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AfricaMoney | September 21, 2017

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Fall in international prices to spur private consumption: Bank of Mauritius report

Fall in international prices to spur private consumption: Bank of Mauritius report

Mauritian consumers may expect international prices, indexed by oil prices, to keep falling, thus increasing purchasing power and supporting growth in private consumption. (Image:

The Mauritius central bank has noted that falling international prices, which are being passed-through to domestic consumers, should support growth in private consumption and consumption-related activities, such as trade and light manufacturing, for 2015.

This expected trend of increasing private consumption was one of the main observations of the Bank of Mauritius’ Financial Stability Report (FSR), released on Wednesday, March 04, 2015, that seeks to identify systemic risks to the domestic financial system.

However, the report also cautions that, even as consumption rises with fall in international prices and the commensurate spur to purchasing power, the observed declining trend in the ratio of investment to GDP is reducing the economy’s actual and potential growth.

Slow private investment growth mirrors weak fundamentals of some leading corporations, which are highly leveraged by international standards and show declining ratios of profitability.

The weak external environment is likely to impair Mauritius’ external position, thus warranting strong surveillance of financial flows which fund current account deficits.

Moreover, while most of the financial flows represent Global Business Companies (GBCs) resources and, therefore, are just in-transit to other jurisdictions, leads and lags between inflows and outflows appear to have provided resources to cover the current account deficit based on the balance of payments compilation and analysis.

Thus, it may be concluded that the net GBC inflows have compensated for net outflows by local banks.

Against this background, strong policy coordination is, thus, critical between the Bank of Mauritius, as regulator of banking institutions, and the Financial Services Commission (FSC), as regulator of GBCs.

According to the report, output growth and inflation has remained within recent trends: real GDP grew by 3.5 per cent, while inflation dropped to a low of 0.2 per cent by the end of December 2014 with a decline in food and energy inflation.

Household indebtedness and household debt service costs, both as a share of disposable income, are relatively low by international standards, but warrant monitoring, nonetheless.

Macro-prudential policies and credit limits are now in place on housing lending, thus providing standard conditions for banks in mortgage financing.

Furthermore, case-by-case analysis and monitoring of non-performing loans is still needed to secure a proper implementation of policy measures.

Corporate debt, as a share of GDP, is also low by international standards in Mauritius. However, the high leverage ratio of some leading corporations in the economy remain a concern and may pose a risk to the soundness of banks.

Leverage ratios in tourism, construction, real estate, traders and financial services are more than 100 per cent, which are multiples of the ratios found in comparator countries. Financial risks stemming from this situation depend on each sector’s ability to reduce its indebtedness, accompanied by larger equity infusion or higher revenue growth, in a reasonably short period of time.

However, failure to do so carries a risk of reducing private investment and overall growth of the Mauritian economy.

Banks in Mauritius, for their part, are adequately capitalised and have increased their loan loss provisions, but face risks stemming from the concentration of corporate credit, thus warranting monitoring and proactive action.

Core capital ratios of domestic-owned banks are in line with prudential requirements, while those held by foreign branches and subsidiaries of foreign-owned banks are higher than the prudential requirements.

Banks on the other hand, have increased significantly their provisions against loan losses during last year.

However, current trends suggest that capital ratios of a number of domestic-owned banks could be under stress, if credit concentration risks were to materialise due to a shock impairing the financial condition of corporations.

Domestic-owned banks’ exposure to highly leveraged corporations operating in the tourism, construction and real estate sectors, thus, warrant surveillance and proactive action.

Initiatives in this regard may include timely re-structuring of corporates’ bank debts to address their underlying cash flow problems, increases in banks’ capital allocations, and the implementation of the April 2014 Supervisory Framework for Measuring and Controlling Large Credit Exposures that was issued by the Basel Committee on Banking Supervision (BCBS).

There are also risks stemming from banks’ sizeable foreign claims on frontier African markets and from the slow growth of the domestic economy.

Credit and possible exchange rate risks exist in terms of the sizeable amount and currency denomination of banks’ foreign claims on frontier markets in Africa and in India.

This has come at a time when there has been a slowdown in growth of credit extended to households while credit extended to corporations contracted.

An extended decline in the ratio of corporate credit to GDP is particularly worrisome as this may adversely affect future economic growth.

Risks stemming from non-bank financial intermediaries remain broadly contained. Non-bank deposit-taking institutions (NBDTIs) remain well capitalised and their balance sheets are relatively small for the size of the economy.

Insurance companies hold sizeable deposits and equity in domestic banks. While these funds could potentially experience volatility, this has historically not been the case.

Payment systems infrastructure is being upgraded and continues to operate with high levels of availability, whereas the potential risks from failures in payment systems infrastructure have limited probability to happen going forward.

Finally, it is important that the Bank of Mauritius’ current projects should be rapidly implemented for high-and-low-value payments in the system, including retail and debit payments.

It may be noted that the current FSR contains an assessment of the stability and resilience of the domestic financial system using available economic and financial data up to the end of December 2014 as per availability of data.

Overall, the report reviews the main developments in the global and domestic economies, analyses the financial position of debtors and creditors, sets out the domestic payment systems infrastructure, and assesses the main risks to the financial sector.

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