Fitch Affirms SFP Prediction of New IMF Program For Seychelles Under PL!
LONDON, February 14 (Fitch) Fitch Ratings has affirmed Seychelles' Long-term foreign currency Issuer Default Rating (IDR) at 'B' and Long-term local currency IDR at 'B+'. The Outlooks are Positive. The issue rating on Seychelles' unsecured foreign currency bond has also been affirmed at 'B'. Fitch has also affirmed Seychelles' Short-term foreign currency IDR at 'B' and Country Ceiling at 'B'. KEY RATING DRIVERS Seychelles' 'B' IDR and Positive Outlook reflect the following key rating drivers: 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 of expenditure and reform in public companies. Fitch expects the primary surplus to stand at 4% of GDP in 2014 and 2015. This is slightly lower than the authorities' target of 4.4% of GDP owing to more conservative revenue assumptions. The agency is factoring in some slippage in VAT revenues and assumes this will not be offset by expenditure cuts. This deficit path remains conducive to debt reduction. Fitch expects public debt to decline to 54% of GDP by 2015 (from 70.5% in 2012). Revenue growth under-performed budget plans in 2013, mainly due to shortfalls in VAT receipts and excise revenues. The underperformance of VAT was partly due to lower than projected collection from the tourism sector, some teething problems in the first year of implementation of the new VAT regime and appreciation of the Seychelles rupee. The fall in excise revenues reflected a decline in imports of motor vehicles and reductions in some excise tax rates. Despite the revenue under-performance, the authorities are on track to meet the year-end target under the IMF Extended Fund Facility (EFF) programme (a primary surplus of SCR788m equivalent to USD65m and 5.2% of GDP). The revenue shortfall was more than offset by a reduction in expenditure (2% of GDP). In Fitch's view, this shows the authorities' commitment to fiscal discipline. Inflation has slowed since its peak in mid-2012 (8.9%) to 3.8% in 2013, supported by an appreciation of the Seychelles rupee (+7%% against the USD from end-2012). Fitch expects on-going reforms in liquidity management, with the introduction of longer maturity instruments, combined with a gradual building of foreign reserves, to benefit economic stability in the longer term. GDP per capita, at USD13,600, is markedly 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 in line with the government's medium-term fiscal plan, including the adjustment of utility prices to cost recovery levels. -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 the large current account deficit, and as a buffer to meet public external debt service which started to rise in 2013. -Sustained GDP growth underpinned by continuing structural reforms to improve the business environment and diversify the economy. The current Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a downgrade. However, any reversal of fiscal reforms or relaxation of expenditure control would likely result in negative rating action. A prolonged period of macroeconomic instability leading to significant fiscal slippages could also result in negative rating action. 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 -0.4% 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-USD105/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. Fitch expects continuing implementation of structural reforms supported by positive collaboration with the IMF. The agency assumes Seychelles will enter into a new programme with the IMF after the previous one ended in early 2014.