Seychelles consolidates ‘B’ sovereign rating |01 June 2021

• Fitch Ratings forecasts rebound to a 5% growth in 2021

Credit Rating Agency Fitch Ratings has affirmed the Seychelles’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook, maintaining the same rating Seychelles received at the end of 2020.

In its first annual assessment of Seychelles for 2021, Fitch Ratings provided ‘B’ rating to Seychelles due to the country’s high public and external indebtedness, adding on the facts that Seychelles is a small economy that is vulnerable to external shocks with large structural current account deficits against strong governance.

It also considered our development and income per capita metrics relative to peer group medians and our good record of public debt reduction pre-pandemic.

Meanwhile the Stable Outlook reflects expectations for gradual economic recovery with tourism and economic growth in 2021 onwards.

Fitch also noted that the country’s moderate near-term external commercial debt repayment schedule and a good record of adherence to International Monetary Fund (IMF) programmes provide the necessary economic environment for the Stable Outlook classification.

Fitch forecasts real GDP to rebound to a 5% growth in 2021 compared to -12.8% in 2020, driven by a robust resumption of tourist activity, favourable base effects, and supported by expansionary fiscal and monetary policies, and a very successful vaccination programme.

Among other things, a sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors when looking to invest in particular jurisdictions.

Fitch’s findings for 2021 stated that Seychelles shows signs of a recovery in tourist flows to Seychelles, as the country reopened its borders on March 25. Visitor arrivals in April rebounded to 38% of the 2019 level, the highest since the onset of the Covid-19 pandemic.

The credit rating agency forecasts that monthly tourist arrivals will revert back to the same level it was in 2019 by the third quarter of 2022.

Although the current tourism recovery is driven by non-core tourist markets (such as Israel, Russia and Eastern Europe, United Arab Emirates), Fitch predicts that the rebound will be supported by the return of tourists from our traditional European markets as and when global travel restrictions ease.

However, the recent rise in daily infection cases and deaths since end of April 2021 could result in further restrictions that could weigh on the recovery while adverse developments in the pandemic globally also pose a downside risk.

The credit agency highlighted that the Covid-19 pandemic had reversed a decade worth of fiscal consolidation and public debt reduction efforts.

Due to this setback, the general government balance turned to a 18.9% of GDP deficit in 2020 compared to 0.2% surplus in 2019 since the country’s income support and other assistance increased current expenditure by 34% while tax revenues fell by 14% with the contraction in tourism, especially in direct taxes (-18%).

“The return of some tourism activity in 2021, larger grant receipts and a rebound in nominal GDP will shrink the fiscal deficit to 11.9% in 2021. Nominal fiscal expenditure should narrow only marginally as grant-financed capital expenditures partially offsets lower current expenditure from the phasing out of the flagship job retention scheme (2020: 6.6% of GDP) at end-March 2021,” noted Fitch’s most recent report on Seychelles.

Government debt increased to 96% in 2020 and Fitch Ratings forecast only a slight fall in 2021 to 95.5% and further to 86% in 2022 due to economic recovery, rupee appreciation, and also to some fiscal consolidation.

Foreign-currency debt comprised almost half of total debt at end of 2020, increasing the vulnerability to external shocks, while short-term maturities accounted for a large 30% share of total debt, increasing interest-rate and roll-over risks.

“Fitch's debt estimates exclude USD82 million (6.5% of GDP) of Air Seychelles debt, of which the government is negotiating USD72 million with the airline's bondholders to reduce to USD20 million. In May 2021, the government acquired Etihad's 40% stake in Air Seychelles to become the sole owner, negotiating a reduction in Air Seychelles' liabilities to Etihad. In 2020, Air Seychelles, the state transport company, and airport authority were the main loss-making state-owned enterprises, with total SOE non-guaranteed debt estimated by the government at 15% of GDP,” the report continues.

In its 2019 report, published pre-pandemic, Fitch Ratings had cited Air Seychelles as one of the country’s major fiscal risks, as the local airline had already recorded a loss of US $44 million in 2018.

“Financing needs in 2020 were largely met through domestic sources (close to 85% of total), mainly through treasury bills, and R1.5 billion (7.5% of GDP) of three-, five- and seven-year bonds. For 2021, Fitch forecasts financing needs at 11.9% of GDP to be met primarily by domestic borrowing from banks (10.4% of GDP). Further programme disbursements from the IMF, World Bank and AfDB (worth roughly USD150 million) are currently being negotiated.”

“In Fitch's view, the negotiation of a new IMF programme is unlikely to be problematic, given Seychelles’ strong record of adherence to previous programmes.”

Fitch noted that Seychelles could see a rating upgrade if the government debt returns to a firm downward path and if there is a reduction in external vulnerabilities.

Seychelles had been scoring a ‘BB-‘ sovereign rating every year since 2015 until it received a rating boost of ‘BB’ with a Stable Outlook in 2019 – our highest rating ever – but which was downgraded to ‘B+’ in the first half of 2020 and then to ‘B’ with a stable outlook by the end of 2020.

Elsie Pointe/Fitch Ratings