January 31, 2013 |
|Fitch Ratings-London-30 January 2013: Fitch Ratings has revised Seychelles' Outlook to Positive from Stable while simultaneously affirming Seychelles' Long-term foreign currency Issuer Default Rating (IDR) at 'B', Long-term local currency IDR at 'B+' and Short-term foreign currency IDR at 'B'. Fitch has also affirmed Seychelles Country Ceiling at 'B'.|
The affirmation of Seychelles sovereign ratings reflects the relatively high value-added economy; favourable governance and investment environment; and public and external debt burden that, post restructuring in 2010, is broadly in line with rating peers. The recent track record of fiscal consolidation and structural reform further enhance Seychelles' credit profile.
The ratings are constrained by the relatively short-track record of macro-financial stability; a history of higher and more volatile inflation than most rating peers; limited fiscal financing flexibility reflected in the short tenor of domestic debt; and recent debt restructuring.
The revision of Seychelles' Outlooks to Positive from Stable reflects the following key rating factors:
- Improving credit profile due to continued fiscal discipline and sustainable debt burden post debt restructuring. Since the start of the IMF programme at end-2008, budget surpluses have averaged 3% of GDP and public debt was 70.5% of GDP at end-2012 (from 178% of GDP at end-2008).
- Expectations of on-going budget surpluses. Fitch expects the budget to remain in surplus, equivalent to 1.1% of GDP in 2013 and a primary (excluding interest payments) budget surplus projected by Fitch to be 4.7%. These budget surpluses reflect policies to improve the efficiency of the tax administration (introduction of VAT in January 2013) and greater control over expenditures.
- The recent focus on public companies, including the restructuring of Air Seychelles and the increase in subsidized electricity prices by 15% in 2012, has significantly reduced potential contingent liabilities to the budget arising from public companies.
- Fitch projects a steady decline in public debt relative to national income (GDP). Fitch's own projections suggest that based on current policies and absent negative external and exchange rate shocks, the government's target for public debt to fall to 50% of GDP by 2018 is achievable.
- Resilient growth and diversification of tourist markets. In 2012, real GDP grew 2.7% after 5% in 2011. Given a difficult external environment with traditional source markets for tourists affected by the eurozone crisis, the relatively resilient growth primarily reflected success in Seychelles' strategy to diversify tourists' origins with flows from the UAE (+52%), Russia (+53%) and China (+111%) offsetting decline from France (-18%), Italy (-9%) and the UK (-16%). Fitch expects economic growth to average 3.5% in the longer term, supported by a recovery in the eurozone and tourists' flows diversification.
The main factors that could lead to an upgrade are:
- Continued reduction in public-sector debt due to fiscal discipline and structural reforms, including a utility prices adjustment.
- Enhanced credibility of the macroeconomic framework derived from establishing a track record of moderate inflation and greater confidence in a more flexible exchange rate regime that can absorb shocks without threatening price and financial stability.
- Increase in external liquidity through rising foreign exchange (FX) reserves. FX reserves were USD307m at end-2012 (2.8 months of current account payments) and Fitch expects it could reach USD347m (3.0 months of current account payments) by end-2014. Increasing FX reserves is key to improving confidence in the currency given the large current account deficit and as a buffer to meet public external debt service.
- Sustained GDP growth underpinned by continuing structural reforms to improve the business environment. Lower dependence on Western Europe, through diversification of tourists' origins as successfully initiated in 2012, would also support GDP growth.
The current rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a rating downgrade. However, any reversal of fiscal reforms or relaxation on expenditure control, especially after the IMF programme will be completed at end-2013, could lead to negative rating action.
KEY ASSUMPTIONS AND SENSITIVITIES
Despite recent diversification, Seychelles' main tourism market remains Europe, and especially eurozone countries (France and Italy). Fitch expects eurozone growth to gradually recover to 0.9% in 2013 and 1.5% in 2014 from -0.4% in 2012.
Seychelles' current account payments are dependent on commodity prices, and especially oil. Fitch expects oil prices to decrease to USD100/barrel in the coming years relative to 2012 levels (USD110/barrel).
Fitch's current judgement is that the policy authorities will continue to enforce fiscal discipline in a way consistent with their debt reduction target of 50% of GDP by 2018.
|Full company name||Republic of Seychelles|
|Country of risk||Seychelles|