Moody’s affirms Mauritius’s Baa1 government bond rating with stable outlook.
Moody’s Investors Service has affirmed Mauritius’s Baa1 government bond rating with a stable outlook. The rating factor underpinning the affirmation of Mauritius’s Baa1 government bond rating with stable outlook relates to the country’s significant economic resiliency and the assessment of Mauritius’s fiscal strength. For an upward pressure on the rating Mauritius should sustained decline in government debt trajectory supported by reductions in fiscal deficits as well as improving growth potential of the country.
The rating was last changed in June 2012 when Moody’s upgraded the rating to Baa1 from Baa2. Since then, the outlook has remained stable.
The first rating factor underpinning the affirmation of Mauritius’s Baa1 government bond rating with stable outlook relates to the country’s significant economic resiliency.
Over the past five years, the Mauritian economy has posted steady, broad-based growth averaging 3.6% in real terms. While the tourism and financial services industries are two pillars of the economic base, contributing directly to approximately 10% of GDP each, the economy remains well-diversified. The country’s wealth level, as measured by its per-capita GDP in purchasing power parity terms has progressed to almost $18,689 in 2014 from $14,539 in 2009.
That said, the economy faces ongoing challenges, including fostering investment, improving cost-competitiveness and maintaining the attractiveness and stability of its financial sector. However, Moody’s expects that continued pro-active economic policies, a key element of the Mauritian economy’s success, will gradually address those challenges.
Economic governance is strong and business-friendly in Mauritius, as exhibited by the country’s strong position in the World Bank’s Ease of Doing Business ranking (32nd out of 189 countries, being the strongest country in Sub-Saharan Africa). As a result, Moody’s expects that Mauritius will continue to grow at robust rates (forecast for 2016 is at 3.8%), though its potential is below what it used to be due to past years’ relatively low investment rates and eroding cost-competitiveness.
Concerning the Double Tax Avoidance Agreement (DTAA) with India, established between the two countries in 1983, the rating agency notes that changes could alter the attractiveness of Mauritius’s financial center, but that any such impact will likely be gradual and manageable. Ultimately, the impact will be a function of the extent of the changes, the sensitivity of investment to such changes, and the capacity of the authorities to develop the financial center as a gateway for investment to places other than India, including in Africa. Besides a friendly business environment, Moody’s notes that the economy’s competitive advantages stem from the country’ macroeconomic and political stability as well as low tax rates.
The second rating factor is based on Moody’s assessment of Mauritius’s fiscal strength. The government’s plan is to reduce fiscal deficits substantially in order to comply with its debt target — a statutory debt of 50% of GDP by 2018. However, achieving such ambitious fiscal consolidation will be difficult — the government of Mauritius has historically run fiscal deficits exceeding 3% of GDP. The statutory debt level reached 54% of GDP in 2014, calculated as the sum of the government’s and state-owned-enterprises’ debts, net of government’s cash reserves.
The rating agency notes that despite its high level, government debt remains affordable with interest charges relative to government revenue reaching 13% in 2014. In addition, the debt is primarily domestic, with the government benefiting from a relatively large domestic funding pool. A substantial part (around 30%) of the government’s debt is held by the National Pension Fund (NPF).
While the banking sector is large, with total assets representing around 3x GDP, contingent liabilities to the government stemming from this sector constitute a relatively low level of risk.
On the one hand, the government has a track record of supporting banks, but on the other hand, recapitalization costs are expected to remain relatively small, as they were in past situations of stress. Despite an increase in the level of non-performing loans to 5.1% of total loans (including loans to non-residents), the banking system remains adequately capitalized (with a Tier 1 capital ratio of 15.4% as of March 2015) and liquid, while domestic credits are fully covered by domestic deposits. Also, a significant portion of banking system assets is controlled by subsidiaries of foreign banks, at 55% of banking assets as of March 2015. Moody’s therefore expects no material contingent liabilities to crystallize on the government balance sheet over the next two to three years.
A sustained decline in the government debt trajectory supported by reductions in fiscal deficits would exert upward pressure on the rating. In addition, upward rating pressure could stem from improved growth potential.
A deterioration in government debt metrics or lower than forecasted growth levels, if maintained over the medium-term, could exert downward pressure on the rating. Particularly detrimental changes to the DTAA, though not in Moody’s baseline scenario, could also exert downward rating pressures, as well as a pronounced deterioration in the financial sector’s soundness.