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Fitch Ratings affirms Seychelles' ‘BB’ rating |19 September 2023

Fitch Ratings has affirmed Seychelles’ Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a stable outlook.

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.

As per the Fitch, the sovereign credit rating is supported by several factors, including relatively high income levels (double the peer median), robust World Bank Governance Indicators, backing from multilateral creditors, and a stable policy environment.

However, the country's heavy economic reliance on the tourism sector, increases its vulnerability to external shocks, including those related to climate change.


Tourist receipts at pre-pandemic levels

While Seychelles experienced a strong rebound in tourist arrivals in 2022, 2023 has seen a slowdown due to sluggish economic growth in key Western European source markets and intense competition from other luxury tourism destinations. Although tourist arrivals remain below pre-pandemic levels, tourist receipts have surpassed them, indicating higher revenue per tourist.

According to the credit rating agency, the Seychelles authorities anticipate a return to 2019 arrival levels by 2026, with tourism earnings growing at an average of 3 percent annually in 2024 to 2025, compared to the 24 percent average growth witnessed in 2016 to 2019.

Among the risks to the projections are prolonged economic downturn in Western Europe and rising oil prices, leading to higher airfares.


Growth converging to potential

After an exceptional 15 percent growth in 2022, largely due to a rebound in global tourism, growth is expected to slow to 4.5 percent in 2023, and 4.2 percent in 2024, eventually converging to around 3.9 percent in 2025.

While the tuna industry faces challenges due to high energy costs and slow external demand, the information and communication technology sector is poised for robust growth, potentially contributing to medium-term growth.


Solid multilateral support

Seychelles has a record of strong compliance with International Monetary Fund (IMF) programmes and has received assistance from various multilateral institutions.

The IMF approved three-year USD46 million Resilience and Sustainable Facility (RSF) and a new USD56 million Extended Fund Facility (EFF) for Seychelles in May 2023, providing climate resilience funding and balance of payment support.

The RSF includes criteria related to climate expenditure in the budget and measures to contain greenhouse gas emissions. In addition to technical assistance to meet the criteria, Seychelles is also expected to receive a USD25 million credit facility from the World Bank, which will supplement other climate-related financing provided by the African Development Bank.

Structurally large current account deficits

The current account deficit (CAD) is projected to widen to around 9.4 percent of Gross Domestic Product (GDP) in 2023 to 2025, driven by a growing trade deficit offsetting a recovering services surplus.

Robust Foreign Direct Investments (FDI) inflows and external borrowing, mainly from International Financial Institutions (IFIs), will help maintain international reserves at about 3.3 months of current external payments over the forecast period.


Near-term fiscal deterioration

Despite strong revenue performance and expenditure under execution in the first half of 2023, a budgetary deterioration is expected in the second half due to revised budget priorities aimed at increasing capital expenditure.

Tax revenue is projected to fall short of earlier estimates.

Capex is anticipated to double to 4.6 percent of GDP in 2023 and rise to 5.6 percent in 2024, leading to a wider budget deficit of 3.7 percent of GDP in 2023 and a subsequent decline to 3.1 percent in 2024. Beyond this period, normalisation of expenditure will reduce the headline deficit to 1.4 percent in 2025.


Public Debt Stabilisation

General government debt/GDP declined to 70 percent in 2022, but remains above 2019 levels. It is expected to reach 70.7 percent by end-2023 and average 68.4 percent in 2024 to 2025.

Seychelles issues long-dated domestic securities to increase the domestic component of public debt and lengthen maturities. There are no plans to issue external securities.

While a sharp currency depreciation poses the greatest risk to debt dynamics, risks are mitigated by the concessional nature of 85 percent of external debt as of the first half of 2023.


Climate change vulnerabilities

Seychelles faces significant risks from rising sea levels, impacting coastal infrastructure and biodiversity. The tourism industry's expansion is constrained due to saturation of coastal infrastructure, posing growth limitations.

Seychelles is estimated to have an annual funding requirement of almost 5 percent of GDP for climate change mitigation but currently spends only 0.9 percent of GDP per year. Fitch foresees a strong likelihood of Seychelles continuing to receive multilateral technical and financial support for climate change adaptation in the medium term.

Seychelles has an ESG Relevance Score of '5+' for various factors, including Political Stability and Rights, Rule of Law, Institutional & Regulatory Quality, and Control of Corruption, all of which significantly influence the rating. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in the Fitch 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

Negative rating action may occur if there is a substantial increase in general government debt/GDP or a significant drop in tourism receipts. Conversely, positive rating action could result from sustained debt reduction and improvements in external finances.


Compiled by Laura Pillay

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