2014: Economic growth slowed down but economy remained stable |31 December 2014

 

The year 2014 started on a bright note following the buoyant performance of 2013 when the economy grew by 5.3 percent in real terms supported by an upbeat performance of the tourism sector while notable results were also realised in the manufacturing sector.  Such outcome was against a backdrop of a more relaxed policy environment with a focus which extended beyond the short-term and which provided for a forecasted growth of 3.7 per cent.  However, based on the latest projection, growth in real GDP would be at around 2.8 per cent, representing a downward revision from the initial forecast and at a slower pace compared to 2013.

The projected lower economic growth is primarily due to a slowdown in the contribution from tourism and related activities as well as an overall decline in manufacturing output.  The performance of the manufacturing sector based on the production indicators for January to September 2014 showed year-on-year declines in, for example, output of ‘beer’, ‘soft drinks’, ‘canned tuna’ and ‘blocks’ by 17 per cent, 4.4 per cent, 14 per cent and 7.5 per cent respectively.  As for the indicators of the performance of the tourism sector, visitor arrivals is expected to finish the year close to the same level as the previous year. Europe remained the main supply market but further diversifications were observed during the year with the Russian, Chinese, African and Middle Eastern markets recording a noteworthy increase in their respective contributions.  Such outcome was mainly the result of an increase in the number of flights to these regions as well as marketing strategies geared towards increased diversification.  However, the direct earnings from tourism are projected at 5.0 per cent lower than in the previous year.  

Against the above backdrop, the economy experienced a strong growth in private consumption fuelled by an increase in income and an expansion in credit, all of which underpinned higher demand for foreign goods, which led to balance of payments pressures and corresponding adjustments in the external value of the domestic currency.  As such, 2014 was arguably an important test of how the Seychelles’ economy adjusts to major shocks while it also gave an indication of the strength of its underlying fundamentals.  

Going into the second half of the year, growth in credit to the private sector has been hovering in the double digits.  Expectedly, such growth in credit translated into an increase in imports and consistently higher demand for foreign exchange.  The resulting growth in demand for foreign exchange exceeded that in supply which under a floating exchange rate regime should result in a depreciation of the domestic currency until a new market-clearing equilibrium is reached.  However, due to certain rigidities in the market, the exchange rate adjusted with some delays and consequently, in early August, certain demands for foreign currency were being met with a lag.  Nonetheless, following the adjustment of the domestic currency, the unmet demand was cleared by the end of October.  With the adjustment, the domestic currency depreciated to an average of R14.10 against the US dollar (by R2.02 or 17 per cent) towards the end of December 2014 compared to its value at the end of December 2013.  

Chart01: Exchange Rate Movement: SCR per USD
 

To reduce demand pressures in the foreign exchange market and stabilise the domestic currency, there was a tightening of monetary policy in the second half of the year.  Consistently, an overall increase in interest rates was observed.  
As regards to movement in prices as measured by the consumer price index (CPI)), the rate of inflation fell from 4.3% end-December 2013 to 1.6% in November 2014.  However, given the high pass-through of an exchange rate adjustment, this is expected to reflect in the price index in the coming months.

Chart 02: Consumer Price Index
 

Notwithstanding the above pressures, the external reserves of the country improved during the year, particularly in the first half.  With this accumulation in the reserves position, it further improves the country’s resilience against external shocks.  Gross official reserves are forecasted to reach US $464 million by the end of 2014 compared to US $425 million end-2013.  The corresponding increase in import coverage is from 3.7 months to 4.1 months.  

Chart 03: Gross Reserves and Import Cover
 

Notwithstanding the improved reserve adequacy level, the strong growth in import payments relative to exports earnings resulted in a widening of the current account deficit as a ratio to GDP from 17 per cent last year to 23 per cent in 2014.  

On the fiscal front, given the strong revenue performance throughout the year, the primary surplus is expected to reach 4.4% of GDP compared to the initial target of 3.7% of GDP.Moreover, the revised projection for total revenue is 7.6 percent above the level of 2013, mainly due to stronger than forecasted value added tax (VAT) and trades tax, which are expected to be 35 per cent above 2013 levels.  Such performance is primarily related to the increased value of imports.  Overall, the year’s fiscal outcome remained consistent with government’s medium-term strategy of public debt reduction to 50 per cent of GDP by 2018, with the stock of public debt forecasted to stand at 62 per cent of GDP by end-2014.