Fitch affirms Seychelles at 'BB-' with stable outlook |03 April 2023
Credit Rating Agency Fitch Ratings has affirmed the Seychelles’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘BB-‘’ with a Stable Outlook.
In its first annual assessment of Seychelles for 2023, Fitch affirms that Seychelles' 'BB-' rating is supported by relatively high income levels, strong World Bank Governance Indicators, support from multilateral creditors and stable policymaking. These strengths are balanced by the exceptionally high concentration of the economy in the tourism sector, which heightens vulnerability to external shocks, and long-term risks associated with climate change.
Fitch notes that Seychelles' tourism sector recorded a solid recovery in 2022, with tourist arrivals surging by 82% year on year and reaching 86.4% of 2019 levels.
The credit agency however notes that global economic uncertainty and competition from other high-end tourism destinations should lead to a slowdown in visitor growth to an estimated 5% in 2023-2024.
However, despite continued visitor growth, Fitch expects tourism receipts will decline by about 14% in 2023 and 7% in 2024, reaching 41.3% of GDP, given the expected tapering in arrivals of high-spending tourists from Russia and other countries. There is upside from a larger than expected fall in oil prices – translating into lower airfares – and shallower than projected recessions in major European economies.
Following real economic growth of 8.9% in 2022, Fitch expects growth of 3.6% in 2023 and 4.2% in 2024, as tourism growth normalises.
In early 2023, the authorities revised recent years' real GDP growth figures in consultation with the IMF, which cut the 2021 outturn from 8% to 2.4% (though the IMF's latest staff statement signals a new revision in this figure back to 5.4%).
Fitch projects medium-term growth of about 4%, and sees upside mainly from investment, which has lagged in recent years due to execution challenges, rather than a boost to productivity or the labour force.
According to Fitch, inflation is highly responsive to fluctuations in the rupee, which is freely floating, with a passthrough to prices typically observed with a lag of six to eight months. A trend of currency appreciation since mid-2021 led to inflation falling to 2.6% on average in 2022 (2021: 9.8%). While macroeconomic and monetary policy is stable and largely predictable, in Fitch's view, transmission of monetary policy is somewhat constrained by the high levels of dollarisation in the economy.
Fitch expects the current account deficit to continue to decline to 3.9% of GDP in 2023 and 3.5% in 2024 (current 'BB' median: 3.7%), from 7.5% in 2022, as tourism inflows continue to normalise. Seychelles' exceptionally high reliance on tourism for FX inflows, and heavy reliance on imports for most basic goods, remain a key weakness.
Fitch expects foreign exchange reserves to stabilise at about 4.4 months of coverage of current external payments in 2023-24, in line with the peer median. Seychelles also benefits from strong liquidity support from multilaterals. In December 2022, the IMF completed the third review of Seychelles' 32-month Extended Fund Facility (EFF), enabling Seychelles to draw down a cumulative US $80.6 million (4.4% of GDP) since 2021. Assuming continued progress with meeting targets on fiscal consolidation, the IMF expects to disburse up to another US $26 million in 2023 and US $35 million in 2024, which would bolster Seychelles' external liquidity.
The fiscal deficit shrunk by 5pp to 1.7% of GDP in 2022 (current 'BB' median: 3%), while the primary balance returned to surplus for the first time since 2019, boosted by very strong revenue growth and capex under-execution. Fitch expects the fiscal deficit to widen to 2.1% of GDP in 2023, given slowing growth and a pick-up in capex performance, before improving to 0.2% of GDP in 2024.
Public debt fell by 16pp to 69% of GDP in 2022 (current 'BB' median: 55.7%), aided by strong nominal GDP growth, a favourable exchange rate effect, and the recovery of a primary surplus. Fitch expects debt to continue declining to around 63% in the forecast period through 2024, barring a growth or exchange rate shock. About 82% of external debt is owed to multilateral and bilateral creditors at preferential rates, reducing interest rate risks. The borrowing pipeline in 2023 includes budget and project financing from multilateral and bilateral sources, with no external issuances planned.
Seychelles is heavily exposed to risks from rising sea levels, although a significant impact will likely only be felt in the medium to long term. In the short term, Seychelles' tourism industry faces constraints in expansion due to the saturation of coastal infrastructure, and various risks of environmental and biodiversity degradation. Climate-change adaptation measures are currently not factored into fiscal planning, although Seychelles receives technical assistance from international bodies in this regard.
Seychelles has an ESG Relevance Score (RS) of '5+' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the WBGI have in our proprietary Sovereign Rating Model (SRM). Seychelles has a high WBGI ranking at the 71st percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
Rating sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Public Finances: Increases in gross general government debt (GGGD)/GDP, for example, due to sharply slower growth prospects or a sharp reversal of fiscal consolidation.
External Finances: Rising balance-of-payment pressures, for example, from a sharp drop in tourism receipts, that lead to a sustained deterioration in external liquidity.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Public Finances: A sustained fall in GGGD/GDP, supported by continued fiscal consolidation.
External Finances: Reduction in external vulnerabilities resulting from a significant buildup in international reserves; for example, from a durable narrowing of the current account deficit and increase in foreign direct investment.
Press release from Fitch