Republic of Seychelles Assigned ‘B’ FC And ‘B+’ LC Ratings; S&P’s 113th Rated Sovereign
SINGAPORE (Standard & Poor’s) Sept. 15, 2006--Standard & Poor’s Ratings Services today said it had assigned its ‘B’ long-term and ‘B’ short-term foreign currency sovereign ratings, and its ‘B+’ long-term and ‘B’ short-term local currency sovereign ratings on the Republic of Seychelles (Seychelles). The outlook is stable. The Seychelles is the 113th sovereign rated by Standard & Poor’s.
The ratings on the Seychelles are supported by the country’s recent strong fiscal performance, entrenched political stability, high per capita income, and advanced social indicators. “These factors are, however, balanced against an onerous public sector debt burden, multiple arrears on bilateral and multilateral loans, as well as the country’s exchange rate regime that imposes considerable distortions, constrains growth, and impairs external viability,” Standard & Poor’s credit analyst Agost Benard of the Sovereigns Ratings group said.
The ratings on the Seychelles are supported by a turnaround in the country’s fiscal management, which has seen robust surpluses delivered in recent years in conjunction with a strong commitment by the administration to maintain this trend in the future. The ratings are also underpinned by social and political stability combined with high levels of human development, which include per capita income, health, education, and literacy standards. These achievements make the Seychelles the only country in Africa that the United Nations Development Programme (UNDP) ranks in its “high human development” category. “Given the correct macroeconomic policy mix, this social and political backdrop should enable the Seychelles to make relatively quick inroads toward reducing its substantial debt overhang and revive its stagnant economy,” Mr. Benard said.
The main constraining factor for the ratings on the Seychelles is its high public sector debt level and the associated impairment of fiscal and external flexibility. Decades of deficit financed growth, high levels of social spending, and balance of payments gaps resulted in an accumulated public sector debt stock of 174% of GDP on a net basis at the end of 2005. The macroeconomic policy mix that led to the country’s high debt levels was a hallmark of the long tenure of the previous executive, under which development objectives based on a socialist ideology took precedence over economic prudence. This approach has only begun to change with the ascendance of the current president who, in his original capacity as finance minister, initiated microeconomic reforms in recognition of the need to arrest rising debt levels and bolster the economy after several years of moribund performance.
Also constraining the ratings is the country’s fixed, administratively set exchange rate, estimated to be at more than 50% above its market rate. The resultant shortage of foreign currency has directly contributed to the arrears on public sector foreign debt to multilateral and bilateral lenders (US$144 million at June 2006). In addition, this shortage constrains growth by preventing the import of necessary inputs, and deters foreign investment due to the difficulty of repatriating profits.
The ratings are also constrained by the vulnerability of the Seychelles’ economic growth and external position, caused by a substantial reliance on tourism and fisheries for output growth and foreign exchange earnings. In the past, downturns in tourism due to geopolitical events revealed the economy’s susceptibility to such exogenous shocks.
The ratings on the Seychelles could improve with a credible and well-executed exchange rate liberalization that enables adjustment of the Seychelles Rupee (SCR) toward its equilibrium level, without a major shock to the economy. The ratings would also benefit from the complete resolution of the arrears overhang in a manner that preserves good creditor relations. The ratings could come under downward pressure, however, if exchange rate liberalization is substantially delayed or causes economic disruption, or if it is insufficient to address underlying distortions. Downward pressure on the ratings would also result if fiscal consolidation withers due to a weakening of resolve in the face of potential political or economic exigencies.
