Seychelles stays at BB- on governance

Seychelles’ governance has bolstered its long-term foreign-currency issuer default rating (IDR), with the country being kept at BB- with a stable outlook by Fitch Ratings, in part due to strong governance.

The ratings balance the progress made under the country’s International Monetary Fund (IMF) Extended Fund Facility programmes since 2010 when Seychelles was cured of default on its external debt. Seychelles has also picked up strong scores for governance and high gross domestic product (GDP) per capita relative to peers. This is balanced against the small size of the economy and its ongoing vulnerability to external shocks.

Seychelles has consistently over-performed on its primary budget surplus targets. Timely implementation and strong willingness to execute the structural reforms in IMF programmes have resulted in more robust and coherent fiscal and monetary policy frameworks.

Seychelles’ public debt remains on a downward path, despite a more expansionary fiscal stance since the start of 2016. In 2017 Seychelles returned a 3% primary budget surplus, in line with the budget target. Nevertheless, tax cuts and spending increases caused smaller primary surpluses between 2016 and 2017, this is compared to between 2011 and 2015, where the average was 5.1%. The medium-term fiscal framework targets primary surpluses of 2.5% of GDP by 2020.

In 2018, the original budget also targeted a 2.5% of GDP primary surplus, but a supplementary budget has increased this to 3% of GDP because of one-off expected revenues. Delayed stamp duty of SCR225 million, from the sale of Cable & Wireless Seychelles in 2017 and some tax arrears, related to the Seychelles Port Authority, will boost revenue.

This has allowed the government to boost spending across a number of lines, while also pencilling in the larger primary surplus.

In December 2017, the IMF and Seychelles agreed a three-year Policy Coordination Instrument (PCI), following the completion of the previous EFF. The PCI does not entail disbursements but ensures ongoing technical cooperation and a framework for reform. The final phase of the progressive income tax, which started in April 2016, will happen in June 2018. The ministry of finance estimates that this measure will have reduced revenue by 1.5% of GDP by the end of 2018. To offset some of these losses, the government is finalising a new property tax for later in 2018 and is planning other measures for 2019, such as allowing some tourism tax incentives to expire and boosting maritime vessel registration fees.

The government is aiming to reduce public debt/GDP to 50% in 2021, including debt issued for monetary purposes. Total public debt was 61.2% of estimated GDP, at end-2017, according to ministry of finance (MOF) figures, which exclude debt owed to the IMF. The debt however includes debt issued for monetary purposes, such as treasury bills (T-bills) and treasury bonds (T-bonds), issued reduce liquidity).

The latter equated to 11% of GDP. Fitch excludes monetary debt from its calculation and includes debt owed to the IMF and on this basis estimates that government debt was 53% of GDP at end-2017. Sovereign external debt owed to commercial creditors was 11% of GDP. We forecast government debt/GDP will fall further, to 47% in 2019. The government’s strategy for debt reduction relies primarily on meetings its primary surplus targets, although it is also looking to unwind some of the stock of monetary debt. The constraint for that is the impact on money supply and potentially inflation.

In addition, as of 2017 year-end, publicly guaranteed debt, mostly domestic, totalled SCR801 million, which is 3.9% of GDP. In terms of potential contingent liabilities, the main source is non-guaranteed SOE debt, which the authorities estimate at SCR2,025 million in 1Q18, which equates to around 9% of forecast 2018 GDP.

Seychelles’ external finances and vulnerability to shocks remain a drag on the rating. Large and persistent current account deficits, averaging 20% of GDP in 2010-2017, underline Seychelles’ external financing vulnerability. This is also constrained by high gross external debt, around 100% of GDP, and relatively undiversified sources of foreign exchange, that is tourism and fishing.

The authorities have sought to mitigate this by increasing foreign reserves and maintaining a flexible exchange rate. The exchange-rate regime has been liberalised since November 2008. The Central Bank of Seychelles (CBS) has largely avoided significant interventions in the foreign-currency market. The CBS has intensified efforts to limit the risk of losing correspondent banking relationships. The authorities now undertake a National Risk Assessment to guide Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) policies.

Gross international reserves (GIR) increased to $545 million at the 2017 year-end, equivalent to 3.4 months of current external payments (CXP). The ratio was below one month before 2009 and averaged 2.7 months between 2009 and 2014. Gross international reserves (GIR) increased to $567 million as of mid-June 2018, with the central bank reporting higher tourism earnings. With higher oil prices persisting and external debt service obligations over 2018, we expect reserves to fall by end-2018, before growing again in 2019.

Seychelles benefited from the oil price slump between 2015 and 2016, but now faces negative impacts of the renewed increase in oil prices, which are feeding through into a weaker rupee and higher inflation. These have not hit FX reserves yet. Inflation trended up to a 12-month average of 3.8% year-on-year in May from 2.9% in December 2017.

In this context, and with private sector credit growth running close to 20% year on year, the CBS tightened policy as of April 2018 by increasing the Standing Deposit Facility to 2% from 1% and the standing credit facility to 8% from 6%. The rates form the corridor for short-term money market interest rates. The reserve money target was reduced by 0.8% from the first quarter.

The GDP per capita, which was at  $15,680 in 2017, is 2.7x larger than the BB median. The World Bank reclassified Seychelles as a ‘high income’ country in July 2015, although both domestic sources and the UN reports that income inequality is high. Seychelles also outperforms the ‘BB’ median in the UN human development indicators and World Bank governance indicators.

The cohabitation between the Parti Lepep presidency and an opposition-controlled National Assembly, the first such political configuration since multi-party polls began in 1993, has not damaged government effectiveness. Nonetheless, the opposition has continued to call for an early presidential election, with the next election due in 2020. While this presents some risk of political turbulence, Fitch expects broad policy continuity.