduction target - A prolonged period of macroeconomic instability demonstrating weakness in the policy framework. KEY ASSUMPTIONS - Despite recent diversification, Seychelles' main tourism market remains Europe, and especially Eurozone countries - chiefly France and Germany. Fitch expects Eurozone growth to weaken slightly to 1.4% in 2017-2018 from 1.7% in 2016. - Sustained domestic political stability. Contact: Primary Analyst Toby Iles Director +852 2263 9832 Fitch (Hong Kong) Limited 68 Des Voeux Road Central Hong Kong Secondary Analyst Eugene Chiam Associate Director +44 20 3530 1512 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009691 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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