Fitch Upgrades Seychelles to 'B+'; Outlook Stable

Fri Aug 8, 2014 4:24pm EDT

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Seychelles - Rating Action Report here LONDON, August 08 (Fitch) Fitch Ratings has upgraded Seychelles' Long-term foreign and local currency Issuer Default Ratings (IDR) to 'B+' from 'B' and 'BB-' from 'B+', respectively. The Outlooks are Stable. The issue rating on Seychelles' unsecured foreign currency bond has also been upgraded to 'B+' from 'B'. The Country Ceiling has been raised to 'B+' from 'B' and the Short-term foreign currency IDR affirmed at 'B'. KEY RATING DRIVERS The upgrade of Seychelles' IDRs reflects the following key rating drivers and their relative weights: Medium The Seychelles' fiscal position has improved markedly under a five-year IMF extended fund facility (EFF) programme, which was completed in December 2013. Budget surpluses have averaged 2.5% of GDP since 2009 and the primary surplus, the key target under the EFF programme, at 7.7% of GDP. The fiscal adjustment was the result of structural reforms including a marked fall in public sector employment, increased efficiency of tax administration, tighter control on expenditure and reform in public companies. Public debt dynamics are improving. Public debt stood at 60% of GDP in 2013, down from 70% a year earlier. Fitch projects a decline in the public debt ratio to below 50% of GDP by 2018, in line with the authorities' medium-term fiscal plan. Fitch's public debt figure does not include Treasury bill issuance for monetary purposes. In June 2014 the Seychelles' authorities and the IMF agreed a three-year SDR11.4m (USD17.6m) arrangement under another EFF. The programme will also coincide with the presidential elections due in 2016, which should hold any election spending in check. Given the Seychelles' strong performance under the previous EFF, Fitch believes the new programme will serve as an important fiscal policy anchor. Inflation has slowed since it peaked in mid-2012 (8.9%) to 3.4% in December 2013. Inflation has continued to moderate so far in 2014: in June 2014 it slowed to 1% yoy. For 2014 as a whole, however, inflation should average 3.6%, as a result of wage increases, an increase in commercial water tariffs and a weaker exchange rate in 1H14. Due to these inflationary pressures, the Central Bank of Seychelles (CBS) tightened monetary policy in 1H14. The authorities have made significant progress in improving the macroeconomic framework, which has become more credible than in the past. The CBS and the Ministry of Finance have agreed to issue medium-term Treasury bonds (2-5 years), supplemented if necessary by Treasury bills. As of May 2014, SCR772m (4.5% of GDP) of T-bonds were issued. The establishment of a yield curve and a money market at longer maturities should improve the depth of the financial markets. Fitch expects financial stability will benefit from on-going reforms to the liquidity management framework. Seychelles' IDRs also reflect the following key rating drivers: The current account deficit was high at 16% of GDP in 2013. This reflects Seychelles' structural trade imbalance (negative 30% of GDP in 2013) due to its dependence on imports for basic foods and products. However, FDI flows have largely financed the current account deficit, limiting its impact on external debt. Despite high current account deficits, Seychelles has been able to build reserves in line with the target set by the authorities under the IMF-supported program since the 2008 balance-of-payments crisis. This reflects the ability of Seychelles to attract large FDI flows (on average 18% of GDP since 2008) into the tourism and hotel sector. Gross FX reserves were USD473m (34% of GDP) in June 2014, up from USD343m (24% of GDP) a year earlier. However, the slower pace of current account deficit reduction could ease the rate of reserve accumulation. In this respect, the new EFF programme with the IMF is a key support of reserve coverage. GDP per capita, at USD15,540, 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. The revenue base is larger and more stable relative to rated peers. The public debt to revenue ratio (157% in 2013) is lower than the 'B' median (181%) and marginally higher than the 'BB' median (148%). RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well-balanced. However, the main factors that could lead to a positive rating action are: - A marked improvement 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 providing a buffer to meet public external debt service, which has started to rise since 2013 -Continued reduction in public-sector debt in line with the government's medium-term fiscal plan -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 -Sustained GDP growth, underpinned by continuing structural reforms, to improve the business environment and diversify the economy The main factors that could lead to a negative rating action are: - Balance of payment pressures leading to falls in foreign exchange reserves and increases in external debt ratios - A prolonged period of macroeconomic instability leading to significant fiscal slippages - Any reversal of fiscal reform or relaxation of expenditure control KEY ASSUMPTIONS Despite recent diversification, Seychelles' main tourism market remains Europe, and especially eurozone countries (France and Germany). Fitch expects eurozone growth to gradually recover to 1.5% in 2015 from -0.5% in 2013. Seychelles' current account payments are dependent on commodity prices, and especially oil. Fitch expects oil prices to remain in a range of USD95-USD108/barrel between now and 2016. Fitch's current judgement is that the authorities will continue to enforce fiscal discipline in a way consistent with their debt reduction targets. Contact: Primary Analyst Michele Napolitano Director +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Arnaud Louis Director +44 20 3530 1539 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. 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