While Mauritius's financial sector has supported economic development and generated foreign-currency earnings, it is also a source of systemic risk, Moody's Investors Service said in a report this week.
The Mauritian authorities have supported the sector's competitiveness through financial innovation, the preservation of tax and non-tax competitive advantages, and through the maintenance of macroeconomic stability.
However, the sector's complexity, size and linkages between financial institutions contribute to contagion risk. Moreover, changes to Mauritius's Double Taxation Avoidance Agreement (DTAA) with India, due to come into effect in April 2017, will weaken an industry that contributes to approximately 9% of GDP and 15% in net foreign inflows annually.
The authorities have intensified efforts to strengthen the country's crisis management framework and to reduce the costs of resolving troubled banks for the government. However, their mandate for preserving macro stability is becoming increasingly challenging in the meantime.
The primarily off-shore financial sector is large and interlinked and constitutes a source of vulnerability to financial stability. The off-shore sector, mainly composed of Global Business Companies (GBCs) that hold assets worth almost 50 times the country's GDP, supports the banking system and contributes to Mauritius's positive balance of payments position.
Offshore deposits account for 43% of the banks' liabilities or 120% of GDP. Moody's considers the banks' foreign-sourced deposits to be sensitive to potential disruptions in the off-shore sector that could result in a loss of confidence and could expose banks to refinancing risks.
While the financial sector is a source of vulnerability, Moody's views a systemic banking crisis as being unlikely, given factors such as the system's sound capital and liquidity buffers.
The report, "Government of Mauritius -- Financial Sector Is a Source of Growth and Diversification, But Also Systemic Risk", is now available on www.moodys.com. The research is an update to the markets and does not constitute a rating action.
Mauritius's external position is also vulnerable to the financial centre's performance. Driven by the financial sector, Mauritius's positive balance of payments dynamic has enabled the country to accumulate relatively large foreign exchange reserves which reached a record high in March 2016 of $3.9 billion. Moody's estimates that the DTAA changes with India could curtail net financial flows by between 1% and 2% of GDP annually.