September 18, 2006 | Cbonds
|Standard & Poor's Ratings |
Services today said it had assigned its 'B' long-term and 'B' short-term
foreign currency sovereign ratings, and its 'B+' long-term and 'B' short-term
local currency sovereign ratings on the Republic of Seychelles (Seychelles).
The outlook is stable. The Seychelles is the 113th sovereign rated by Standard
The ratings on the Seychelles are supported by the country's recent
strong fiscal performance, entrenched political stability, high per capita
income, and advanced social indicators. "These factors are, however, balanced
against an onerous public sector debt burden, multiple arrears on bilateral
and multilateral loans, as well as the country's exchange rate regime that
imposes considerable distortions, constrains growth, and impairs external
viability," Standard & Poor's credit analyst Agost Benard of the Sovereigns
Ratings group said.
The ratings on the Seychelles are supported by a turnaround in the
country's fiscal management, which has seen robust surpluses delivered in
recent years in conjunction with a strong commitment by the administration to
maintain this trend in the future.
The ratings are also underpinned by social and political stability
combined with high levels of human development, which include per capita
income, health, education, and literacy standards. These achievements make the
Seychelles the only country in Africa that the United Nations Development
Programme (UNDP) ranks in its "high human development" category. "Given the
correct macroeconomic policy mix, this social and political backdrop should
enable the Seychelles to make relatively quick inroads toward reducing its
substantial debt overhang and revive its stagnant economy," Mr. Benard said.
The main constraining factor for the ratings on the Seychelles is its
high public sector debt level and the associated impairment of fiscal and
external flexibility. Decades of deficit financed growth, high levels of
social spending, and balance of payments gaps resulted in an accumulated
public sector debt stock of 174% of GDP on a net basis at the end of 2005. The
macroeconomic policy mix that led to the country's high debt levels was a
hallmark of the long tenure of the previous executive, under which development
objectives based on a socialist ideology took precedence over economic
prudence. This approach has only begun to change with the ascendance of the
current president who, in his original capacity as finance minister, initiated
microeconomic reforms in recognition of the need to arrest rising debt levels
and bolster the economy after several years of moribund performance.
Also constraining the ratings is the country's fixed, administratively
set exchange rate, estimated to be at more than 50% above its market rate. The
resultant shortage of foreign currency has directly contributed to the arrears
on public sector foreign debt to multilateral and bilateral lenders (US$144
million at June 2006). In addition, this shortage constrains growth by
preventing the import of necessary inputs, and deters foreign investment due
to the difficulty of repatriating profits.
The ratings are also constrained by the vulnerability of the Seychelles'
economic growth and external position, caused by a substantial reliance on
tourism and fisheries for output growth and foreign exchange earnings. In the
past, downturns in tourism due to geopolitical events revealed the economy's
susceptibility to such exogenous shocks.
The ratings on the Seychelles could improve with a credible and
well-executed exchange rate liberalization that enables adjustment of the
Seychelles Rupee (SCR) toward its equilibrium level, without a major shock to
the economy. The ratings would also benefit from the complete resolution of
the arrears overhang in a manner that preserves good creditor relations. The
ratings could come under downward pressure, however, if exchange rate
liberalization is substantially delayed or causes economic disruption, or if
it is insufficient to address underlying distortions. Downward pressure on the
ratings would also result if fiscal consolidation withers due to a weakening
of resolve in the face of potential political or economic exigencies.
|Full company name||Republic of Seychelles|
|Country of risk||Seychelles|