New York, July 28, 2022 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Mauritius's long-term foreign and local currency issuer ratings to Baa3 from Baa2, and changed the outlook to stable from negative.
The downgrade to Baa3 is driven by Moody's assessment that the quality and effectiveness of institutions and policy making has weakened, which in turn hampers Mauritius's economic resiliency and capacity to absorb future economic shocks. While the institutional framework remains strong and policymaking has historically supported high and stable economic growth, reversing the deterioration in economic and fiscal strength as a result of the pandemic is complicated by the reliance on unconventional and one-off measures which creates some uncertainty around future fiscal performance and ultimately weighs on Moody's assessment of institutions and governance strength.
The stable outlook reflects Moody's expectations that Mauritius's credit profile will remain aligned with Baa3-rated sovereigns and, in particular, incorporates Moody's view that the headline fiscal and debt metrics will further improve, with the debt burden falling below 70% of GDP by the end of the fiscal year ending June 30, 2023 (fiscal year 2023), notwithstanding risks to fiscal consolidation stemming from the global inflation shock. Mauritius's sizeable international reserves limit external vulnerability risk despite large current account deficits and provide a buffer to higher import prices. The Baa3 rating is also supported by low social and political risk.
Mauritius's country ceilings have been lowered by one notch. Namely, Mauritius's local-currency country ceiling was lowered to A2 from A1. The four-notch gap to the sovereign rating reflects a relatively favorable legal and regulatory framework, low external vulnerabilities and a stable political system, balanced by reliance on tourism which represents a source of common shock for the government and non-government issuers in the country. The foreign-currency ceiling was lowered to A2 from A1. Mauritius's role as an international financial center significantly reduces the incentives to impose transfer and convertibility restrictions, supporting the foreign-currency ceiling's alignment with the local-currency ceiling.
RATIONALE FOR THE DOWNGRADE TO Baa3
LOWER ASSESSMENT OF THE QUALITY AND EFFECTIVENESS OF INSTITUTIONS AND POLICY MAKING WEAKENS MAURITIUS'S CAPACITY TO ABSORB FUTURE ECONOMIC SHOCKS
The government has articulated medium-term goals to reduce government debt to 60% of GDP, increase international reserves to between 22 and 24 months of import coverage, and sustain growth rates of 5%. However, the reliance on one-off measures and use of unconventional policies over the past two years raises the risk that fiscal and economic repairs following the pandemic shock will be slower than previously expected. This informs Moody's view that institutions and governance strength has weakened which reduces Mauritius's capacity to absorb future shocks.
The government's reliance on a number of one-off measures, such as transfers from state-owned enterprises (SOEs) and asset sales, increases uncertainty over the ultimate trajectory of government debt and complicates an accurate assessment of fiscal strength. While one-off measures can reduce financing needs and the debt burden - something which Moody's factors into its baseline assumption for the debt burden in the next two years - they are subject to a high degree of uncertainty with risks to the valuation of asset sales and to the sustainability of cash surpluses at SOEs. Moreover, such one-off measures do not set the debt burden on a sustained downward path. While Moody's expects the economic recovery to ultimately support debt stabilization, the government will likely require some additional measures either on the tax side or through lower spending, as yet unspecified to offset an increase in pension spending beginning in fiscal year 2024. As growth reverts toward its pre-pandemic trend, Moody's expects government debt will stabilize rather than continue declining as the government forecasts.
The reliance on one-off measures also diminishes fiscal policy transparency, limiting the usefulness of the fiscal balance as an indicator of the pace of fiscal consolidation and trajectory for government debt. Therefore, even if government debt declines, fiscal strength, a key rating factor, has not necessarily improved commensurately. Transfers of excess cash from SOEs to the central government may reduce the fiscal deficit at the expense of increasing the need for transfers from the central government to SOEs in the future.
Meanwhile, the Bank of Mauritius's balance sheet has weakened as a result of pandemic-related support measures, such as the creation of Mauritius Investment Corp (MIC) and the large one-off grant from the central bank to the government (MUR 55 billion, or 12% of 2020 nominal GDP), reducing monetary policy predictability and effectiveness. The creation of MIC, a special purpose vehicle that is fully owned by the Bank of Mauritius, supported financial stability when it was initially created at the start of the pandemic. However, MIC's evolving role in the economy, which includes supporting economic development and developing a savings base for the country, exposes the central bank's balance sheet to increased credit risk. Ultimately a deterioration in the central bank's balance sheet would increase the risk of a crystallization of contingent liabilities to the central government. While an independent structure has been put in place to separate decisions made by MIC from central bank monetary policy decisions, in Moody's view, the fact that MIC invests part of the central bank's reserves will further complicate assessment of government effectiveness.
RATIONALE FOR CHANGING THE OUTLOOK TO STABLE FROM NEGATIVE
Mauritius's credit profile continues to benefit from a stable political and macroeconomic environment conducive to growth and attracting foreign investment. Prior to the coronavirus shock, the Mauritian economy demonstrated very steady growth rates, averaging 3.7% between 2010 and 2019. The country's business-friendly investment environment has attracted foreign investment, mainly in the financial sector, which has contributed to the accumulation of international reserves, which in turn limits external vulnerability risk despite large current account deficits. The Bank of Mauritius reported gross international reserves of $7.6 billion at the end of June 2022, equivalent to 16.3 months of import coverage.
