Fitch rating downgrade expected but path to recover more important |22 December 2020

Minister Hassan (Photo: Thomas Meriton)

Fitch Ratings has for the second time this year downgraded Seychelles' Long-Term Foreign-Currency Issuer Default Rating (IDR), this time downgrading to 'B' from 'B+', with a Stable Outlook.

Given the economic situation around the globe, Minister for Finance, Economic Planning and Trade Naadir Hassan, in a press conference yesterday, noted no surprise in the rating issued as of December 18, despite expectations that the domestic tourism industry would have started on the road to recovery towards the end of the year.

“Seychelles’ rating downgraded two notches in May, so this is another downgrade. This is not a surprising development to us, given the economic situation and development in 2020. We saw that the Covid-19 pandemic and travel restrictions, our tourism industry was affected, and this has resulted in significant reduction in economic activities,” the minister said.

“According to our latest projections, there will be a 15.5% contraction in our economic activities. And if you consider the reasons behind the downgrade, it has to do with our debt to Gross Domestic Product (GDP) ratio which has increased because our budget deficit has also increased, and revenues have fallen while expenses have increased. The report also states that expenses to support the economy, FA4JR and other fiscal measures, have helped to widen the deficit and increase our debt,” Minister Hassan said.

According to the Fitch report, numerous factors have been instrumental to the rating, namely, the fact that general government debt is rising more sharply than projected during the last full review in May, reflecting a slower recovery in tourism, extension of fiscal measures, and greater exchange rate depreciation. There is also greater uncertainty over the financing of next year's fiscal deficit.

Air Seychelles’ $71.5 million “project box” bond owed to Etihad Airways is also stated to be a significant debt in the report, although negotiations are underway with government and stakeholders as to the way forward regarding the national airline.

As such, it is imperative that government and all economic actors are financially disciplined, urged Minister Hassan and Central Bank Governor Caroline Abel, so as to give the economy a chance at recovering.

“What is important now is how we recover. 2021 will be a tough year and we need to be disciplined that on the fiscal side, government manages the budget well, as well in terms on consuming, to ensure that the Rupee does not continue to depreciate and we have to manage rupees in a responsible way,” Minister Hassan added.

The rating is an indication that borrowing is no longer sustainable, Governor Abel highlighted, and it is now more critical than ever for government to be prudent in relation to fiscal policies. It could potentially impact on interest or risk-premium on borrowing, making it more expensive to borrow. Presently, government has no intentions of borrowing commercially, and is relying rather on alternatives such as multilateral loans with concessionary rates, through organisations such as the International Monetary Fund and the World Bank which are not affected by ratings, if necessary.

Despite the downgrade, the outlook remains stable per the Fitch report.

“Stable outlook, means there are still certain positives. We have vaccines being rolled out and with the vaccine, tourism can once again start and this will help our tourism sector to recover, but this also depends on other factors as well. If we can bring our debt-long-term in a sustainable way, and to do this, we need to manage our budget, and for our budget to be sustainable, and the environment we are in and with revenues being so low, this means we have to control our expenditure. This is critical as we move forward to manage our financial position, so it is easier for us to continue our recovery,” Minister Hassan said.

While he acknowledged the potential benefits of diversifying the economy so as to not keep all eggs within the tourism basket, tourism will remain the biggest industry for small-island states, he said, especially in consideration of the structure of the economy, and how long tourism has been the key economic pillar. At its peak, the sector was generating $3 million daily.

In addition to disciplined fiscal policies, the ministry aims to initiate reforms of the Financial Services Sector, fisheries and other sectors as additional sources of income, to complement revenue generated by tourism. Work on import substitution within agricultural sectors to encourage local production and reduce the amount of foreign exchange spent on importation is also on the agenda.

Laura Pillay