Bangkok--5 Nov--Standard & Poor's Standard & Poor's Ratings Services said today that it had affirmed its 'B' foreign currency and 'B+' local currency long-term sovereign credit ratings on the Republic of Seychelles. The 'B' short-term sovereign credit ratings were also affirmed. At the same time, however, the outlook on the long-term ratings has been revised to negative from stable. The outlook revision reflects the possibility of a downgrade if there is a continuation of fiscal slippages stemming largely from expenditure overruns, and if the public sector's heavy debt burden continues to rise in nominal terms and as a proportion of GDP. The Seychelles' fiscal imbalances and indebtedness sustain continuing, albeit somewhat reduced, external liquidity pressures. General government spending rose to 54% of GDP in 2006, from 46% in 2005. This yielded a budget surplus that was nearly 3% of GDP lower than planned, and which ultimately relied on year-end unbudgeted inflows. Similarly, for this year the initial fiscal surplus target of 7% of GDP was scaled down to below 4%, with an expected 75% rise in capital spending against the originally planned figure. Set against an accumulated public sector debt stock of 171% of GDP net of deposits currently, and with a rising portion of external and commercial debt as a share of total debt, these slippages exacerbate the sovereign's vulnerability to adverse shocks. The weaker-than-expected fiscal performance, combined with the lack of progress in privatization which could bring about faster debt reduction, detract from the authorities' numerous achievements over the past year in implementing fundamental reforms. Chief among these have been the gradual and orderly partial liberalization of the exchange rate, and the steps taken to normalize relations with external creditors and major foreign investors. Since October 2006, the currency has depreciated 32%, though the prevailing shortages indicate it still remains overvalued. In parallel with the managed depreciation, the authorities embarked on a systematic program to reduce the government's substantial debt arrears to various types of creditors, and enabled major foreign investors to repatriate accumulated profits, the result of prolonged foreign exchange shortages. While an agreement with Paris Club creditors is yet to be reached, the progress so far removes a major rigidity in external financial affairs by enabling the resumption of concessional borrowing. These developments complement a resurgence of foreign direct investment in the Seychelles, projected at 28% of GDP this year, which together with a more competitive exchange rate is expected to ameliorate still significant weakness in external liquidity. The outlook could revert to stable on evidence that fiscal consolidation is pursued with renewed vigor, such that expenditure overruns are eliminated, to yield fiscal surpluses in line with previous government commitments, enabling significant debt reduction. These steps will be essential to alleviate the increased vulnerability from the rise in total and external leverage brought about by foreign borrowing and concurrent exchange rate depreciation. Conversely, the ratings would come under downward pressure should fiscal outcomes convey withering commitment to the more robust pace of consolidation needed to meet the government's debt target of 60% of GDP by 2016. Complete ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Media Contact: David Wargin, New York (212) 438-1579 [email protected] Analyst Contacts: Agost Benard, Singapore (65) 6239-6347 Sani Hamid, Singapore (65) 6239-6346