Just as the United States had their Lehman Brothers moment, Mauritius is witnessing a Moody’s moment, the looming of a protracted economic crisis. With the second lockdown, it is a foregone conclusion. In its assessment dated 4 March 2021, Moody’s Investors Service points out that Mauritius’ economic fundamentals, its economic strength, its fiscal or financial strength, its debt profile and its institutions and governance strength all “have materially decreased.” If the Bank of Mauritius, the Mauritius Bankers Association and Mauritius Finance want to remain in a state of denial, that is their own business. By downgrading Mauritius to Baa2 with negative outlook, Moody’s is giving the government a big warning which sounds like Meade’s wake-up call.

The credit rating agency has come up with three key messages. Firstly, owing to “a sharp and longlasting deterioration in fiscal and debt metrics”, Mauritius has to look at fiscal consolidation. Obviously, it is a tricky situation for the country because, with close borders and muted demand, it needs some stimulus. This can be done only by borrowing more or by printing more money. But according to Moody’s, Mauritius cannot do that anymore as it has reached the limits of its ability to stimulate the economy. It has no other choice than to cut spending, which will worsen the economic situation as demand is already weak, or to raise taxes, which will also have a negative impact on the economy.

Secondly, Mauritius should put the brakes on its galloping government debt which Moody’s expects “to peak at just over 80% of GDP in 2021.” Moody’s does not care about the net debt numbers of the ministry of finance, but only about gross debt. When a country starts playing around with net debt, as is the case in Latin America, it is a sign that economic trouble is brewing.

Following the removal of the legal debt ceiling, Mauritius needs to regain credibility by targeting a certain debt-to-GDP ratio. In order to avoid another credit downgrade, the government must put forward a credible fiscal consolidation plan that constrains borrowing and shows a path to sustainable debt levels in the medium term.

Thirdly, the Bank of Mauritius must stop printing money because the monetary base is growing too fast (by 58% in 2020), which can completely destabilise the economy and significantly affect the ability of the central bank to maintain price stability. Moody’s negative outlook also captures the risks related to “the large financing of the 2021 budget by the central bank, which raises risks to monetary policy effectiveness.” But the Bank of Mauritius has the cheek to say that it “conducts monetary policy in line with international best practices”! And what about the misappropriation of foreign exchange reserves for the Mauritius Investment Corporation whose success, writes its chairman, will not be measured by profit or loss?

From now on, businesses and households should abandon what Ramesh Basant Roi calls “a state-dependent mentality attributable to welfarism at its worst.” They cannot expect the government to do everything for them, and continue asking for money that it does not have. It is up to private firms to go to the equity markets with good business plans to raise capital by themselves, instead of relying heavily on debt to avoid diluting family shareholding.

Besides, all commercial banks are busy cleaning up their balance sheet and are not particularly interested in buying bonds issued by restructured companies. Banks cannot have the same rating as the country: they are rated one notch lower. As expected, the Mauritius Commercial Bank, which has big corporate exposures, has been downgraded to Baa3 negative, only one notch above high yield. If tomorrow the country goes down to Baa3, banks can be rated junk whereby they will not be able to get cheap funding on the international markets. This could spell economic disaster, bearing in mind the huge amount of deposits of Global Business Companies.

When South Africa was downgraded from Baa3 to non-investment grade a few years ago, Absa Bank shifted some of its balance sheet to Mauritius which was rated much above at Baa1. In the event Mauritius loses the benefit of the investment grade credit rating, a lot of dollars will leave the island. At a time when the latter is on the black list of the European Union and is getting little tourist income, it is careless of the Bank of Mauritius to convert international reserves into rupees to bail out companies.

The only reason for which Mauritius still retains its investment grade status is its political and social stability. It seems that Moody’s does not know that government is shaken by scandals, that street demonstrations are becoming frequent and that populism is gaining ground in the island. However, Moody’s is telling the ministry of finance and the central bank to stop doing what they have been doing. There is no alternative from the moment business operators feel moody.