CENTRAL BANK OF SEYCHELLES

CENTRAL BANK OF SEYCHELLES MONTHLY REVIEW August 2013

1.0 Key Economic Developments August 2013 observed a slight monthly pick-up of 0.5 per cent in the Consumer Price Index (CPI) which was primarily associated with a seasonal movement in domestic price level. Nonetheless, the year-on-year change in the CPI was 3.7% compared to 3.3% in the previous months whilst the rate of inflation or 12-month average continued to decline, falling to 5.4% compared to 5.8% last month. The period under review also recorded a seasonal depreciation of the domestic currency against both the US dollar and the Euro. Real sector activity continued to be boosted by the strong performance of the tourism sector whilst to further cushion the country against external shocks, the Central Bank continued to accumulate international reserves. 1.1 Tourism In August 2013, the total number of tourists to the Seychelles amounted to 21,677, which was 15 per cent higher than recorded in the corresponding month last year. The European market accounted for 67 per cent of these visitors, albeit its share was 3.5 percentage points less than in the previous month. For the first time this year, Italy was market leader, contributing a total of 3,786 visitors, which was equivalent to 18 per cent of total visitor arrivals. Germany and France followed with a share of 14 per cent and 13 per cent, respectively. Notable was the increase in the number of tourists from Asia which was by 71 per cent and 28 per cent in comparison to July 2013 and August 2012, respectively. On a year-to-date basis, a total of 152,073 visitors arrived in Seychelles or 13 per cent higher than in the corresponding period of 2012. 1.2 Inflation The month-on-month change in the Consumer Price Index (CPI) for August 2013 was 0.5%. This was mostly driven by seasonal factors, which in particular impacted on the price of fish. Per cent (%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Chart 01: Inflation Annualised Year-on-year In addition to the afore-mentioned change in the price of fish, other components of the CPI, namely other food and the nonfood categories recorded a 0.2 per cent increase. The year-on-year inflation stood at 3.7%, an increase of 0.4 percentage points in comparison to the previous month. This was mostly driven by the 30% increase in fish prices. Price increases were also recorded in 1

the Other Food (5.3%) and Non Food (1.7 %) categories. As regards to the 12-month average inflation rate, the declining trend observed since March 2013 continued with the rate reaching 5.4% in the period under review compared to 5.8% last month. 1.3 Exchange Rates For August 2013, the rupee (SCR) traded at an average of 11.9855 and 15.9533 against the US dollar and Euro respectively. This was a monthly depreciation of the domestic currency by 0.2 per cent relative to the US dollar and 2.0 per cent vis-à-vis the Euro. Nonetheless, compared to the same period last year, the rupee has appreciated by 7.9 per cent and 1.2 per cent against the US dollar and Euro, respectively. R 18 17 16 15 14 13 Chart 02: Exchange Rates In terms of its average value for 2013 so far, the domestic currency has strengthened against both the US dollar and Euro, by 14 per cent and 12 per cent, respectively, in comparison to the corresponding period of the previous year. 12 11 2013 R/US$ R/EUR 1.4 Foreign Exchange Transactions During the month under review, the total value of foreign exchange purchased or supplied 1 reported by authorised dealers 2 amounted to US$38 million at 19 per cent lower than in the previous month. A decline was also observed in the volume of sales (or demand) and this was by 17 per cent, from US$51 million to US$42 million. Overall, the month under review recorded net sales of US$4.4 million. Foreign exchange transactions were mainly channelled through commercial banks, which accounted for 61 per cent and 65 per cent of total purchases and sales, respectively. 1 The tourism industry is the main source of foreign exchange inflows and the fact that the majority of visitors originate from the European continent, inflows are predominantly in Euros. 2 Reported by commercial banks and bureaux de change (authorised dealers) 2

