Moody's Downgrades Mauritius's Ratings, Maintains Negative Outlook
Prithvirajsing Roopun, Mauritius President

Moody’s Downgrades Mauritius’s Ratings, Maintains Negative Outlook

Moody’s Investors Service has today downgraded the Government of Mauritius’s long-term foreign and local currency issuer rating to Baa2 from Baa1 and maintained the negative outlook.

The downgrade to Baa2 reflects the weakening in fiscal and economic strength as a result of the shock brought on by the coronavirus pandemic.

The large share of economic activity, export earnings and employment derived from tourism and related sectors will weigh on the pace of the economic recovery.

This in turn will slow the pace of fiscal consolidation. Combined with large fiscal support, this points to a sharp and long-lasting deterioration in fiscal and debt metrics, resulting in a weaker fiscal profile than Baa1-peers, and reducing the government’s shock absorption capacity.

Mauritius’s credit profile continues to be supported by a strong institutional framework, which has supported historically high and stable growth rates.

Past economic growth has supported an increase in income per capita, signaling a higher capacity to absorb shocks.

The negative outlook reflects the mutually reinforcing downside risks from a slower recovery in the tourism sector than Moody’s currently expects, with spillovers to the rest of the economy, which would exacerbate the weakening of fiscal strength.

The negative outlook also captures the risks related to some of the pandemic-related policy measures, and in particular the large financing of the 2021 budget by the central bank, which raises risks to monetary policy effectiveness.

Mauritius’s country ceilings have been lowered by one notch. Namely, Mauritius’s local-currency country ceiling was lowered to A1 from Aa3.

The four-notch gap to the sovereign rating reflects a relatively favorable legal and regulatory framework that supports policy predictability, 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 A1 from Aa3. 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.

Moody’s Downgrades Mauritius’s Ratings

RATIONALE FOR DOWNGRADE TO Baa2

Explaining the rationale for downgrade to Baa2, Moody’s cited erosion of the economic and fiscal strength as a result of the coronavirus pandemic.

It said Mauritius faces more severe long-term economic scarring than Moody’s anticipated a year ago, which will reduce both economic and fiscal strength.

Real GDP contracted by 15% in 2020, with the tourism sector being hardest hit. Mauritius faces prospects for a slower economic recovery, with the tourism industry likely to suffer durable effects from the shock brought on by the coronavirus pandemic.

The economic recovery is highly dependent on a rebound in tourism activity.

Tourism’s direct contribution to GDP is estimated at 8.2% of GDP in 2019 and, when including the indirect contribution from other industries such as transport and accommodation and food service, 23% of GDP.

The government expects international tourism flows to resume in the second half of 2021.

While Moody’s also assumes that activity in the tourism sector will grow during this year, a return to pre-pandemic tourist arrivals is likely several years away.

Under Moody’s baseline scenario for economic growth of 6.5% and 5% in 2021 and 2022, respectively, taking into account a recovery in non-tourism sectors that has started since the easing of lockdown measures in the second half of 2020, Mauritius’s economy will remain 5% smaller than 2019 levels in 2022.

Per capita income (measured in local currency) will only return to 2019 levels at the end of 2022.

The severity of the contraction and the government’s fiscal policy response contribute to a significant rise in government debt and weakening in Mauritius’s fiscal strength.

The government’s fiscal policy response to the coronavirus shock has been one of the largest among Moody’s-rated sovereigns.

The government has expanded social protection schemes aimed at supporting household income and minimizing job losses, while also providing support to large corporations and other businesses affected by the coronavirus shock.

While the government is committed to maintain moderate deficits over the medium term, the pace of fiscal consolidation will largely depend on the speed of the economic recovery, with material proactive fiscal consolidation unlikely in the near term.

Overall, Mauritius’s debt burden was already higher than comparable Baa-rated sovereign peers and will rise further as a result of the pandemic.

Central government debt increased to 73.4% of GDP at the end of fiscal year 2020 (ending 30 June 2020), above the Baa-rated median of 63.8%.

Moody’s expects government debt to peak at just over 80% of GDP in 2021, before gradually declining. An unconditional grant from the central bank, worth 12% of GDP, prevented an even larger increase in government debt.

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 recently established free trade agreement with China and the signing of a Comprehensive Economic Cooperation and Partnership with India will likely boost trade and investment with both countries over the next several years.

The country’s business-friendly investment environment has attracted foreign investment, mainly in the financial sector, which has contributed to accumulation of international reserves.

The accumulation of a large stock of international reserves provides a significant buffer to external shocks.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the mutually reinforcing downside risks from a slower recovery in the tourism sector than Moody’s currently expects, with spillovers to the rest of the economy, which would exacerbate the erosion in fiscal strength.

In the near term, risks to a recovery in tourism will depend on the ongoing rollout of vaccination programs and lingering consumer concerns about the safety of travel.

Over the longer term, changes in consumer behavior could reduce demand for long-haul travel, affecting demand for tourism in Mauritius.

Moody’s Downgrades Mauritius’s Ratings

The government’s plans for fiscal consolidation rest on the re-opening of the tourism sector.

A delayed resumption of tourism activity, or a slower recovery over the long term as mentioned above, would prevent a faster reduction in government spending, while also weighing on revenue collection.

The negative outlook also captures the risks related to some of the pandemic-related policy measures, and in particular the large financing of the 2021 budget by the central bank, which raises risks to monetary policy effectiveness.

There is a risk that the large expansion of the monetary base increases inflationary pressures that prove hard to contain, leading to a rise in domestic borrowing costs including for the government.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Mauritius’s ESG Credit Impact Score is neutral to low (CIS-2) reflecting its moderately negative exposure to environmental risks, neutral to low social risk, and the positive influence of governance.

A high debt burden will constrain the sovereign’s resiliency, and may limit its ability to maintain a large social safety net, with a potential increase in social risk.

Mauritius’s credit profile is moderately negatively exposed to environmental risks (E-3 issuer profile score) reflecting natural capital risks, given the country’s reliance on natural capital as a basis of economic activity and significant risks posed by climate events on economy and government finances.

 In particular, Mauritius is exposed to weather-related events due to its small size and the importance of tourism in the economy.

Exposure to social risks is neutral to low (S-2 issuer profile score), and it captures broad access to basic services, high levels of secondary school enrollment, and low levels of inequality.

Demographic trends pose a moderate negative risk. The country has almost nonexistent poverty rates and a relatively even distribution of income, 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.

The influence of governance on Mauritius’s credit profile is positive (G-1 issuer profile score) and captures the overall strength of Mauritius’s institutions.

The government has demonstrated a strong track record of economic management with a technically competent public administration and good policy coordination.

As mentioned, there are risks to the effectiveness of monetary policy from the nature and size of the policy actions taken in response to the pandemic.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade is unlikely in the near future. The implementation and execution on a fiscal consolidation that arrests the upward debt trajectory would likely result in a return to a stable outlook.

A return to the stable outlook would also likely entail increasing confidence that the central bank’s monetary policy effectiveness is not negatively affected and in particular, that medium-term inflationary risks remain contained.

A continued deterioration in debt metrics, beyond Moody’s current expectations, would likely lead to a downgrade. This may be consistent with weaker fiscal policy effectiveness.

Furthermore, weakening monetary policy effectiveness as demonstrated by rising inflationary risks would also likely result in a downgrade.

An increase in domestic or external imbalances, as reflected in an increase in price and exchange rate volatility, accompanied by a deterioration in the country’s balance of payments position, could also lead to a downgrade.

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Moody’s Downgrades Mauritius’s Ratings, Maintains Negative Outlook