Fitch Ratings-London-01 February 2010: Fitch Ratings has today assigned Seychelles Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B-' and 'B' with Positive Outlooks, respectively. Fitch has also assigned Seychelles a Country Ceiling of 'B-' and a Short-term foreign currency IDR of 'B'.

"Seychelles' newly-assigned ratings signal its emergence in January 2010 from a default event after the successful conclusion of a debt exchange with the holders of its USD230m Eurobond and EUR55m promissory note," says Purvi Harlalka, Associate Director in Fitch's Sovereigns group. "The Positive Outlook reflects the potential for creditworthiness to improve, given continued strong implementation of the authorities' impressive reform programme".

Following the debt exchange and earlier write-offs from the Paris Club and other bilateral creditors, the maturity profile of external public debt is significantly improved and the debt burden materially lowered to a projected 50% of GDP in 2010 from 144% of GDP in 2008. The sovereign's immediate financing needs have been significantly reduced to less than USD30m per annum (3% of GDP) over 2010-11.

A total USD100m worth of unrated external liabilities owed to private sector creditors, mainly foreign commercial banks, have been restructured or are in the process of being restructured, with the intention that this process be largely completed by the end of Q110. With only just over 10% of foreign currency debt to the private sector still under negotiation, and owed to just one or two banks, the agency is satisfied that Seychelles has normalised relations with the international financial community and that the default has been cured.

However, the rating also takes into account Seychelles' history of macroeconomic and fiscal mismanagement, narrow economic base, still high debt levels, large current account deficit and low levels of foreign exchange reserves that render it susceptible to external shocks. These factors continue to constrain the rating. On a positive note, the authorities are aggressively implementing an ambitious and challenging reform programme including the floating of the exchange rate, elimination of subsidies, and extensive public sector downsizing. Fiscal performance has been impressive, outperforming IMF targets despite a sharp drop in GDP, and inflation has been significantly reduced. The extension of an IMF programme to a three-year Extended Fund Facility is testament to the authorities' long-term commitment to reform despite ongoing challenges. As a result, Fitch expects Seychelles' credit profile to gradually improve, consistent with the Positive Outlook on the rating.

Reforms instituted thus far have helped confer a nascent stability since the 2008 crisis. Inflation has moderated from 63% y-o-y at its peak in December 2008 to -2.5% y-o-y in December 2009 and is expected to average 2.3% in 2010. The exchange rate, which fell 50% after its floatation, has also recovered by over 30% from its trough, while interest rates on benchmark 91-day treasury bills have moderated to about 4% in January 2010 from 30% in January 2009. These rapid reversals have prevented major losses in the domestic banking sector, causing the government's contingency recapitalisation reserve of SCR300m (3.4% of GDP) to remain largely unused. In addition, at 7.5%, output contracted by less than expected in 2009, partly due to buoyancy in tourism - arrivals were virtually unchanged in 2009 relative to 2008 - a better performance than many other tourist destinations. Fitch expects GDP growth to recover to a reasonable 4%-5% pace over 2010-2011.

Fiscal dynamics are also positive. In 2009, Seychelles recorded an impressive primary surplus of 13.4% of GDP against the targeted primary balance. Although largely due to one-offs, primary surpluses targeted over the next three years, although more modest, are still an impressive 6-7% of GDP. These will accrue largely due to moderation in expenditure, as although the tax system is being extensively overhauled, this is designed to be revenue neutral. As the surpluses will be used to pay down domestic debt, together with the restructuring in external debt, they will bring about a reduction in total government liabilities to 84% in 2011 from 194% of GDP in 2008. However, indebtedness will nevertheless remain significantly above the 29% of GDP 'B' range median.

Although the sovereign debt service burden falls from 182% of foreign exchange reserves (FXR) in 2007 and 103% in 2008 to 15% in 2010, external finances will remain a rating weakness. The current account deficit (CAD) is forecast to start widening again from 19% of GDP in 2009 to about 30% of GDP in 2010 and 2011, and although the bulk of this will be financed by foreign direct investment (FDI), foreign reserves are also forecast to remain low (about 2 months of imports) suggesting that Seychelles' ability to withstand any external shocks will be limited. An improvement in Seychelles' external liquidity profile coupled with the embedding of macroeconomic stability and continued reform implementation will be key to any future rating upgrade.

Applicable criteria available on Fitch's website at www.fitchratings.com; 'Sovereign Rating Methodology' dated October 16, 2009.

Contacts: Purvi Harlalka, London, Tel: +44 (0) 20 7417 6318; Richard Fox: +44 (0) 20 7417 4357.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Additional information is available on www.fitchratings.com.

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