1.5 Interest Rates The month under review observed a further decline in interest rates. At the end of the period, the effective lending rate stood at 11.72% at 28 basis points lower than in the previous month. Chart 03: Interest Rates Per cent (%) 13.8 13.5 13.3 13.0 12.8 12.5 12.3 12.0 11.8 11.5 11.3 11.0 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 Per cent (%) Consistently, the savings rate fell from 1.91% last month to 1.45%. As for interest rates on fixed-term rupee deposits, the average stood at 3.77% which represented a drop of 17 basis points relative to the previous month. A reduction in returns was also recorded Average Lending Rate Savings Rate (secondary axis) on all categories of the fixed-term rupee deposits and this was with the exception of those in the maturity bracket of less than 7 days which increased by 9.4 basis points. The decline in interest rates on instruments under the maturity profile, 7 days up to 3 months, above 3 months up to 6 months, above 6 months up to 12 months and greater than 12 months were by 14 basis points, 17 basis points, 15 basis points and 47 basis points respectively. The interest rate spread the difference between the average lending rate and the savings rate rose to 10.28% compared to 10.09% last month. Interest rates on government securities continued on the declining trend observed since November 2012, standing at 2.50%, 2.94% and 3.67% on the 91-day, 182-day and 365-day securities, respectively. 3

1.6 Monetary Aggregates 1.6.1 Reserve Money 3 R2,010 million remained the applicable reserve money target for the period after having been loosened by R30 million compared to the quarter ending Chart 04: Reserve Money March 2013. R (million) 2,950 2,850 2,750 2,650 2,550 2,450 2,350 2,250 2,150 2,050 1,950 1,850 1,750 1,650 Reserve Money Target During the month under review, no open market operations were conducted. Given the low inflationary risks, this allow for more credit to be extended to the economy in support of activity and thus growth. At the end of August 2013, the stock of reserve money stood at R2,811 million, which was R801 million above the target. 1.6.2 Money Supply Monetary statistics showed month-on-month increases of 4.8 per cent and 3.5 per cent in net foreign and domestic assets respectively in August 2013. The growth in net foreign assets was due to an improvement in that of the R (millions) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 Chart 05: Money Supply 2,000-9.0 Money Supply, M3 Money Supply, M2 Money Supply, M1 m-m Change - M3 m-m Change - M2 m-m Change - M1 Central Bank by 4.6 per cent whilst that of other deposit taking institutions increased by 5.2 per cent. The expansion in domestic assets was driven by increases in claims on all main sectors, namely private public entities and government. Consistent with the above movements in assets, the broadest monetary aggregate, M3, grew by 3.5 per cent compared to last month. Such expansion in M3 reflected an increase across all components of the money supply. The monthly increase in M2 was by 3.0 per cent whilst the growth in M1 was by 1.7 per cent. 7.0 5.0 3.0 1.0-1.0-3.0-5.0-7.0 Change (per cent) 3 Reserve money consists of currency in circulation and depository corporations reserves at the Central Bank. Under the adopted monetary targeting framework, the Central Bank has to ensure the level of reserve money does not exceed a predetermined ceiling. 4

On a year-on-year basis, M3 grew by 17 per cent following double digits growth in M1 (15 per cent), M2 (18 per cent) as well as foreign currency deposits of residents (16 per cent). 1.7 Credit At the end of August 2013, the stock of outstanding credit of other depository corporations stood at R6,504 million, which was a growth of 1.6 per cent compared to the previous month. Such movement was due to an increase in credit to the private sector and public entities whilst gross claims on government fell by 1.5 per cent. R (million) 6,500 5,500 4,500 3,500 Chart 06: Credit The increase in credit to the private sector was by 2.6 per cent mainly represented loans extended to finance building and construction activities. 2,500 1,500 Government Public Non-Financial Sector Private sector In comparison to August 2012, the stock of credit to the private sector rose by 5.8 per cent compared to 3.1 per cent in the previous month. The year-on-year growth in August 2012 was weaker at 4.9 per cent. 1.8 International Reserves Following a net-inflow of US$12 million, gross international reserves increased to US$374 million at the end of August 2013 compared to US$361 million a month earlier and reached approximately 3.8 months 4 of total imports of goods and services. 390 Chart 07: International Reserves 3.9 Net international reserves (NIR) 5 stood at US$288 million, which was US$54 million 370 350 3.7 above the third quarter target. US$ (million) 330 310 290 270 3.4 3.2 Months 250 2.9 Gross Foreign Reserves Import Cover (Secondary Axis) 4 Based on revised 2012 data and projected total imports of goods and services for 2013, as at June 2013. 5 The calculation of NIR excludes blocked deposits at the Central Bank. 5

