Here some extracts from the report.
The economic outlook : healthy, helped by accommodative policies
We assess Mauritius’s economic strength as Moderate. While the small and open economy remains particularly susceptible to external shocks and structural impediments to higher growth are well-entrenched, it has an impressive record of resiliency. Relative economic diversification and wealth as well as the authorities’ proactive economic policy stance have been key supports. The economic outlook remains healthy, helped by accommodative policies. Our real growth forecasts for 2015 and 2016 are 3.6%, in line with the historical average. This is below the assumptions set out by the new government in its budget for 2015/16. Indeed while the budget growth forecast relies on the completion of projects with high expected multiplier effects, we believe their economic benefits are likely overestimated.
This Moderate assessment is consistent with those of the small and open economies of Lithuania (A3, stable) and Namibia (Baa3, stable).
A small, open and FDI-reliant economy which benefits from relative diversification, wealth and supportive economic policy.
The Mauritian economy is small and open, with an estimated nominal GDP of almost $13 billion in 2014 and a degree of openness as measured by the sum of exports and imports of goods and services of 116% of GDP. With a GDP per capita on a purchasing power parity basis of $17,716 in 2013, the World Bank classifies the country as an upper-middle-income economy. As a small economy with moderate domestic savings, key sectors such as the labour intensive tourism sector and the financial services industry have developed thanks to foreign direct investments.
While these attributes would mean that the Mauritian economy is likely to be volatile and susceptible to external shocks, its record points to the contrary. This does not mean that the Mauritian economy is immune from external developments such as the euro area crisis, which caused tourism and FDI from Europe to drop by 8% and 25% respectively, but overall it has a steady record of growth over the last five years. According to our preferred measure of economic stability, i.e. a long-term normalised average of growth, Mauritius ranks among the top 10 in our rated universe. Over the last five years, domestic demand and in particular household consumption have been the main driver of growth and contributor to economic stability. The balance sheet of Mauritian households is healthy with low indebtedness and employees’ compensation has continuously increased in real terms since 2009. The labour market has shown signs of improvement throughout 2014 with the unemployment rate reaching 7.5% at the end of 2014, down from an annual average of 8.0% in 2013 to 7.8% in 2014.
Financial sector regulation: supervision shows Shortcomings
Financial sector regulation is broadly in line with international standards, a necessity for an international financial centre. As banks operate under a single banking licence, operating both offshore and domestic activities, the main challenge we see is for the regulatory authorities to prevent any problems that potentially arise from the former segment spreading to the latter. The two key institutions in charge are the Bank of Mauritius (BoM) for the banking sector and the Financial Services Commission (FSC) for the rest of the financial sector. In addition, the presence of large and complex conglomerates operating under the Global Business Company licences adds to the difficulty to regulate and supervise the financial sector.
In its last Financial System Stability Assessment of Mauritius in December 2008, the IMF noticed progress achieved in upgrading the regulation, in particular that of the banks, but identified delays and challenges with the supervision. More recently, problems of large related parties exposures within Mauritius-based Bramer Corporation Limited and its parent group, the British American Investment (BAI) conglomerate were announced by the Mauritian authorities.
The group was domestically present and taking deposits via its insurance activity, operated by the BAI Co (Mtius) Ltd, one of the largest insurance companies in Mauritius with 125,000 active policies and a market share of over 50%, and its banking activities, via the Bramer Banking Corporation Limited (the Bramer Bank), a bank listed on the Mauritius Stock Exchange, operating both onshore and offshore.
While details of the problems have yet to be disclosed – we expect that the authorities will disclose more information within the next few months – the case reveals, in part, shortcomings in the authorities’ supervision and enforcement capacity. Indeed, while the regulation imposes a limit on related parties exposure, the BAI has been known by the FSC to be breaching this requirement for several years. Related parties exposure was reduced at the request of the supervisory body, from its 85% (of total assets) level to 58% lately, but remained well above the 10% regulatory requirement.
The fiscal authority of Mauritius’s decision to bailout depositors and policy had the advantage of being swiftly implemented, avoiding panic behaviours and a deposit run at the sector level, but carries the disadvantage of increasing the risk of moral hazard.
Focus on the Bramer Bank and the BAI Co (Mtius) Ltd
Based on available information, we understand that the problem was also a matter of misgovernance and in particular misreporting of related parties lending on behalf of the Bramer Bank. The BoM identified capital shortfall following the discovery of large related parties lending (approximately 1 billion rupees compared to the bank’s deposits of 14 billion rupees) in the bank and requested the bank to fresh capital by 31 March, 2015, as a first step in the recapitalisation process. Meanwhile, the bank was already facing liquidity stress at the end of 2014, relying heavily on BoM financing (reportedly, almost all the eligible collateral of the bank had been used). The BoM ultimately revoked the banking licence of the Bramer Bank on 2 April, 2015 and part of its domestic assets and business was transferred to the newly created state-owned bank, the National Commercial Bank Limited, on 10 April, 2015.
