J Banker on Scoop.mu downplays the Moody's threat and disputes the need for needed fiscal action on the following grounds:
1. The financial markets are already expecting Mauritius to be downgraded and have already discounted (i.e., priced in) the impact of a Moody's downgrade. In other words , nothing drastic will happen when Mauritius is downgraded. As evidence, it is argued that MCB recently made a significant foreign borrowing, and the interest rate on these borrowings (not disclosed publicly) is apparently higher than previously, and already reflects sub-investment grade status. MCB uses these borrowings along with its foreign currency deposits, which includes GBC deposits, to lend to foreign borrowers, mainly in Africa. Its profits on foreign lending account for around two thirds of its profits. (With higher interest rates on its borrowings, MCB makes lower profits. If there is a Moody's downgrade, MCB may look to relocate its holding company to another foreign destination where it can still enjoy an investment grade rating.)
2. Interest rates in Mauritius will not increase, because of the prevalence of high liquidity in the financial system.
3. A large part of GBC deposits will not move out of Mauritian banks in anticipation of a Moody's downgrade. So a downgrade will have no strong negative effect.
4. The rupee will weaken, but the rupee is overvalued anyway and needs to fall to its true equilibrium price.
5. Governance failures is more likely to impacting on investors than some grade status from rating agencies.
6. Mauritius will become more attractive relative to Dubai, namely "With the right vision, strategy, and skilled leaders, it could capture capital than can that can no longer take Gulf stability for granted .
These standpoints are partly valid, but can be mostly refuted. The impact of a Moody's rating on local interest rates is not the major issue, 𝒊𝒕 𝒊𝒔 𝒕𝒉𝒆 𝒊𝒎𝒑𝒂𝒄𝒕 𝒐𝒏 𝒕𝒉𝒆 𝒓𝒖𝒑𝒆𝒆. 𝑻𝒉𝒆 𝒉𝒐𝒑𝒆 𝒕𝒉𝒂𝒕 𝒕𝒉𝒆 𝒓𝒖𝒑𝒆𝒆 𝒘𝒊𝒍𝒍 𝒇𝒂𝒍𝒍 𝒕𝒐 𝒂 𝒓𝒆𝒂𝒔𝒐𝒏𝒂𝒃𝒍𝒆 𝒕𝒓𝒖𝒆 𝒆𝒒𝒖𝒊𝒍𝒊𝒃𝒓𝒊𝒖𝒎 𝒗𝒂𝒍𝒖𝒆 𝒊𝒔 𝒘𝒊𝒔𝒉𝒇𝒖𝒍 𝒕𝒉𝒊𝒏𝒌𝒊𝒏𝒈 𝒂𝒏𝒅 𝒊𝒏𝒄𝒐𝒓𝒓𝒆𝒄𝒕. Foreign exchange restrictions currently in place at commercial banks are intensifying, implying a growing overvaluation of the rupee. How the rupee will behave in the short term in the event of a downgrade will depend heavily on how much foreign and Mauritian foreign deposits leave Mauritian banks. In the medium term, South African and international banks themselves will likely move out of Mauritius.
𝑶𝒃𝒗𝒊𝒐𝒖𝒔𝒍𝒚, 𝒕𝒉𝒆 𝒆𝒎𝒑𝒉𝒂𝒔𝒊𝒔 𝒔𝒉𝒐𝒖𝒍𝒅 𝒏𝒐𝒕 𝒃𝒆 𝒔𝒊𝒎𝒑𝒍𝒚 𝒐𝒏 𝒕𝒉𝒆 𝑴𝒐𝒐𝒅𝒚'𝒔 𝒓𝒂𝒕𝒊𝒏𝒈, 𝒃𝒖𝒕 𝒐𝒏 𝒘𝒉𝒂𝒕 𝒕𝒉𝒆 𝒓𝒂𝒕𝒊𝒏𝒈 𝒊𝒔 𝒑𝒐𝒊𝒏𝒕𝒊𝒏𝒈 𝒕𝒐, 𝒏𝒂𝒎𝒆𝒍𝒚 𝒂𝒏 𝒖𝒏𝒔𝒖𝒔𝒕𝒂𝒊𝒏𝒂𝒃𝒍𝒆 𝒇𝒊𝒔𝒄𝒂𝒍 𝒅𝒆𝒇𝒊𝒄𝒊𝒕 𝒂𝒏𝒅 𝒅𝒆𝒃𝒕 𝒔𝒊𝒕𝒖𝒂𝒕𝒊𝒐𝒏. Not a word from J Banker about the excessive fiscal deficit, which is directly related to the large external current account gap, and the fate of the rupee. A shortfall of Rs10 bn in this year's budget and the adverse impact of the oil price will cause havoc on the fiscal accounts, and raises the risk of a potential collapse of the rupee. While the Bank of Mauritius boasts of forex reserves of over USD10 bn with the help of foreign borrowings and rising gold prices, usable reserves are estimated, as by S & P, at around USD5-6 bn.
J Banker does not appear to favour fiscal discipline, which is officially driven by the need to avoid a Moody's rating. Hence his arguments that Moody's downgrade should not reflect a doomsday scenario. 𝑰𝒓𝒓𝒆𝒔𝒑𝒆𝒄𝒕𝒊𝒗𝒆 𝒐𝒇 𝑴𝒐𝒐𝒅𝒚'𝒔 𝒉𝒐𝒘𝒆𝒗𝒆𝒓, 𝒕𝒉𝒆 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒇𝒊𝒔𝒄𝒂𝒍 𝒔𝒕𝒂𝒏𝒄𝒆 𝒘𝒊𝒍𝒍 𝒍𝒆𝒂𝒅 𝒕𝒉𝒆 𝒄𝒐𝒖𝒏𝒕𝒓𝒚 𝒕𝒐 𝒂 𝒇𝒐𝒓𝒆𝒙 𝒂𝒏𝒅 𝒇𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒄𝒓𝒊𝒔𝒊𝒔.
𝑨 𝒃𝒆𝒕𝒕𝒆𝒓 𝒄𝒓𝒊𝒕𝒊𝒄𝒊𝒔𝒎 𝒐𝒇 𝒕𝒉𝒆 𝑴𝒐𝒐𝒅𝒚'𝒔 𝒇𝒊𝒙𝒂𝒕𝒊𝒐𝒏 𝒊𝒔 𝒕𝒉𝒂𝒕
a) in the absence of substantial reforms in the archaic rent-seeking and low tax-centric economy-as I have shown in my earlier post - fiscal consolidation becomes unavoidable but should also be accompanied by deep structural and economy-wide reforms that promote higher productivity and exports
b) Fiscal consolidation is possibly avoidable only if we go for a total transformation of the failed economic system . 𝑻𝒉𝒂𝒕 𝒎𝒆𝒂𝒏𝒔, 𝒂𝒎𝒐𝒏𝒈 𝒐𝒕𝒉𝒆𝒓𝒔,
-a redrawing of the policies that favour the privileged, the oligarchy-dominated private sector of conglomerates and the rent seekers.
- a rethinking about our land markets, the high concentration of land, or the liberalisation of land that has unlocked massive potential for profits in real estate development for large landowners.
-a recasting of the advantageous cast-iron contracts granted to Independent Power Producers (IPP) and a reconfiguing of the whole idea about Smart Cities projects, the silver economy, or the unproductive FDI inflows that go to construction and real estate activities.
- Promoting a more competitive domestic market as our key markets have remained oligopolistic, where our so-called performing firms have been extracting rents for years on the basis of their market power
