Main Highlights and impact :
• We do not expect a return to pre-pandemic output levels until 2024 at the earliest .
• The tourism industry will continue to struggle because tourist arrivals are unlikely to reach 2019 levels until after 2024.
• The contraction in economic output in 2020, along with exchange rate depreciation resulted in per capita income declining by 23% last year. We do not expect per capita income to return to 2019 levels until 2024.
• Banks’ reliance on offshore deposits remains a vulnerability ; the offshore sector supports bank deposits, with foreign deposits accounting for a fairly high 40% of banks’ total liabilities or 156% of GDP, as of December 2020.
• Large cross-border exposures remain the key source of risk.
• Asset quality will deteriorate
• Government’s capacity to support banks may weaken
• A potential weakening in Mauritius' credit profile, as indicated by the negative outlook, would mean that Government’s capacity to support the banking system may weaken.
Recommendation: A strong policy response and sound capital and liquidity will limit lasting scars from the pandemic on banks.
Heightened Risk : The negative outlook means that there is always the possibility of a further downgrade. Now we understand why Government is scurrying for fiscal consolidation and the drastic measures to rein in expenditures. Bye Bye to the populist measures, for the moment at least !
You recall that Moody’s had also alerted us to the the large financing of the 2021 budget by the central bank which raises the risks to monetary policy effectiveness. There is also the risk that the large expansion of the monetary base increases inflationary pressures that will prove hard to contain.( Note that Moody's classifies the transfer of Rs 140 billion or 32.7% of GDP as contingent liabilities)
If we have a look at the table below, we can see that our monetary base(year on year) has been expanding at a phenomenal rate – for Feb and Mar 2021 it was respectively 60.6% and 55.3%. So is our money supply -monetary liabilities. Please note that the low level of credit growth and the huge slump in consumption expenditures have till now contained to some extent the inflationary pressures.
But what will happen once the activities pick up ? The monetary authorities will have to apply the brakes leading to a rise in domestic borrowing costs sounding the death knell of the policy of low interest rates and inevitably pushing the country into a spiral of inflation and higher interest rates and falling economic growth . Can we avoid stagflation?
