Moody's Investors Service has today affirmed Mauritius's Baa1 government bond rating with a stable outlook. 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 affirmation of the Baa1 rating and the stable outlook are based on two key rating factors:
(1) The Mauritian economy's significant resiliency as reflected in robust economic growth, supported by the economy's diversification, combined with effective policy support from authorities.
(2) Mauritius' stable fiscal strength with a debt-to-GDP ratio that remains elevated at around 56%, but which is unlikely to deteriorate materially over the next two to three years in light of manageable budget deficits.
Mauritius's local-currency country and deposits ceilings remain at A1, and the foreign-currency ceilings for bank deposits and bonds remain at Baa1/P-2 and A2/P-2, respectively.
RATING RATIONALE
FIRST DRIVER - MAURITIUS'S ROBUST ECONOMIC GROWTH REFLECTS THE ECONOMY'S SIGNIFICANT RESILIENCY
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.
SECOND DRIVER - MAURITIUS'S ELEVATED, BUT NOT MATERIALLY INCREASING DEBT SUPPORTS THE GOVERNMENT'S FISCAL STRENGTH
The second rating factor is based on Moody's assessment of Mauritius's fiscal strength. Whereas Mauritius's government debt is at an elevated level -- at 56% of GDP at year-end 2014 -, Moody's expects the level to remain broadly stable over the next two to three years. 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. The rating agency further notes that the authorities are working on the formalization of a crisis management and banking resolution mechanism which would further help the containment of banking sector risk.
What Could Change the Rating -- Up/Down
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.
GDP per capita (PPP basis, US$): 18,689 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2014 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.2% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -3.2% (2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.5% (2014 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 19 November 2015, a rating committee was called to discuss the rating of the Government of Mauritius. The main points raised during the discussion were: 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 not materially changed.
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