One deal apologists for Lehman Brothers might not cite was its raising almost $300 million for an island nation of just 80,000 people. Indeed, the Seychelles looks a likely candidate for the title of Africa’s first sovereign Eurobond defaulter of the new millennium.
The Eurobond interest payment due at the beginning of October is Seychelles’ first since it defaulted on a €55 million private note this summer. But even if the state meets this payment, renewing the $230 million Eurobond through commercial means when it matures in 2011 looks likely to be difficult. Standard & Poor’s downgraded the government to Selected Default this summer. At the end of September, the Eurobond was still rated CCC–, meaning the agency thinks the likelihood of a default within 12 to 18 months is more than 50%.
The Seychelles’ funding needs are far greater than its current account receipts, and the central bank has only $40 million in reserves.
Honouring interest payments now, say sources, would seem to be only putting off an inevitable restructuring of the debt, and indeed the government is requesting a stand-by arrangement from the IMF. The government has hired legal and financial advisers on the matter.
"The Seychelles authorities have indicated their strong commitment to a fundamental economic reform, including a lifting of exchange controls," says Paul Mathieu, the head of the IMF’s mission to the Seychelles.
The Eurobond was trading at about 67 cents on the dollar in mid-September, having fallen from face value before the default on the private notes. In late August, however, it was trading at between 40 and 50 cents on the dollar.
"Reports in September from an IMF visit probably helped," says Stuart Culverhouse, head of research at London-based frontier markets specialist Exotix.
When it was issued with a coupon of 9.125% in the autumn of 2006, the Eurobond, originally of $200 million, was rated single B by S&P.
But foreign exchange restrictions and a fixed exchange rate in the Seychelles have long discouraged tourist dollars – which often never make it into the local banking system anyway. The official exchange rate is between 30% and 40% lower than the black-market rate.
To counter such problems, the exchange rate was devalued by about a third at the end of last year but this only increased the price of debt payments. Also, another $30 million was added to the Eurobond earlier in the year. The €54 million private note had also been taken out in 2007.
A weaker exchange rate also meant the import-dependent nation was even worse hit by the worldwide oil and food price rises. Inflation is running at about 25%.
Sources say an uneasy relationship between the finance minister and the central bank governor makes the transition to a more sustainable debt programme more complicated.