On July 24, Moody’s re-affirmed the country’s sovereign rating at borderline investment grade, with a stable outlook. Following the earlier July 22 downgrade, Government had applied all its efforts to “cook the books” by artificially inflating Government revenue and GDP statistics. Notably, Moody’s did not respond with a rating upgrade or an outlook change to positive.

The latest Moody’s report of August 24 identified the factors that could lead to a rating upgrade or a downgrade. For an upgrade: “Upward pressure on the rating could develop if Mauritius successfully implements successful reforms that sustainably boost potential growth rates, leading to a faster than expected reduction in Government debt ratios.” For a downgrade: “Conversely, a reversal or slowdown of fiscal consolidation which results in Government debt stabilizing at higher levels than currently anticipated would put downward pressure on the rating.”

In its next credit assessment, Moody’s will review progress made on (1) fiscal consolidation, i.e. the deficit as a ratio of GDP, and (2) the reduction in the Government debt ratio to GDP.

Fiscal consolidation

Moody’s expected a continued decline in the fiscal deficit relative to GDP – “The fiscal deficit has steadily narrowed from 5.5% of GDP in fiscal year 2021-22 to 3.9% of GDP in fiscal year 2023-24. We expect a further gradual consolidation, with the deficit narrowing to around 3.5% of GDP in fiscal year 2024-25, where we expect it will remain thereafter”.

However, the actual deficit figure for fiscal year 2023-24 and the estimate for fiscal year 2024-25 show the opposite of fiscal consolidation. From fiscal data published by Statis- tics Mauritius, the revised fiscal deficit for 2023-24 is 5.4% and not 3.9% as expected by Moody’s. The main reason for this higher deficit outcome in 2023- 24 stems from deliberate Government revenue overestimation of some Rs14 bn. The revised deficit of 5.4% in 2023- 24 is higher than the deficit figure of 4.9% in the previous year.

Assuming similar revenue overestima- tion for 2024-25, and a minimum addi- tion to the deficit of Rs10 bn arising from electoral promises, the expected fiscal deficit in 2024-25 will exceed 6.4% of GDP, or at least 1% point higher than in the previous year. Moody’s will likely estimate the size of electoral handouts far less conservatively, and then firmly conclude that the ongoing fiscal consolidation is a delusion. The fiscal deficit in 2024-25 could even be double the expected level of 3.5% of GDP.

Government debt reduction

Moody’s also expected a further reduction in the Government debt ratio – “After government debt declined to 65% of GDP at the end of fiscal 2024, we forecast the debt ratio will decrease further, albeit at a more gradual pace and will ultimately stabilize around 60% of GDP. General government debt is anticipated to fall overtime, though remaining at an elevated level compared with Baa peers (56%).”

However, the actual Government debt ratio to GDP for June 2024 was revised by the Ministry of Finance to 68% at end September 24, instead of 65%. Revised Government debt at June 24 stood at Rs479 bn, or Rs19 bn higher. Moody’s expected the Government debt ratio in June 25 to fall slightly to 64%, representing Government debt of about Rs503 bn. Revised Government debt in June 25 will in fact be higher by (a) the debt adjustment of Rs19 bn made for June 24, (b) the financing of a repeated revenue shortfall of Rs14 bn in 2024-25, and (c) the financing of electoral promises for at least Rs10 bn. Government debt in June 25 will thus amount to over Rs546 bn, or at least 68% of GDP.

Moody’s will not find any improvement in the Government debt ratio in 2024-25, and instead foresee ultimate stabilization at 68% instead of 60% of GDP, far higher than peer countries. The Government debt ratio will even exceed 70% after correcting for GDP overestimation.

Averting a downgrade

It is highly probable that Moody’s will downgrade Mauritius, starting with an outlook change to negative, followed by a lower than investment grade rating, or junk status. As shown above, Moody’s could take a negative rating decision based on publicly available information on Government finances, irrespective of the results of the current fiscal deficit verification exercise.

To ward off such an unfavorable development, which could precipitate banking instability and a forex crisis, Government should urgently start engaging with the World Bank and the International Monetary Fund (IMF) and other development institutions for a budget support programme. Such an adjustment programme of economic and financial reforms will aim at fiscal consolidation and a significant reduction in Government debt, over a medium-term period.

Moody’s, like the IMF, would be specially comforted by spinning off Mauritius Investment Corporation (MIC) from the Bank of Mauritius (BoM), which would no longer be used as an instrument for quasifiscal operations. The MIC was the epitome of monetary irresponsibility, and also reflected the extremely corrupt practices of a kleptocratic regime. Open and transparent disclosure of doubtful MIC investments should be followed by in-depth investigations by the Financial Crimes Commission and other law enforcement agencies.

Conclusion

Painful and unpopular economic measures spoil the party but can no longer be avoided or postponed. External reserves are dwindling on account of the external current account gap. The pressure on the rupee will continue, unless the country reverts to affordable fiscal spend- ing, and abandons monetary laxity. Egypt, Ghana, Kenya and Sene- gal provide recent examples of other African countries struggling with similar economic issues, and choosing to partner with the IMF and other international institutions. The new economic team at the Ministry of Finance and BoM inspires confidence that serious domestic and external economic imbalances can indeed be corrected to put the country back on a sustainable growth path.