1.9 Fiscal Outcome The fiscal primary balance recorded a surplus of R95 million for the month of August 2013, which was equivalent to 0.6 per cent of GDP. This was R28 million lower than the budgeted balance of R123 million, as a result of the underperformance in revenue collection, despite the 6.9 per cent savings on the expenditure side. R (million) 600 500 400 300 200 100 Chart 08: Fiscal Outcome, August 2013 Total expenditure and net lending stood at R434 million, which was 6.9 per cent less than expected for the month. Current outlays stood at R367 million, exceeding the budget by 1.8 per cent, whilst capital expenditures amounted to R60 million, compared to the budgeted R103 million. 0 Total Revenue Total Expenditure Primary Balance Overall Balance Budget Actual Total revenue (excluding R6.3 million grants) stood at R468 million, 11 per cent less than the budgeted amount. The underperformance in revenue collection was due to the less-than-expected tax and non-tax receipts. The most significant shortfall was observed in the other non-tax and fees and charges categories, by 44 per cent and 28 per cent, respectively. With regards to tax revenue, the amounts collected under all categories were below expectation, with the exception being Trades Tax, which exceeded its budget by 54 per cent. 1.10 Public Debt In August 2013, the total stock of public debt stood at R10,333 million (US$862 million), equivalent to 69 per cent of GDP. This represented a decline of 3.1 per cent in rupee terms and an increase of 5.1 per cent in US dollar terms relative to August 2012. On a Chart 09: Public Debt similar trend, the month-on-month 12,000 100 90 comparison for August showed a 10,000 8,000 80 70 reduction of 0.5 per cent and 0.2 per cent in rupee and US dollar terms, respectively. R (million) 6,000 4,000 2,000 20 Domestic debt External debt Total debt Domestic debt External debt Total debt 60 50 40 30 % of GDP In comparison to August 2012, the stock of domestic debt increased by 0.4 per cent, whilst external debt went down by 5.8 per cent. As a ratio of GDP, the aggregate stock of 6

public debt declined by 10 percentage points compared August 2012. The reduction in debt level remained consistent with government s objective of reducing public debt to 50 per cent of GDP by 2018. 2.0 Money Market Developments 2.1 Open Market Operations In August 2013, the Central Bank did not conduct any Open Market Operation. 2.2 Money Market Interest Rates (DAA) Since there was no intervention by Bank in the money market during the month under review, the latest applicable rates corresponded to those from the auctions undertaken in June 2013. Table 01: Weekly Summary of DAA Interest Rates 6 Maturity Periods Week Ending DAA Three (3) Days DAA Seven (7) Days DAA Fourteen (14) Days DAA Ninety One (91) Days DAA One Hundred and Eighty Two (182) Days DAA Three Hundred and Sixty Five (365) Days 21-Jun-13 - - - 2.31% 3.12% 3.99% 28-Jun-13 1.73% 1.92% 2.02% 2.34% 3.27% - 3.0 Banking Developments 3.1 Seychelles Electronic Fund Transfer (SEFT) system The SEFT system was officially launched on August 19, 2013. This interbank domestic funds transfer system facilitates money transfers through a secure online communication channel in a safe and efficient manner minimising the need for physical exchange of money and manual processing. It will provide the customer with instant email and SMS transaction notification for accepted and also rejected transaction. The SEFT has been implemented in partnership with the banks and the Seychelles Credit Union as part of the modernisation of the national payment system. 3.2 Mobile Banking Project The government has been approached by Airtel to engage in a Pilot phase of mobile payment in the country. Since there is no legal framework in place at the moment, the government has agreed, in principle, to allow Airtel to proceed with the test. However, government has also decided that CBS shall have oversight over the Pilot Program and Department of Information Communications Technology will oversee the technological aspects. CBS has informed Airtel of Government s decision to allow for the pilot program which shall be governed by an MOU. Hence, the National Payment Unit and the Legal Unit are currently working on the MOU with the assistance of the Attorney General s office. 6 Latest applicable rates 7

