Seychelles lifted by tourism

Seychelles’ long-term foreign-currency issuer default rating (IDR) has been lifted to B+ from B, with a stable outlook, by Fitch Ratings, on the back of a rise in tourism activities.

The country’s tourism arrivals have rebounded faster than expected since the country reopened its borders in March 2021.

Arrivals are on course to reach 70% of the 2019 level by end of 2021. Strong vaccination rollout, as of 8 November, 78% of the population is fully vaccinated, are expected to be supportive of the sector.

A sharp resurgence of the crisis in main source markets for tourism is the main downside risk to the recovery of the tourism sector.

Disruption in the operations of the distressed national carrier Air Seychelles would also pose a downside risk to the growth outlook.

Fitch expects real gross domestic product (GDP) growth to reach 6% in 2021, peak at 6.8% in 2022 and moderate to 4.8% in 2023, with the current B median at 4.1%.

Investment is set to pick up in 2022 and 2023, as hotel construction and expansion projects that were paused in 2020 and part of 2021 resume.

However, this will also contribute to higher import costs, given capital goods imports, global supply chain disruptions and high oil prices.

Export growth will be underpinned by tourism receipts and tuna exports, although high oil prices and investment-related imports will constrain the contribution of net exports to growth.

The strong rebound in economic activity in 2021 and resulting revenue growth will lead to the budget deficit contracting more quickly than previously expected.

Fitch expects the deficit to shrink from 18.4% of GDP in 2020 to 9.4% in 2021, from the previous projection of 11.9%, and average 4.4% in 2022 and 2023 for the previously 7.1%.

Grants will account for a cumulative 7pp of GDP over 2021 and 2023. Tax revenues are projected to increase by 9.1% in 2021 and average 6.7% annual growth in 2022 and 2023.

The expiry of crisis-related fiscal support and tapering of other social transfers will contribute to a reduction in headline expenditure, which is expected to fall below pre-crisis levels by 2023.

Total social transfers peaked at 16.7% of GDP in 2020 and are expected to drop to 8.7% by end of 2021 and average 6.5% in 2022 and 2023.

However, capital expenditure growth will be strong in part to compensate for deferred projects from 2020, averaging 13.4% in 2021 and 2023.

Fitch expects a faster decline of gross general government debt (GGGD) levels than previously, given the strong expected nominal GDP growth and improved budgetary performance, which reduces issuance needs.

GGGD to GDP will fall to an estimated 77.3% by end of 2021, from the previous projection of 94.4%, 72.% in 2022 and 68.3% in 2023, compared to the current B median of 89.6%, from nearly 90% in 2020.

Under Fitch’s baseline, debt will remain above pre-crisis levels by 2025, but the trajectory is firmly downward, barring a major fiscal or currency shock, 48% of public debt is forex (FX)-denominated.

Authorities are seeking to move away from higher-cost domestic funding and benefit from multilateral and bilateral loans, and external grants for financing.

The successful execution of a liability management operation in July 2021 led to the conversion of SCR1.2 billion, 4.8% of GDP in short-term debt to three, five and seven-year treasury bonds. This raised the average maturity of domestic debt to 3.2 years, a 28% increase from end of 2020.

Authorities do not currently intend to issue more external debt, while domestic financing costs have fallen substantially since the start of the year.

Government guarantees, mainly to state-owned enterprises, amount to 5.5% of GDP as of third quarter 2021. This poses a risk to public finances.

Earlier in 2021, the government took over distressed national carrier Air Seychelles’ liabilities to Etihad of $11.4 million, representing an 80% haircut. In 2021, the government has paid about $12 million, 0.8% of 2021 GDP, in subsidies to Air Seychelles to support wages.

In July 2021, the IMF approved a 32-month $105.6 million, 7.3% of projected 2021 GDP, extended fund facility (EFF) for Seychelles. This will help meet financing requirements in 2021 and 2023 and is positive for debt sustainability.

Seychelles is also expected to receive a $35 million loan from the World Bank in late 2021 or early 2022, which should further mitigate financing pressures.

Seychelle boasts strong governance, development and income per capita metrics relative to peer group medians and a good record of public debt reduction pre-crisis. Set against these factors are Seychelles’ small and undiversified economy, and weak external metrics compared with peers.

The country’s economic performance is highly volatile and exceptionally dependent on tourism which contributed to 25% of GDP in 2019.

A rebasing exercise by the authorities in quarter four of 2021 led to notable revisions to recent years’ data, for example, real GDP growth for 2019 was revised from 1.2% to 4.2%.

External finances are a rating weakness for the Seychelles, owing to large and recurrent current account deficits (CAD) and a large external debtor position.

Nevertheless, support from the IMF and other international creditors, and a stronger tourism sector performance will mitigate external vulnerabilities.

Fitch expects the CAD to be volatile and large, at 19.2% of GDP in 2021 and average 17.7% in 2022 to 2023, compared to the current B median of 3.2%.

FDI is expected to pick up in 2022 to 2023, particularly in the hospitality sector, although it will not be sufficient to fully cover the CAD.

Fitch expects the Seychelles’ FX reserves position to stabilise at around four months of import cover in 2021 to 2023, compared to the current B median of 5.1.

The rating agency would downgrade the rating if there were acute balance-of-payment pressures, from a sharp drop in tourism receipts, leading to a sustained fall in FX reserves and higher external debt ratios.

Fitch would also drop the rating if there were failure to place GGGD/GDP on a firm downward path over the medium term.

The rating agency would upgrade the rating if there were greater confidence that GGGD/GDP remains on a firm downward trajectory beyond 2022.

Fitch would also upgrade the rating if there was a reduction in external vulnerabilities, for example, from a sustainable narrowing of the current account deficit, net of FDI.

This comes after Seychelles’ IDR was dropped by Fitch in 2020, as the tourism space took a hit from the COVID-19 crisis.

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