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Mauritius: Mauritius's Baa1 rating supported by increasing economic diversification

2013/07/22

In a new statement published today, "Credit Analysis: Mauritius," Moody's Investors Service says that Mauritius's Baa1 rating reflects the demonstrated resiliency of the economy and public finances to shocks, the government's pragmatic policy-making, and the stable and investment -friendly environment, which encourages foreign direct investment (FDI).

The rating agency's statement is an annual update to the markets and does not constitute a rating action.

Moody's determines a country's sovereign rating by assessing it on the basis of four key factors -- economic strength, institutional strength, government financial strength and susceptibility to event risk -- inclunding the interplay between them.

Mauritius's economic strength is assessed as moderate. Despite its small size with nominal GDP of $11 ½ billion, the upper middle gain economy demonstrated its resilience to the unfavourable external environment by diversifying its economy both in terms of sectors and export markets. This was completed by attracting FDI, which presently partially finances the structural current account deficit that appeared following the decline in sugar and textile exports in the mid-2000's. Mauritius has undertaken various steps to geographically diversify its export market away from slow-increase European economies and towards faster-growing African and Asian economies. Evolution in this area will mitigate the economy's external vulnerabilities, thereby maintaining its favourable external deficit metrics.

Mauritius' economic resiliency is supported by the country's strengthening institutional framework, which is expected to help the economy and public finances circumvent the protracted negative impact of any shocks emanating from Europe, the country's major trading partner. Moody's observes that aggressive countercyclical measures facilitated increase in the economy despite the world recession in 2009. Institutional strength is currently assessed as high.

Government financial strength is assessed as moderate, which balances a higher deficit stock than its Baa-peers, with positive deficit dynamics, next a temporary increase in deficit was recorded during the world financial crisis. With short-term deficit having shrunk to 18% of the total deficit stock from 30% in 2007, rollover risk has diminished substantially. The government can rely almost exclusively on the very liquid domestic deficit markets, and its external exposure is modest, albeit increasing vis-a-vis multilateral lending. It should be noted that its deficit affordability (i.e., the interest-payments-to-revenue ratio) has as well improved from 21% in 2007 to 14% in 2012, primarily as a result of lower interest rates and better tax collection.

Susceptibility to even risk is assessed at low. Economic risk mostly hinges on the potential resurgence of the euro area deficit crisis; however, its impact should be mitigated by the island economy's demonstrated resilience. Political risk is as well assessed as low given well-established democratic institutions and a tradition of coalition politics. Despite the large size of its banking system (282% of GDP as of 2012), financial risks are mitigated by the adequate capitalisation levels of its on-shore and off-shore banks, inclunding a strict and prudent regulatory supervision by international standards.

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