4.0 Key Financial Sector Developments 7 4.1 General Financial Soundness Indicators As illustrated in Chart 10, growths were observed in all of the industry s general soundness indicators in the month under review. R (millions) Chart 10: General Financial Soundness Indicators 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 Total deposits liabilities Total assets Loans & advances Equity Capital Total assets grew by R425 million or 2.5 per cent. The most significant growth was observed in Balances with the Central Bank 8, notably statutory reserves which went up by R232 million. The growth in reserves was explained by an increase in deposit liabilities and consequently in the amounts of reserves to be maintained (Minimum Reserve Requirement). The period also observed a growth in excess reserves held. Total deposits rose by R311 million (2.2 per cent) compared to the previous month due to increases under all of its categories, with the highest growth recorded in time deposits by R146 million. The monthly increase in the industry s loans and advances was by R131 million or 3.1 per cent on account of a R78 million expansion in term loans. A R58 million rise in foreign-currency-denominated loans contributed to the rise in the industry s total loans and advances. With regards to equity capital 9, this rose by R37 million (2.4 per cent) which was mainly attributed an increase in the industry s profit to R37 million at the end of August 2013. On a year-on-year basis, the industry observed increases in its total assets (25 per cent), equity capital (10 per cent) and loans and advances (7.3 per cent) and total deposits liabilities (29 per cent). 7 The Statistics in Section 4 are compiled for prudential purposes and therefore follow different conventions to that in Section 1 8 Includes statutory reserves with Central Bank and banks investments in Deposit Auction Arrangement (DAA) and Reverse Repurchase Agreement (RRA) 9 This includes paid-up capital, statutory reserve fund, other reserves, undistributed profit or loss and current unaudited profit or loss. 8

4.2 Capital Adequacy Indicators The Capital Adequacy Regulations, 2010 stipulates a minimum Capital Adequacy Ratio of 12 per cent. As depicted in Chart 11, the ratio stood at 26 per cent in the month under review which was also an increase of 0.1 Percentage (%) Chart 11: Capital Adequacy Indicatorss 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Aug Sep Oct Nov Dec Jan Feb Mar Apr Mayy Jun Jul Aug 2012 2013 Regulatory capital to risk weighted assets Net tangible capitalization ratio future losses. percentage pointss from July 2013. This implies that the industry remained r well above the minimum requirement level in August 2013. With regards to the net tangible capitalisation ratio, a marginal decline of 0.02 percentage p points was recorded. As at August 2013, it stood at 9.5 per cent, which was above a the required 6.0 per cent. This showss that the industry was well capitalised and well w cushioned in case of unexpected 4.3 Asset Quality Indicators Minor increases were recorded in both the industry s non-performing loans 10 (NPLs) and specific provisions 11 in R (millions) 500 400 300 200 100 0 Chart 12: Asset Quality Indicatorss 50.0 40.0 30.0 20.0 10.0 0.0 Aug Sep Oct Nov Dec Jan FebMarAprMayJun Jul Aug 2012 2013 Non performing loans (NPLs) Specific Provisions Non-performing loans to grosss loans (secondary axis) Provision as % of non-performing loans (secondary axis) Percentage (%) the month under review. NPLs N went up by R8.2 million, driven by b loans classified in the doubtful category. c Specific S provisions also increased and this was by R2.2 million from July to August A 2013. The increase was in provisions p on loans in the doubtful category. c No major changes were observed in the industry s NPLs to gross loans. The ratio declined slightly to settle at 9.3 per cent following an increase in loanss and advances. Provision as a percentage of NPLs fell by 0.23 percentage point during the same period. 10 T These include loans classified as substandard, doubtfull and loss category as per the Credit Classification and Provisioning Regulations 2010, as amended in 2011. 11 Specific provisions are provisions made on special mention loans and NPLs. 9

