Moody’s has downgraded the outlook for Mauritius from Stable to Negative, but maintained its sovereign rating at Baa3. The downrating is mainly driven by information on fiscal deterioration from the State of the Economy (SE) Report of Dec 2024, and the new Govt’s revised fiscal estimates. A larger fiscal deficit of 7.6% of GDP is now expected in 2024/25, as well as a rising Govt debt ratio of 77% of GDP in June 2025, which is already higher than peer countries.

This article reviews Moody’s fiscal deficit and debt projections, highlights the financial risks associated with the threat to country creditworthiness, and underlines the urgency of taking fiscal and other policy actions to restore economic stability. Moody’s fiscal scenario Moody’s expects Govt to pursue a fiscal consolidation plan to raise revenue, cut spending, and reduce the Govt deficit to 4.9% in 2025/26, and to stabilize Govt debt at 77% in June 2026. With continued fiscal adjustment in the medium term, Moody’s foresees Govt debt to fall to 74% by June 2030.

Moody’s definition of Govt debt excludes public enterprises, which represent about 10% of GDP. Public sector debt, including both Govt and public enterprises, is thus expected to be around 87% of GDP in June 25, well above the previous Govt’s debt target of 80%.

Moody’s notes that it would prove socially and politically difficult to go for stronger and immediate fiscal adjustment, which could also dampen growth. Moody’s draws attention to the difficult financial situation of State-Owned Enterprises (SOE’s), which calls for revised prices of water, electricity and public transport, to alleviate Govt spending and debt pressures.

Inclusive of expenditures disguised as transfers to SoE’s to support their operations, estimated at 1% of GDP by Moody’s, the actual Govt deficit would amount to 8.6% of GDP in 2024/25. A consolidated fiscal deficit including net expenditure of special funds exceeds 9% of GDP in 24/25.

Moody’s considers any reliance on “one-off measures” as less effective for undertaking fiscal adjustment. These “one-off measures” are not identified, but likely refer to foreign grants, the sale of state-owned enterprises and assets, and to the use of central bank reserves, or printed money, such as from the Mauritius Investment Corporation (MIC). The front-loading of any rental proceeds from the U.K. on the Chagos deal would also likely fall in the category of “one-off measures”.

Danger zone

Moody’s lower outlook rating was predictable, but it comes with the threat of a downgrading to junk status in about 12-18 months. While the country has been given a reprieve, Moody’s rating action is a final wake-up call to address excessive fiscal spending. South Africa failed to tackle fiscal deterioration over more than 2 years, and was finally downgraded by Moody’s from a Baa3 rating with a negative outlook, like Mauritius, in June 2017, to sub-investment grade in March 2020.

Mauritius is especially vulnerable to a Moody’s rating downgrade because of its position as a financial centre. If Mauritius loses its investment grade rating, the banking sector is likely to experience significant capital outflows on its global business deposits. Foreign bank lending activities would be greatly destabilized, triggering a potential forex and financial crisis.

With Moody’s rating action, Mauritius is now entering dangerous territory, as the global business sector needs to remain fully confident in Govt’s ability to undertake fiscal consolidation and avert a future rating downgrade. Local banks may also risk downgrading. It is therefore critical that Govt demonstrates its capacity to carry out fiscal and monetary tightening to stabilize the economy.

The Prime Minister’s end of year address raised a sense of urgency about economic issues, and did not refrain from mentioning the difficult road ahead. The President’s address has similarly provided a commitment to economic reforms, and to boost existing and new economic activities. Govt has been proactive in setting up a competent and credible team to spearhead the reform agenda, but it must now urgently focus on an action plan for economic adjustment.

Moody’s Final Warning (Part 2)

Fiscal measures

According to Moody’s comments, dated 16 December 2024, the Government should run a primary fiscal balance to reduce the public debt to GDP ratio, and demonstrate the effective execution of proposed reforms by a balance between deficit reduction and the preservation of essential social spending. Since then, the Government has increased social spending and the fiscal deficit by about 1.5% of GDP, and has yet to show concrete actions on fiscal reform.

Mauritius cannot continue to live beyond its means; the Government must restore fiscal discipline. To bring down the Government deficit from 7.6% of GDP in 2024/25, or from Rs55 bn, to 4.9% of GDP in 2025/26, or to Rs38 bn, a reduction in net spending of Rs17 bn is required. This fiscal adjustment could be partly achieved by enhancing VAT revenue. VAT accounts for over a third of total taxes, and every one percent increase in the VAT rate would yield more than Rs4 bn.