On 3 April, 2015, one day after the revocation of the banking licence of its sister company, the BAI Co (Mtius) Ltd was placed under special administration by the FSC who appointed two conservators from PricewaterhouseCoopers in order to safeguard the interests of policyholders. On 6 April the government offered to take over and honour a large part of the insurance policies of BAI. On 30 April, two special administrators were appointed.
The authorities’ proactive stance
Mauriutius's diversified, upper-middle income economy supports its Baa1 rating, despite its small size. The economy has proven resilient to an unfavourable external environment, thanks to its successful attraction of foreign direct investment (in the financial sector, tourism and real estate) and diversification of exports. The authorities’ proactive stance in maintaining Mauritius’s attractiveness, coupled with the stable political environment, has contributed to this success. We view political risk as being very low, given the wellestablished and functioning institutions and the tradition of coalition politics. Mauritius stands out in the region for its ease of doing business, its low taxes, and the importance given to the private sector’s views in shaping the economic policy. Lastly, the ample liquidity available in the domestic capital market supports the government’s capacity to access local currency denominated Funding.
Effective monetary policy
We expect monetary policy to remain in-line with the central bank’s objectives of price stability and balanced economic development. The monetary committee cut its key policy rate by 25 bps in June 2013 to 4.65% in order to support economic activity, and has left it unchanged since then. The central bank has managed to maintain a fair amount of stability in the inflation rate, after bringing down inflation from a high of 6.6% in November 2011; it has remained in the 3.4-4% range since November 2012, though it has fallen recently. The openness of the economy implies substantial pass-through from imported inflation, and the 2014 y-o-y inflation rate was only 0.2%, largely on the back of falling global commodity prices and low inflation globally.
The authorities have successfully established and leveraged an investment-friendly climate in the country. Mauritius is particularly well ranked by the World Bank’s Ease of Doing Business, at 28th place (out of 189 surveyed countries). The World Economic Forum also ranked the country highly, at 39th (out of 144 countries) in its last Competitive report, an improvement on previous years. As an illustration, Lithuania (A3, stable) and Poland (A2, stable) are respectively placed 41st and 43rd, while Iceland (Baa1, stable) is 30th, Spain (Baa2,positive) 35th and Azerbaijan (Baa3, stable) is 38th. Unsurprisingly, Mauritius is penalised by its small size which is reflected in its low ranking under the ‘market size’, while it ranks particularly well under ‘financial sector development’, ‘business sophistication’ and ‘goods market efficiency’.
The fiscal authority of Mauritius’s decision to bail-out depositors and policy had the advantage of being swiftly implemented, avoiding panic behaviours and a deposit run at the sector level, but carries the disadvantage of increasing the risk of moral hazard.
Mauritius maintains a certain level of vulnerability to external shock that is common to all small island economies. This vulnerability, which would best be characterized as a form of concentration risk, stems from the possibility of one large event impacting the entire economy in a systemic fashion. This could include weather events or communications infrastructure breakdown.
The government, by taking over a part of the Bramer bank’s domestic activities via the creation of a state-owned bank, the National Commercial Bank Ltd (NCB), has had to inject 200 million rupees into the new bank. One risk for the government with the unwinding of the Bramer bank relates to the potential need to provide further capital to the NCB. But given the small size of the Bramer bank’s balance sheet at the time when its licence was revoked, we believe that the risk should be contained. In addition, the government took over a large portion of the insurance policies of BAI Mauritius and set up, again, a stateowned insurer, the National Commercial Insurance Ltd (NCI). It is difficult to assess whether the government will incur any fiscal cost in relation to the insurer, but again the size of the insurer remains relatively small, the government capital injection having reached 30 million rupees.
Public governance lags slightly
Public governance is not as strong as economic governance. As an illustration, the World Economic Forum identifies inefficient government bureaucracy as the most problematic factor in the ease of doing business. That said, the fiscal framework (i.e. elements that shape fiscal policy making) is consistent with our high assessment of the institutional framework. Some of the key features of the framework include a clearly defined debt ceiling of 50% of GDP to be reached by 2018 and which is used as the main fiscal anchor, building fiscal buffers in annual budgets, a medium-term perspective that complements annual budgets, or the involvement of non-governmental organisations (e.g. A public account committee and a national audit office).