Sovereign Analysis /

Seychelles: The canary is back on its perch

  • The government isn't about to restructure and/or default after all

  • Statement on 23 April seeks to clarify what it had said in its revised budget on 7 April about needing to restructure

  • But there may be some reputational damage and concerns will linger about the economic damage caused by Covid-19 too

Seychelles: The canary is back on its perch
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
1 May 2020
Published byTellimer Research

The Ministry of Finance announced on 23 April that it intends to continue honouring its international debt, including its eurobond payments (see its press statement here). The statement follows the announcement in the amended 2020 budget statement on 7 April in which the government noted that the dire economic situation meant that it will approach its creditors to discuss the possible restructuring of its international debt (see our research, Seychelles: Canary in the coal mine dated 8 April). Without providing further detail, markets took this at face value and the country's only international bond (SEYCHE 8% 2026) fell some 30pts (from the mid-90s to the high 60s, on an indicative mid-price basis). 

The new statement seeks to clarify the government's position given the ensuing market reaction and uncertainty. The government confirmed that it is currently able to meet its obligations to all its international creditors and "does not intend to defer on its commitments at this stage". It stated that all debt obligations for FY 20 have already been factored into the 2020 Budget and its official reserves projections for the year. It noted that US$51.1mn worth of foreign debts falls due for payment this year. We note that this compares with reserves (net basis) of US$438mn as of January 2020 (2.7 months of imports). 

The clarification – that it will pay and not default – is welcome and may have come after the authorities observed the price action of its bond following its amended Budget, perhaps also after enquiries from market participants and bondholders as to their intentions, and cognisant of the potential adverse impact on its otherwise solid sovereign rating (which has taken it a decade to repair after its previous default following the GFC). Seychelles is rated BB by Fitch and we are pretty sure the government will want to try to preserve this during this crisis if it can. The government might have been unaware of, or underestimated, the impact of using the R-word (with markets especially sensitive to it in these times), or failed to communicate clearly enough what it meant, although this would be surprising given the country's impeccable track record on macroeconomic policies and debt management since the GFC. And, if it was aimed more at seeking support from its official sector creditors rather than bondholders, that cannot be the case either as the clarification restates its commitment to pay all its international creditors. 

But some reputational damage has been done, although we hope it is not permanent and the economic crisis for Seychelles is still real. While better late than never, we suspect even with this clarification, it may take a bit of time for the bonds to recover the ground they lost, and that they may not recover entirely, as investor concerns linger about the economic damage caused by the coronavirus pandemic and its impact on fiscal and debt sustainability and repayment capacity, if not this year, then for 2021 and beyond. The bonds are still indicated around 68 (mid), with a yield of c17%, although their small size, relative illiquidity and limited trading may also be a factor.