Budgeted capital expenditure is likely to amount to less than Rs10 bn in 2024/25, so that the scope for spending cuts rests mainly on current expenses. Social benefits represent 35% of current expenses, and are an obvious target for cutbacks by engaging in pension reform. Transfers to Special Funds can also be reviewed by downsizing or postponing capital projects financed from these special funds, including social housing.

The privatization of SOEs or by the sale of the Government equity will provide Government with some financial breathing space, albeit limited. Entrusting the management of SOEs to private operators will also produce better value for money in the delivery of public services. SOE’s have supplied an endless litany of financial scandals under successive Governments, although the last one did break all records of brazen plunder. SOE’s can no longer be countenanced as a perpetual drag on the public purse. A Privatization Committee supported by financial experts should be set up to identify potential SOE candidates for disposal or for private sector management.

With these and other corrective budgetary measures, Mauritius should start a fiscal adjustment process without waiting for the next Budget exercise in mid-2025. It is always easier for the Government to implement difficult measures at the start of a political mandate. Results will be reaped sooner, and the need for a greater adjustment effort later can be avoided. Earlier done is better done.

Other Policy Actions

The SE Report called for the “approach to monetary policy to be completely revisited”, and a decision on interest rates is now awaited with the recent reconstitution of the Monetary Policy Committee of the Bank of Mauritius (BoM). The timing of an interest rate hike in December last to coincide with the 14th month salary bonus was a missed opportunity that could have contributed to buttress savings, restrain consumption growth, and also signal monetary tightening.

The SE Report also recommended that “regarding the future of the MIC, the BoM will come up with appropriate solutions after carrying out an in-depth audit of the situation”. Despite the strong condemnation of Mauritius Investment Corporation (MIC) in official statements, repeated calls for a forensic audit of MIC, preferably by an international consultant, have so far gone unanswered. Potential valuation losses on MIC investments are sizeable, and expert foreign consultancy advice should also be sought for restructuring this distressed fund.

Actions are awaited to give a clear and positive signal to the International Monetary Fund (IMF) and Moody’s about strengthening BoM independence and prohibiting recourse to “one-off measures” for deficit financing. MIC should be phased out from BoM, and around Rs24 bn of MIC unused equity refunded to BoM. Any temptation to turn the MIC into a sovereign fund based on printed money should be ruled out. The announced but long-pending amendments to the BoM Act should be expedited to strengthen BoM independence, so that it is never again used to print helicopter money.

The integrity of our official statistics still suffers from the severe damage inflicted by data manipulation under the previous Government. Responsibility for this “deliberate trimming and cooking of data”, as described in the SE Report, is shared between top officials at the ministry of finance and Statistics Mauritius. A fact-finding committee should be set up to look into deceptive practices in estimating GDP statistics as well as Finance statistics, and to make recommendations for strengthening the independence of Statistics Mauritius. A new Director of Statistics as well as a new Financial Secretary should be appointed forthwith.

Although GDP data has been corrected for overestimation, the accuracy of the revised GDP figures is still tinged with uncertainty. The statistical discrepancy in GDP by expenditure components is excessively high, of the order of Rs25 bn, compared with around Rs5 bn in earlier years, which points to sizeable unaccounted expenditures. As recommended in the SE Report, an IMF technical mission to review our GDP estimation methodology is important for restoring the credibility and reliability of GDP statistics.

Mauritius should resume discussions with the World Bank for a Budget Support Loan, which was already envisaged by the previous Government in 2023/24. The establishment of an Economic Advisory Council to the Prime Minister could help the design of economic policies, with support from experienced professionals. A revival of the Economic and Social Council would promote public debate and forge a national consensus on challenging economic policies.

Conclusion

Moody’s has given Mauritius fewer than two years to adjust its fiscal imbalance and debt burden to sustainable levels. The country’s vulnerability to the looming risk of losing investment grade could have disastrous consequences for financial stability. The Government should therefore act without delay on the implementation of an economic reform programme, spread over five years.

The Goverment should reject any attempt to stay the fiscal course by relying on a front-loaded Chagos windfall, or a continued massaging of GDP statistics. An alternative, business as usual, strategy will still aggravate the external deficit, deplete foreign reserves and weaken the rupee. Restrictions on rupee convertibility and other exchange control measures to cope with a persistent forex market imbalance will only prove counterproductive and undermine growth prospects.