I have highlighted in a previous article titled “Pada’s nominal illusion !” , that both Pada and his BoM boy are off target; the level of real GDP in 2022 is about 5.4 % below pre-pandemic 2019. It is only after 2023 that our GDP, in volume or real terms, surpasses the 2019 level. Similarly most of our sectors- Manufacturing - Electricity,Construction ,Transportation and storage, at constant 2006 prices, are still below the 2009 level.
More seriously, our exports in real terms in 2021 were Rs 54.9bn as compared to Rs 83.7bn in 2014 and Rs 69.4bn in 2019. And on the basis of the trade statistics of the first quarter of 2022, we do not expect any improvement in the current account in 2022 from its present high deficit of -13.7% of GDP.
I do not think that there are reasons to be optimistic as this review shows. On the contrary, the abrupt rise in interest rates is a response to signs of impending trouble ahead as market sentiment indicates continued rupee weakness ahead.
Growth
GDP in real terms grew by 4% in 2021. The first four months of 2022 have also shown good improvement, with tourist arrivals rising to three quarters of pre-Covid levels. GDP growth is estimated at around 6% in 2022, less than the official forecast of about 7.5%.
Inflation
Inflation has surged sharply this year, reaching 11% in April 2022 compared with a year earlier, due to the pent-up and cumulative impact of a sizeable depreciation of the rupee of the order of 25% since Jan 2019, as well as to recent global increases in energy and commodity prices following the Ukraine war. Inflation is expected to rise further as the full effect of the Ukrainian crisis feeds through domestic prices.
Fiscal deficit
The additional Covid related spending was financed by Govt borrowings, with a fiscal deficit exceeding 10% of GDP. The Bank of Mauritius also helped with budgetary deficit financing.
Public debt
Public debt is currently hovering around 100% of GDP, rising from a pre-Covid level of 65% of GDP. The share of external debt has been getting closer to around 30% of total debt.
Public debt was on the uptrend since 2014 as Govt pursued an aggressive social policy of increasing universal pensions as well as public sector employee compensation which account for about 60% of Govt recurrent expenses. With Covid, total Govt expenditures have risen over 30% of GDP, while Govt revenue has remained stable at around 21% of GDP.
The current level of public debt is considered as elevated and unsustainable by Moody’s, the credit rating agency, and by the IMF. Govt is committed to another substantial pensions increase by 2023-24, and has imposed the equivalent of a payroll tax to finance this additional spending. However, the consensus is that there will still be a pensions financing gap. Reform on pensions is therefore considered to a priority to reduce the fiscal deficit and stabilize public sector debt.
Moody’s downgrade
Mauritius was downgraded from Baa3 to Baa2 by Moody’s last year, and is rated with a negative outlook, which means that a further downgrading to Baa1 is possible in the wake of further debt deterioration. Such a downgrade will have serious implications for the stability of the banking sector, as most banks will perforce be rated less than investment grade. Fearing this eventuality, the Mauritius Bankers Association has recently called on Govt to pursue a fiscal stabilization policy in order to stabilize debt.
The MIC
Besides massive Govt spending to respond to the Covid pandemic, the Bank of Mauritius has also engaged in quasi-fiscal spending, with the setting up of a special purpose vehicle, namely the Mauritius Investment Corporation. The MIC was set up to provide financial support of a total of about 15% of GDP to private sector companies, especially in the tourism sector, mainly through equity and quasi-equity investments. Of the total investments of about 10% of GDP made by MIC so far, about half has gone to effectively bail out Air Mauritius, the national airline as well as to redeem Govt debt. Both Moody’s and the IMF consider such central bank investments as weakening its effectiveness and independence.
Repo rate
The Bank of Mauritius has raised its key interest policy rate by too little . As interest rates are rising globally, the central bank needs to tighten monetary conditions and conduct a more effective anti-inflationary policy.
