Fitch Affirms Seychelles "B" Rating:Meaning Vulnerable
Fitch Ratings has affirmed 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'. The Outlook is Positive. Fitch has also affirmed Seychelles' Country Ceiling at 'B'. KEY RATING DRIVERS Seychelles' 'B' IDRs and Positive Outlook reflect the following key rating drivers: -Positive fiscal dynamics. Strong budget discipline has been enforced since the start of the IMF-supported programme at end-2008. The primary budget surplus has averaged 8% of GDP since 2009 due to substantial reforms including a marked cut in public sector employment, tighter control on expenditure and reform in public companies. Fitch expects the primary surplus to be 5.1% of GDP in 2013 and public debt to decline to 54% of GDP by 2015 (from 70.5% in 2012) due to continuing surpluses. -Improved macroeconomic stability. Inflation has slowed since its peak in mid-2012 (8.9%) to 3.7% in August 2013, supported by an appreciation of the Seychelles rupee (+8% against the USD from end-2012). Fitch expects on-going reforms in liquidity management, with the introduction of longer maturities instruments, combined with a gradual building of foreign reserves (FX), to benefit economic stability in the longer term. -Completion of public debt restructuring. The central government debt declined to 70.5% of GDP in 2012 (from 178% in 2008) due to public debt restructuring following a fiscal and balance-of-payment crisis in 2008. Debt is still high relative to that of 'B'-rated peers' median (40% of GDP) but external debt service is lower than peers' due to favourable post-restructuring repayment conditions. The short tenor of domestic debt limits fiscal financing flexibility. -Sustained GDP growth. Fitch expects GDP growth to reach 3.5% in 2013 and 4% by 2015 (from 2.9% in 2012), supported by a gradual recovery in the eurozone and continued expansion into new markets. Seychelles has offset recent weakness in traditional European tourist arrivals with an increase in new tourism markets from Asia (+29% in the first six months of 2013, +57% from China) and the Gulf (+22% from the UAE). Unemployment is low, at about 2%, due to job opportunities in the tourism sector. -High level of economic and human development. GDP per capita, at USD13,000, is much higher than peers', reflecting a high value-added economy and a favourable business environment. Scores on UN human development indicators and World Bank governance indicators are also much higher than those of peers. RATING SENSITIVITIES The main factors that could lead to an upgrade are: -Continued reduction in public-sector debt due to fiscal discipline and structural reforms, including the adjustment of utility prices to cost recovery levels. -Enhanced credibility of the macroeconomic framework by establishing a track record of moderate inflation and greater confidence in the flexible exchange rate regime to absorb shocks without threatening price and financial stability. -Continued increase in external liquidity through rising foreign exchange reserves. Increasing reserves is key to improving confidence in the currency given a large current account deficit and as a buffer to meet public external debt service which will start to rise from 2013. -Sustained GDP growth underpinned by continuing structural reforms to improve the business environment and diversify the economy. Lower dependence on Western Europe, through diversification of tourist arrivals as successfully initiated in 2012, would also support the ratings. The current 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 of expenditure control would be rating- negative. KEY ASSUMPTIONS Despite recent diversification, Seychelles'' main tourism market remains Europe, and especially eurozone countries (France and Italy). Fitch expects eurozone growth to gradually recover to 1.3% in 2015 from -0.6% in 2013. Seychelles' current account payments are dependent on commodity prices, and especially oil. Fitch expects oil prices to remain in a range of USD100-105/barrel between now and 2015. Fitch's current judgement is that the authorities will continue to enforce fiscal discipline in a way consistent with their debt reduction target of 50% of GDP by 2018.