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���������ֳ� - London - 18 Dec 2020: ���������ֳ� 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, ���������ֳ� 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. ���������ֳ� 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 ���������ֳ�'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). ���������ֳ� 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%. ���������ֳ� 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.

MEDIUM

���������ֳ� forecasts the current account deficit widens to 30.5% of GDP at end-2020, from 16.4% at end-2019 and the highest in the 'B' rating category. A near 60% fall in tourism revenues, which accounted for around three-quarters of FX receipts last year, is partly offset by import compression including from a forecast 75% drop in net FDI. Foreign exchange reserves have fallen by less than expected, to USD563 million at end-November from USD594 million at end-February. This reflects a large drawdown of private sector foreign assets to meet foreign-exchange demand, and likely positive net error and omissions in the balance of payments, including from statistical over-reporting of the size of the trade deficit.

Central bank FX interventions were limited to supporting the normal functioning of the FX market, totalling USD29 million this year, in the face of the sharp depreciation to USD/SCR21.2 from USD/SCR13.9 in mid-March. ���������ֳ� projects the current account deficit steadily narrows to 22.3% of GDP at end-2022, with recovering tourism demand also helped by the weaker Seychellois rupee. We forecast net FDI recovers to 12.0% of GDP in 2022 from 5.3% in 2020, and FX reserves fall to 2.5 months of current external payments at end-2022 (from 4.7 months at end-2020, below the projected 'B' median of 4.0 months). Net external debt/GDP is rising rapidly to a forecast 85.6% of GDP at end-2021, from 33.4% at end-2019, well above the peer group median of 32.8% of GDP, driven by the exchange rate depreciation, fall in nominal GDP, reduction in private sector assets, and increase in sovereign external debt.

There is greater uncertainty over external financing sources next year. Planned IFI budget support and project loans cover only around one-quarter of the current account deficit plus FDI. Existing external debt service totals USD51.4 million in 2021 and USD54.1 million in 2022 (50% of which is private sector, mainly Eurobond payments). External financing was boosted this year by USD31 million IMF Rapid Financing Support and USD22 million from the World Bank but IFI budget support is set to fall next year, and no Eurobond is planned. The government is exploring bilateral support of around USD70 million. ���������ֳ� considers the possibility of a new funded IMF programme has increased. The negotiation of any such programme is likely to be unproblematic, given Seychelles' strong track record of adherence to previous programmes, including the current Policy Coordination Instrument (notwithstanding that the latest review could not be completed due to Covid-19 constraints).

Seychelles 'B' IDRs also reflect the following key rating drivers:

Seychelles' GDP per capita, governance, and human development indicators are much higher than the peer group medians, and there was a strong track record of stable fiscal balances coming into this crisis (averaging 0.2% of GDP surplus in 2015-2019). Set against these factors are Seychelles' small and undiversified economy, structural current account deficit, high external debt, volatile GDP growth and vulnerability to external shocks.

The victory of Wavel Ramkalawan in October's presidential election marked the first peaceful transfer of presidencies from different parties since independence. President Ramkalawan's LDS increased its majority in the National Assembly, winning 25 out of the 35 seats. ���������ֳ� anticipates broad continuity of macro and fiscal policy, with steady economic reform and general compliance with IMF benchmarks, helping underpin a post-coronavirus fiscal adjustment, consistent with the initial statements of the new government. Legislative risks have been reduced somewhat by the new president representing a party that holds a majority in the National Assembly, albeit the minority position of the previous president had not resulted in legislative gridlocks.

The banking sector entered the crisis well capitalised and profitable, which will help absorb the expected deterioration in asset quality. Local currency credit grew 6.5% yoy in October, but we expect that greater pressure on capital positions will impair lending, constraining the pace of economic recovery. The sector Tier 1 ratio fell to 15.4% in October, from 17.1% in March. The non-performing loan ratio has remained low and relatively stable at 2.6%, although we expect it will rise markedly over the next year.

There continues to be a risk of loss of correspondent banking relationships due to anti-money laundering concerns with associated reputational costs for Seychelles. Policy in this area has been enhanced through the enactment of anti-money laundering and beneficial ownership legislation and technical assistance from the World Bank.

ESG - Governance: Seychelles has an ESG Relevance Score of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Seychelles has a medium WBGI ranking at the 65th percentile, reflecting 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

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

- General government debt/GDP returning to a firm downward path over the medium term, for example, due to a sustained recovery in economic growth and a post-coronavirus-shock fiscal consolidation.

- A reduction in external vulnerabilities, for example, from a sustainable narrowing of the current account deficit net of FDI driven by a solid recovery in the tourism sector, supporting a higher reserve coverage ratio and reduction in net external indebtedness over the medium term.

The main factors that could, individually or collectively, lead to negative rating action/downgrade are:

- More acute balance of payment pressures leading to a larger fall in foreign-exchange reserves and higher external debt ratios.

- Failure to place general government debt/GDP on a firm downward path over the medium term, for example due to more prolonged weakness in economic activity, greater structural fiscal loosening, or additional crystallisation of contingent liabilities.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Seychelles a score equivalent to a rating of 'B+' on the LTFC IDR scale, two notches lower than the 'BB' SRM score at our previous review.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

- External finances: -1 notch to reflect the Seychelles' high gross and net external debt, large and persistent current account deficits, and very high dependence on tourism and fisheries for FX, leaving it exposed to further shocks.

The removal of the -1 notch under Macroeconomic performance, policies and prospects since the previous review reflects the fact that the volatility of GDP growth it captured has now fed through to a lower SRM score (in explaining the addition of this notch when downgrading Seychelles' IDRs at the last review we cited the "expected further negative impact on the SRM score").

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [/site/re/10111579].

Key Assumptions

- ���������ֳ� assumes that the global economy develops in line with its Global Economic Outlook published on 7 December.

- ���������ֳ� assumes that the global tourism industry experiences a gradual recovery extending into 2021-22 after the initial, sharp shock from the Covid-19 pandemic this year.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Seychelles has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are highly relevant to the rating and a key rating driver with a high weight.

Seychelles has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Seychelles has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.

Seychelles has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Seychelles, as for all sovereigns.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v1.7.1 (1)
• Debt Dynamics Model, v1.2.1 (1)
• Macro-Prudential Indicator Model, v1.5.0 (1)
• Sovereign Rating Model, v3.12.1 (1)

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