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Fitch Upgraded Seychelles to 'B'; Outlook Stable

February 07, 2011 | Fitch Ratings

Fitch Ratings-London-03 February 2011: Fitch Ratings has upgraded Seychelles' Long-term foreign currency Issuer Default Rating (IDR) to 'B' from 'B-'; Long-term local currency IDR to 'B+' from 'B', and Country Ceiling to 'B' from 'B-'. The Outlooks on the Long-term IDRs are Stable. The Short-term IDR is affirmed at 'B'.
The upgrade reflects Seychelles' outperformance, by a wide margin, of the fiscal targets set for it by the International Monetary Fund (IMF) programme, for a second consecutive year. It also reflects the successful restructuring on more favourable terms of all its commercial bank debt and most outstanding non-Paris Club bilateral debt, a solid macroeconomic performance and an improvement in external liquidity, which nonetheless remains a key rating weakness.

Together, these outcomes led to a further reduction in general government debt to 86% of GDP in 2010, from 117% in 2009 and lengthened the average maturity of external liabilities to 13 years from six months. In addition, the authorities aim to reduce debt to 50% of GDP by 2017, underlining the strong political commitment to fiscal and structural reform, which Fitch expects to remain robust despite the forthcoming presidential elections (expected by June 2011).

The considerable reduction in Seychelles' external debt service burden, together with the rebuilding of foreign exchange reserves to USD238m (2.2 months of imports) at the end of 2010, from USD9.8m (0.1 months of imports) at its trough in 2008, have improved the external liquidity ratio to 147% from 36% over the same period. Nevertheless, even at these elevated levels, the reserve cover remains low.

"Given the structural wideness of Seychelles' current account deficit, any future upgrades of its rating would be based on an increase in the reserve stockpile and a continued decline in indebtedness, combined with economic stability," says Purvi Harlalka, Director in Fitch's Sovereign rating team. "Higher reserves will provide the buffer Seychelles needs to withstand unexpected external pressures, like those arising from potential volatility in commodity prices," adds Ms. Harlalka.

The current account deficit (CAD) widened to 46% of GDP in 2010, which is wider than the 44% of GDP it reached during the default in 2008. This deterioration was mainly due to a large foreign-financed residential project that is now complete and Fitch consequently expects the CAD to narrow to 20.5% of GDP by 2012.

This large project also provided a one-off boost to growth, which exceeded 6% in 2010 and was revised up to 0.7% for 2009, from the expected contraction of 7.5%. However, the resurgence in activity also reflects buoyancy in the tourism, telecommunications and construction sectors. Fitch expects growth to revert to 4%-5% in 2011-2012.

Over the same period, disinflation has been swift and the rupee has stabilised at 25% above its post-liberalisation lows, prompting the repatriation of resident funds held abroad and a fall in dollarisation levels. However, the increase in commodity prices could create inflationary pressures, albeit from a low base (inflation averaged 2.2% in 2010). This could also arise from a weakened exchange rate if the banks, which have high levels of liquidity following the large repayments of domestic debt, decide to increase lending abroad in the search for yield. The central bank aims to contain inflation at 3%.

Seychelles' rating is also supported by the strength of its institutional framework relative to peers. This is evident from its scores on human development, corruption, political and social stability, and governance indicators, which compare more closely with the 'BBB' range than the 'B' range. Similarly, income per head, at USD10,975 in 2010, is above both the 'B' median (USD2,632) and the 'BBB' median (USD7,953).

However, the small economy (USD1bn) is heavily exposed to volatility in import prices and to concentration risk arising from a relatively narrow economic base. In Fitch's view, these factors mean that stronger fiscal and external-finance buffers would be necessary to support higher ratings.

Company: Seychelles

Full company nameRepublic of Seychelles
Country of riskSeychelles


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