4.4 Earnings and Other Indicators Increases were observed in both the industry s Return on Assets (ROA) and Return on Equity (ROE) in the month under review. ROA and ROE increased to 3.3 per cent and 35 per cent respectively. The movement in both Chart 13: Earnings and Other Indicators ratios was driven by an increase in their 70.0 60.0 50.0 40.0 numerator. The latter was due to a reduction of R6.8 million in total expenses (interest expense and non-interest expense). 30.0 20.0 10.0 In August 2013, the industry s broad liquid 0.0 assets 12 to total liabilities dropped by 0.3-10.0 percentage points to 57 per cent as a result of 2013 an increase in total liabilities. As such, at the Return on assets Return on equity end of the month, the industry s broad liquid Broad liquid assets to total liabilities Net open position to capital assets could match 57 per cent of its total liabilities 13. Percentage (%) As at August 2013, the ratio of net open position to capital stood at 3.8 per cent. The total long and short position was 7.3 per cent and 3.6 per cent respectively, which was well within the 30 per cent limit as stated by the Foreign Currency Exposure Regulations, 2009. 12 Consist of cash, balances with CBS, balances with other banks and Government securities. 13 This is in line with the Liquidity Risk Management Regulations, 2009 which stipulates that a bank shall maintain liquid assets in an amount which shall not, as a daily average each month, be less than 20% of the bank's total liabilities. 10

Summary of Financial Indicators (Ratios) Central Bank of Seychelles Monthly Review: August 2013 Figures are in SCR 000 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Total deposits liabilities 11,460,457 12,926,022 11,873,797 11,876,112 12,344,627 12,644,422 12,294,397 12,111,229 12,273,586 13,085,286 13,422,571 14,420,475 14,731,303 Total assets 13,839,419 15,388,627 14,266,597 14,277,211 14,835,716 15,115,851 14,749,101 14,530,814 14,748,085 15,500,354 15,872,006 16,870,195 17,295,576 Loans & advances 4,018,417 4,103,493 4,068,772 4,107,079 4,171,083 4,090,495 4,084,261 4,164,252 4,128,377 4,107,520 4,158,442 4,182,309 4,313,278 Equity Capital 1,471,259 1,502,474 1,496,513 1,524,901 1,525,376 1,520,903 1,519,883 1,509,179 1,567,612 1,517,318 1,548,979 1,584,396 1,621,757 Non-performing loans (NPLs), gross 370,847 338,785 376,980 388,438 386,698 396,211 403,718 398,190 393,062 389,346 394,361 394,489 402,726 Actual Provisions (Specific) 113,450 112,647 112,373 113,960 113,906 154,644 151,836 147,520 146,424 146,441 147,179 147,858 150,017 Figures are in percentage (%) Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Capital Adequacy Regulatory capital to risk weighted assets 28 26 27 28 27 26 27 27 28 26 26 26 26 Net tangible capitalization ratio 11 10 11 11 10 10 10 11 11 10 10 10 9.5 Asset Quality Non-performing loans to gross loans Provision as % of nonperforming loans Earnings & Profitability 9.2 8.3 9.3 9.5 9.3 10 10 10 10 9.5 9.5 9.4 9.3 31 33 30 29 29 39 38 37 37 38 37 37 37 Return on assets 4.0 4.2 5.0 4.7 3.1 5.1 1.4 2.3 4.4 4.3 3.3 3.1 3.3 Return on equity 39 41 50 45 30 50 14 22 42 42 34 32 35 Liquidity Broad liquid assets to total liabilities 63 66 60 61 58 58 59 58 59 60 59 57 57 Sensitivity to Market Risk Total long position in foreign exchange to capital Total short position in foreign exchange to capital 6.4 5.2 5.7 9.7 15.6 6.1 9.0 11.6 11.4 13.4 6.4 9.5 7.3-5.8-6.1-4.0-1.0-7.8-1.0-2.1-4.8-5.3-6.1-7.0-2.9-3.6 Net open position to capital 0.6-0.8 1.6 8.7 7.9 5.1 6.8 6.8 6.1 7.3-0.6 6.6 3.8 11