Depreciation of the rupee
Following Covid, the external accounts have worsened as tourism receipts dried up, although imports were also subdued for a while. The central bank has allowed the rupee to depreciate to reflect the larger external disequilibrium, but rupee depreciation was also used by the central bank to inflate the valuation of its foreign exchange reserves. These valuation gains were then distributed to Govt for its budgetary needs
External borrowing
Govt has mobilized external financial support of some USD 1 bn, to support Govt spending, and also to buttress foreign exchange reserves. External lenders include the African Development Bank, Agence Francaise de Developpement, and the Japanese International Cooperation Agency. International lending assistance was mostly on a long term basis at favourable interest rates. The Bank of Mauritius has also been borrowing to shore up its reserves, in larger amounts reaching over USD1 bn at Apr 2022. The BoM also conducts some special balance sheet transactions to window-dress the level of forex reserves, which stand at Rs7 bn at Apr 2022. The net level of reserves is thus around USD6 bn currently, at a level which is regarded as fairly adequate to meet the country's external financing needs in the medium term.
Continued weakness of the rupee
However, the BoM has been actively pressuring banks to limit foreign exchange sales only to meet priority needs. This led to an acute shortage of foreign currency in April 2022, which needed an exceptionally large intervention by the central bank to sell dollars. The BoM has also been intervening to appreciate the rupee by a few percentage points, in order to demonstrate its credentials to combat imported inflation.
It appears that the BoM may have incurred heavy losses in April 2022 as a result of valuation losses on its foreign reserve holdings, and also on its foreign fixed income investments. This could wipe out all of the BoM’s current reserves, requiring a new injection of capital from Govt, unless the BoM reverses its exchange rate policy next month, in June 2022, and allows for further exchange rate depreciation. Despite the record levels of central bank intervention, excess demand for foreign currency still prevails, and there is evidence of an offshore market developing in the rupee, with a slightly weaker unofficial value of the rupee against the USD. Market sentiment indicates continued rupee weakness ahead.
This brief review of the main macro-economic indicators points to
(1) a modest growth recovery highly dependent on tourism growth. The adverse effect of the Ukraine crisis on the global and European economies does not augur well for a strong tourism revival.
(2) higher inflation in line with the global inflationary trend, and continued rupee weakness in the absence of monetary policy tightening.
(3) continued fiscal deficits. Inflation is putting more pressure for social spending, and the scope for reducing recurrent expenditures other than social benefits and employee compensation is limited. Fiscal consolidation through revenue measures and spending cuts, especially through pension reforms, is critical, but unlikely to happen in next month’s budget exercise. The expansionary fiscal deficit is mirrored in a higher current account deficit which puts added downward pressure on the rupee.
(4) a possible but unlikely stabilization of public debt in view of the political difficulties in reining in public spending or increasing taxation. Unless substantial foreign grant assistance can be obtained from friendly countries. Inflation can reduce the debt ratio by increasing the nominal GDP and tax revenues, but only for a short period until expenditures catch up with higher prices and the need for more social spending to offset inflation.
(5) a potential downgrade by Moody’s which could destabilize the financial sector, and lead to capital flight. The forthcoming 2022 IMF Article IV Consultation Report on Mauritius in a few months will probably have a determining influence on a Moody’s rating decision by year end. The absence of any fiscal correction measures in the next budget will weigh negatively on a rating assessment.
(6) an overall adverse outlook on the state of the economy. It does not mean that Mauritius has reached a crisis situation, like in Sri Lanka. There are similarities, in that both countries have been engaging in excessive fiscal spending, with gaping fiscal deficits and heavier debt burdens. Sri Lanka was however more reliant on foreign debt, whereas Mauritius is not under such immediate pressure to service its foreign debt commitments. Both are tourism-dependent countries that were badly hit by the Covid crisis, but Mauritius still have an adequate level of foreign reserves to meet its external financing requirements for the next 2-3 years. Although improbable, it cannot be ruled out that the uncertainties of the global economy as well as the rising vulnerabilities of the domestic social and political situation could well contribute to a collapse of market confidence, and eventually precipitate a foreign exchange crisis.
