Fitch Ratings has downgraded Seychelles' Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B' from 'B+', with a Stable Outlook.
KEY RATING DRIVERS
The downgrade of Seychelles IDRs reflects the following key rating drivers and their relative weights:
HIGH
General government debt/GDP is rising more sharply than we projected at our last full review in May (when we downgraded the IDRs by two notches), reflecting a slower recovery in tourism, extension of fiscal measures, and greater exchange rate depreciation. There is also greater uncertainty over the financing of next year's fiscal deficit. In addition, Fitch forecasts wider current account deficits than previously, a faster increase in net external debt/GDP, and overall external vulnerabilities remain high, despite foreign exchange reserves falling less than expected this year.
The Stable Outlook reflects a forecast recovery in economic growth that will provide support over time to the Sovereign Rating Model score, a moderate near-term commercial external debt repayment schedule, and a good track record of adherence to IMF programmes that would help negotiate a new funded programme.
GDP is forecast to contract by 15.5% this year, due to the collapse in tourism, which accounts for an estimated 25% of GDP (or 55% if indirect factors are included). Growth in the canned tuna sector, large fiscal stimulus, 200bp of interest rate cuts, and robust credit growth have provided some support to economic activity. Fitch has revised down its 2021 GDP growth forecast by 2.0pp to 5.0% on expectations of a more gradual pick-up in tourism in 1H21.
Our projection for GDP growth to accelerate to 6.5% in 2022 reflects the resumption of FDI, and benefits of vaccination, alongside the low base in tourist numbers and a view that Seychelles' high-end tourism model provides somewhat greater insulation from potential structural impacts from the coronavirus shock. There remain sizeable downside risks to our forecasts, should the Covid-19 pandemic not be effectively contained in line with Fitch's baseline assumption.
The general government deficit is projected to widen to 19.0% of GDP in 2020, from close to balance last year, the highest in the 'B' rating category. This is 3.9pp higher than we forecast at the previous full review in May, partly reflecting the extension into 4Q20 of wage subsidies (which total 6.5% of GDP in 2020). Fitch has also revised up its 2021 deficit forecast by 7.4pp to 14.1% of GDP, which incorporates the government's plan for further employment measures in 1H21 costing 3.4% of projected GDP and support for Air Seychelles of close to 3.5% of GDP.
We forecast the deficit falls to 9.1% of GDP in 2022, in line with a stronger economic recovery, withdrawal of the fiscal support package, and much smaller transfers to SOEs. There is a risk of additional crystallisation of contingent liabilities, which are estimated at close to 19% of GDP, including from Air Seychelles, where the USD71.5 million "project box" bond owed to Etihad is currently being restructured.
General government debt is forecast to rise to 86.5% of GDP at end-2020, from 50.5% at end-2019, well above the projected 'B' median of 63.8%. Fitch excludes debt issued for monetary purposes (8.6% of GDP) as these treasury bills are fully backed by deposits at the Central Bank. The weaker Seychellois rupee has contributed to the increase in general government debt, 49.6% of which is foreign currency-denominated. We project debt peaks at 95.8% of GDP at end-2021, 17.3pp higher than we forecast at the last review, before falling to 89.3% at end-2022.
This year's financing need has largely been met through domestic sources (close to 85% of total), mainly through T-Bills, and SCR1.5 billion (7.5% of GDP) of three, five and seven-year bonds. The government plans further heavy reliance on net domestic issuance in 2021 and 2022 but there is greater uncertainty over the capacity of the domestic market to absorb this.