As mentioned, Moody's expects that government debt will decline driven by a continued economic recovery and narrowing fiscal deficits, from its peak of 83% of GDP in fiscal year 2021 to below 70% of GDP by fiscal year 2023, and compared to 57% of GDP in fiscal year 2019, the last fiscal year prior to the pandemic. Moreover, debt affordability, as measured by the interest-to-revenue ratio, will compare favorably to pre-pandemic metrics due to the introduction of revenue measures such as the solidarity levy and the Contribution Sociale Generalisee (CSG).
The pace of fiscal consolidation remains tied to the economic recovery, primarily driven by tourism activity returning to pre-pandemic levels. Since easing travel restrictions in October 2021, Mauritius has experienced a recovery similar to other tourism-reliant sovereigns. Tourist arrivals have exceeded 70% of pre-pandemic levels in recent months and Mauritius has benefited from favorable trends for average length of stay and average daily spending by tourists.
While demand for travel remains strong, with still strong pent-up demand, rising prices and weakening growth, particularly in key source markets such as France, the UK, and Germany, pose downside risks to tourism activity, especially from next year. Mauritius relies on five markets France, UK, Germany, South Africa, and Reunion Island - for about 60% of tourist arrivals. Mauritius also faces downside risks owing to higher commodity prices and inflation, which weigh on real income levels and purchasing power.
Mauritius is particularly exposed to higher commodity prices, as imports of food- and fuel-related products account for 36% of total imports, or 14% of GDP in 2021. Higher commodity prices, along with the depreciation of the exchange rate have driven inflation higher in 2022, with consumer prices rising by 9.6% year-on-year in June 2022. The erosion of purchasing power from higher inflation is likely to weigh on household consumption, while also posing challenges to the government's fiscal consolidation agenda, evident in the increase in social benefits provided in the budget for fiscal year 2023.
Balancing these downside risks, and notwithstanding a lower overall assessment of institutions and governance strength, the country's institutional framework and policymaking continue to support the economy's resiliency to shocks, at the Baa3 rating level. The Baa3 rating is also supported by low social and political risk.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Mauritius's ESG Credit Impact Score is neutral-to-low (CIS-2) reflecting its moderately negative exposure to environmental risks and neutral to low social risk, and a solid governance profile which has contributed to macroeconomic stability and supports the sovereign's capacity to respond to environmental and social challenges.
Mauritius's exposure to environment risks is moderately negative (E-3 issuer profile score) reflecting natural capital risks, given the economy's reliance on natural capital and the credit negative effects should it not be managed sustainably. In particular, climate change is contributing to coastal erosion, coral depletion, which, if not addressed, would undermine the country's ability to continue to benefit from its natural capital.
Exposure to social risks is neutral-to-low (S-2 issuer profile score), and it captures widespread access to high-quality basic services, high levels of secondary school enrollment, and low levels of inequality. Demographic trends pose a moderately negative risk. Incomes for nearly all the population are above poverty levels and relatively evenly distributed, while the government offers universal free access to education and primary healthcare, all of which reduce the risk of social unrest. Over time, an aging population, combined with negative net migration and low fertility rates, could increase government spending pressures.
Mauritius's governance risk exposure is neutral-to-low (G-2) and captures the country's robust institutions. The government has demonstrated a proactive approach to addressing challenges to important sectors of the economy, increasing the economy's resilience. However, as explained above, in Moody's view, the quality of institutions and governance strength has diminished somewhat in recent years. A high debt burden will constrain the sovereign's resiliency, and may also limit its ability to maintain such a large social safety net, which can increase the social risk score over time.
GDP per capita (PPP basis, US$): 22,195 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.8% (2021)
Gen. Gov. Financial Balance/GDP: -18.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -13.8% (2021) (also known as External Balance)
External debt/GDP: 35.5% (2021)
Economic resiliency: baa2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 21 July 2022, a rating committee was called to discuss the rating of the Mauritius, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, have materially decreased. The issuer's governance and/or management, have materially decreased. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer susceptibility to event risks has not changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward pressure on the rating would emerge over time if medium-term growth accelerated toward the government's 5% target on a sustained basis. An improvement in fiscal strength, such as through a more pronounced reduction in the government debt burden than Moody's currently expects without an increase in contingent liabilities from guaranteed and non-guaranteed debt of the public sector, would also strengthen Mauritius's credit profile, particularly if it is accompanied by an improvement in debt affordability.
Conversely, should it become increasingly likely that government debt will remain higher than Moody's expects, this would weigh on fiscal strength and would be credit negative. An increase in the likelihood of government support for state-owned enterprises or a marked decrease in international reserves that would point to higher external vulnerability risks would also exert downward pressure on the rating.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
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JOURNALISTS: 1 212 553 0376
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