Fitch: Seychelles Vote Adds Risk; Broad Policy Continuity Likely
LDS, a coalition of four parties, won 19 seats in the National Assembly, a majority of five over President James Michel's Parti Lepep, which had been in power since multi-party polls began in 1993. Michel said that Parti Lepep, which dominated the National Assembly after an opposition boycott of the 2011 elections, "respects the people's opinion."
The victory for the opposition follows last December's close-run and controversial presidential election, which went to a second round and in which the opposition petitioned the Constitutional Court to annul the result (the court confirmed Michel as president in May). Seychelles' stable political environment is reflected in World Bank Governance indicators that outperform rating category medians.
It remains to be seen how the election outcome will affect policy formation and implementation. LDS can now block ministerial appointments and legislation, so its victory inevitably creates some uncertainty about the impact on policymaking. Much will depend on how much LDS chooses to oppose the government and on whether the president reshapes his cabinet in response to the vote to foster cooperation. But LDS' election campaign did not set out markedly different policy aims from that of Parti Lepep.
Notably, it has not opposed reforms under the current IMF Extended Fund Facility, which was approved in June last year. Impressive outcomes under successive IMF programmes since Seychelles was cured of a default in 2010 have increased external buffers, started reducing public debt, and improved the fiscal and monetary policy frameworks. This has been reflected in three sovereign rating upgrades between February 2011 and July 2015.
We affirmed Seychelles' sovereign rating at 'BB-'/Stable in July this year. The primary fiscal surplus target was exceeded again in 2015, gross international reserves cover rose to four months of current external payments, and the current account deficit, although still large, dropped to 17.7% of GDP, helped by lower oil prices and a bigger services surplus.
But while the authorities have maintained their broad emphasis on fiscal consolidation, various measures were announced in early 2016 that loosen fiscal policy to address poverty and income inequality. These include increases to the income tax threshold, pensions, and the minimum wage. The IMF has said that such measures would have "substantial fiscal costs" worth around 3% of GDP on a full-year basis. Some off-setting measures have also been announced, but the Ministry of Finance has pushed back its target to cut public debt to 50% of GDP by two years, to 2020.
Continued improvement of external buffers, reduction in public-sector debt in line with the medium-term fiscal plan, sustained GDP growth and value-retention in the economy, and a track record of moderate inflation are among the factors that could lead to positive rating action.
Reversal of fiscal reform, balance-of-payment pressures leading to falls in foreign-exchange reserves, and a prolonged period of macroeconomic instability demonstrating weakness in the policy framework are among the factors that could lead to a negative rating action.