Default a Distant Memory as Seychelles Bonds Beats Region

Investors in Seychelles dollar debt are being rewarded with region-beating returns almost six years after the Indian Ocean archipelago defaulted as an improvement in tourism spurs economic growth.

The January 2026 securities returned 10 percent this year, beating the 8.2 percent gain in a Bloomberg index that tracks 56 emerging-market Eurobonds, excluding the nation. Yields on the bond tumbled to a record low last week amid projections Seychelles will post its fourth straight budget surplus this year, with tourism and fishing the government’s biggest sources of foreign income.

“We’ve been positive on the bonds for some considerable time,” Stuart Culverhouse, chief economist of Exotix Partners LLP in London, said by phone yesterday. “We see it as a good post-default recovery story. Some investors are beginning to share that view.”

Seychelles, which defaulted on about $311 million of debt in 2008, is coming back as vacation visits jumped 11 percent last year. Economic growth for the country of 90,000 people is forecast to rise 3.7 percent in 2014 and 3.8 percent next year, according to the International Monetary Fund.

Royal Honeymoon

The debt was restructured by offering holders in December 2009 a step-up bond, which pays interest of 3 percent to 8 percent over its duration. Seychelles’ notes rose three basis points, or 0.03 percentage point, to 8.68 percent by 7 p.m. in Victoria, the capital. The rupee gained 0.9 percent to 12.2470 per dollar, paring its loss this year to 1.5 percent.

Fishing and tourism contribute 19 percent to the economy, according to the country’s statistics office. Visits to the honeymoon spot of British royals Prince William and Kate Middleton reached 230,000 last year, according to President James Michel, whose party controls almost all seats in the National Assembly.

His government aims to reduce debt to below 50 percent of gross domestic product by 2018. The ratio was cut to 71 percent in 2013 from about 130 percent in 2008 amid the IMF bailout, according to the Washington-based lender.

“Seychelles was really a welfare state and it was very much financed through commercial loans,” Thea Fourie, senior economist for sub-Saharan Africa at risk-analysis company IHS Global Insight, said yesterday by phone from Pretoria, South Africa.

Debt ‘High’

While foreign-currency reserves rose 27 percent to the equivalent of 3.8 months of imports at the end of 2013 from a year earlier, the country’s debt-to-GDP ratio “remains high” at 65 percent, the IMF said in a June 5 report on its website. Reaching the 50 percent target requires “a fiscal path which strikes a balance between the pace of debt reduction and addressing vital social and investment needs,” the IMF said as it approved a $17.6 million loan over three years for Seychelles.

“We’ve seen in recent years that despite relatively harsh global conditions, the government stick to their guns,” IHS’ Fourie said. “I don’t think they will do anything at this stage to jeopardize” keeping a budget surplus, she said.

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