Debt Outlook For Mauritius

Elevated debt levels in Mauritius are raising concerns both domestically and internationally when it comes to the country's long-term economic stability, and as evidence, Moody’s Ratings recently affirmed Mauritius's long-term foreign and local currency issuer ratings at Baa3 but changed the outlook from ‘stable’ to ‘negative’. Albeit Mauritius has preserved its investment grade status (Baa3) and remains the second-best rated country over the African continent behind Botswana, which is rated A3, the shift in Moody’s Ratings outlook underscores the growing reservation with regards to Mauritius's fiscal challenges and the probability of future downgrades if these challenges are not addressed effectively. This shift in outlook adds up a layer of complexity to the country's economic landscape and position the country for careful monitoring requirement to avoid any downgrades. The rationales behind the change in outlook are mainly due to the following:  

1. High Debt Burden: Government debt projection is forecasted to reach 77% of GDP by June 2025 (previous projection: 64%), which represents a higher level in comparison to the Baa3 median of 58%. 

1. Revised Fiscal Deficit: The revised fiscal deficit for FY24 is 5.7% of GDP, higher than previous forecast of 3.9%, and FY25 is projected to be at 7.6%. 

1. State-Owned Enterprise Debt Exposure: This accounts for 10% of fiscal 2024 GDP, where over half is guaranteed by the government – which constitutes further fiscal risks. 

 

The consumption-driven economic model that we have been acquainted overtime is backfiring and we expect some structural change and austerity measures to remedy the situation. While private sector debt is returning to pre-COVID levels, public sector debt is unsustainably increasing over the years (Graph 1), and it is expected to witness a further rise in the current year. 

 

Graph 1 – Public & Private Sector Debt evolution |Source: Monthly statistical bulletin of Bank of Mauritius/estimates & State of the Economy report. 

 

As per the ‘State of the Economy’ report projection, government borrowing requirements for the financial year 2024-25 is expected to reach 8.2% of GDP, significantly higher compared to the 4.8% in the published Budget report estimates. The fiscal deficit is now projected to be at 5.7%, which surpasses initial targets of 3.9% as per revised estimates, which is an illustration of an increasing debt level trend. 

 

The public sector gross debt has ballooned from MUR 238bn (Dec-14) to MUR 559bn (Jun-24). Main contributors have been the increase in basic pensions (MUR 101bn) and Covid-19 (MUR 29.6bn). Given that the large proportion of public sector debt comprises of government recurrent expenditure (approximately 40% of public sector debt as per ‘State of the Economy’ report), simply reducing government expenditure is insufficient to lower the public sector debt. The potential options to reduce public debt are (1) to increase government revenue through taxation, (2) cutting government expenditure, (3) allowing inflation to erode the debt's real value, (4) utilising the Chagos expected inflow - which is more of a long-run fix, and (5) restructuring the debt. A mix of fiscal consolidation would have to be tabled for any meaningful improvement in the debt of our country. The ‘Discours Programme’ of Government for 2025 to 2029 is aiming to rectify the fiscal outlook with the following identified key measures (Table 1):  

 

FISCAL POLICY MEASURES

Debt & Deficit Reduction to achieve long-term fiscal stability;  Expenditure Reform: Cut unnecessary expenditure & introduce performance-based budgeting; &  New Fiscal Responsibility Act: Potential positive signal to Moody’s Ratings & IMF.

Tax System Reforms: Focus on fairness, efficiency & convenience → Fairness may mean higher income/corporate taxes (progressive system); &  SME Support: Favourable tax policies for SMEs, tax deductions for reinvested profits & exemptions for new businesses.

 

Table 1: Fiscal Policy Measures announced in the ‘Discours Programme’ of Government for 2025 to 2029

 

Moody’s Ratings provided approximately 12 to 18 months to Mauritius for adjustment of its debt to sustainable levels and implementation of a proper fiscal consolidation plan, where success to achieve same would lead to a rating stabilisation and bring back a ‘stable’ outlook. Contrastingly, failure will lead to a Ba1 downgrade implying a push of bonds into "junk" status, which will have abysmal impact on the financial sector and the country’s financial stability. Per Moody’s Ratings, a front-loaded fiscal adjustment involving tax reform and targeted measures to reduce spending, rather than relying on one-off measures, would have a greater likelihood of returning Mauritius' fiscal metrics to the trajectory envisioned prior to the audit.

 

The implementation risks however remains heightened. As pointed out by Moody’s Ratings, Mauritius faces limitations in its capacity to increase corporate or personal income taxes due to competition with other low-tax jurisdictions. In addition, raising consumption taxes, like Value-Added Taxes, may be politically and socially contentious. Social spending comprises 30% of total expenditures, which restricts the ability to reduce spending without reforms to the welfare system, such as pensions or family allowances, which would also be politically challenging. Additionally, a significant fiscal adjustment might negatively impact growth, reducing the effectiveness of tax policies. Enhancing the financial performance of State-Owned Enterprises will be essential to alleviate spending pressures. However, this improvement would require actions that are socially and politically difficult, such as raising regulated prices for water, electricity, and public transport which will also drive inflation.