SOVEREIGN AND SUPRANATIONAL

ISSUER IN-DEPTH
7 May 2020
Government of Mauritius
FAQ on credit implications of the coronavirus outbreak
Given its small economy and weak fiscal position relative to other similarly rated sovereigns,
Mauritius (Baa1 negative) faces significant challenges from the global coronavirus outbreak.
In this report, we answer frequently asked questions about how the global pandemic will
affect economic growth, the government's fiscal and debt trajectory, and the country's
Contacts external position.
David Rogovic +1.212.553.4196 » How will the coronavirus outbreak impact the Mauritian economy? We expect
VP-Senior Analyst a sharp deterioration in economic activity in 2020, with the economy contracting for
[email protected]
the first time in 40 years, driven by a decline in tourist arrivals amid border closures and
Domenico Barbieri +1.212.553.4515
restrictions on movement within the island. The contraction in economic activity will be
Associate Analyst
[email protected] severe, but short-lived, and we expect the economy to expand in 2021. However, risks of
a larger spillover from tourism to the rest of the economy – beyond those captured in the
Matt Robinson +44.20.7772.5635
Associate Managing Director indirect contribution of tourism to GDP – point to further downside risks to our growth
[email protected] forecast for 2020 and the recovery in 2021.
Marie Diron +65.6398.8310
» Will slower economic growth have a knock-on effect on fiscal strength? We
MD-Sovereign Risk
[email protected] expect the fiscal deficit to widen to around 5% of GDP in fiscal 2019/20 and 6% in
fiscal 2020/21 as lower growth weighs on tax revenue collection. Higher government
spending to limit the economic impact of the shock will also have a negative impact
on government finances. While there are downside risks to the fiscal trajectory over
the next 12-18 months given uncertainty over the duration and severity of the global
coronavirus pandemic, from 2022 onward we expect fiscal deficits to return to their pre-
crisis levels, averaging between 3% and 3.5% of GDP. As a result, we expect the debt
burden to increase over the next two years and stabilize at around 65% of GDP. At this
level, Mauritius' debt burden will be higher than that of most other 'Baa' rated peers.
Nevertheless, the government should be able to comfortably finance its higher debt
burden given its deep domestic market for government debt.

» How will weaker growth prospects and lower tourism earnings affect the current
account balance? A decline in gross tourism earnings will reduce export receipts and
contribute to a widening of the current account deficit. The high import content of
tourism and lower oil prices, which reduce the import bill, will prevent a larger widening
of current account deficits. A large stock of international reserves will limit immediate
pressures from a larger current account deficit.
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

How will the coronavirus outbreak impact the Mauritian economy?

The rapid global spread of the coronavirus pandemic, deteriorating economic outlook, falling oil prices and financial market volatility
are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these
developments are unprecedented. For the Mauritian sovereign, the main credit exposure is through the tourism sector, which plays a
large part in the economy and external accounts. A broadening of the global economic crisis into a global financial crisis would further
deepen the impact on the Mauritian economy by slowing capital inflows and tightening financial conditions.

We expect Mauritius' economy to contract by 4.1% in 2020 (see Exhibit 1), marking the first annual contraction in output since 1980.
However, the trajectory for growth and the pace of any recovery will depend on the success of containment measures both in Mauritius
and globally. The main impact of the coronavirus on the Mauritian economy is through the tourism sector, which will suffer as a result
of containment measures and travel restrictions imposed around the world. Tourism directly accounted for around 7% of GDP in 2019.
When including indirect contributions from other industries such as transport, accommodation and food services, tourism accounted
for approximately 24% of GDP, 22% of employment and 35% of export receipts.

Exhibit 1
After a decade of steady growth, Mauritius' economy will contract sharply in 2020 before recovering in 2021
Real GDP growth, % change year-over-year
Mauritius Baa-rated median
6.0

4.0

2.0

(2.0)

(4.0)

(6.0)
2011 2012 2013 2014 2016 2015 2017 2018 2019 2020F 2021F

Source: Moody's Investors Service

Widespread travel restrictions will weigh on Mauritius' tourism industry through at least the end of 2020. Even under our baseline
scenario, where Mauritius and key source markets successfully contain the coronavirus pandemic in the second quarter of 2020,
we expect tourist arrivals to decline by at least 35% this year. The recovery in tourist arrivals in 2021 will depend on how well the
coronavirus is contained globally and on the severity of the economic contraction in key source markets. Even with a recovery in tourist
arrivals in 2021, it will take several years for tourist arrivals to return to the levels seen in 2019.

Measures to control the spread of the coronavirus domestically, such as the closure of both essential and nonessential businesses,
will also weigh on economic activity. These measures, and the uncertainty around the duration of the global pandemic, will weigh on
business investment and household spending. The government of Mauritius expects a sharp contraction in investment, and projects
unemployment to rise to 17.5% in 2020, from 6.7% at the end of 2019.

We expect the steepest contraction in quarterly GDP to occur in the second quarter, with almost no tourist arrivals and as stay-at-
home orders weigh on domestic demand through at least mid-May.1 Most non-tourism industries will likely return to growth in the
second half of the year. This recovery will carry over into 2021, when we expect Mauritius to grow by 5%, benefiting from a favorable
base effect.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

The risks of a larger spillover from tourism to the rest of the economy – beyond those captured in the indirect contribution of tourism
to GDP – point to further downside risks to our growth forecasts. Downward revisions to growth forecasts in key tourism source
markets, such as France (Aa2 stable) and the United Kingdom (Aa2 negative), would prolong the downturn in the tourism sector
through at least part of 2021. A broadening of the global economic crisis into a financial crisis would deepen the impact on Mauritius’
economy via slowing capital inflows and tightening financial conditions.

A broader and deeper economic shock that weighs on the banking sector's asset quality and where domestic and international travel
restrictions remain in place for an extended period would weigh on growth beyond this year. Under such a downside scenario, growth
would remain below 3% through 2021.

Government stimulus measures will limit the economic impact of the coronavirus

The government and the Bank of Mauritius (BOM) introduced various measures to support industries and local businesses facing cash
flow challenges from the coronavirus containment measures. The BOM lowered its benchmark policy rate, the key repo rate, by a
cumulative 200 basis points since the beginning of March. On 16 March, the central bank announced measures to support banks and
local businesses facing cash flow challenges, including an MUR5 billion (1% of GDP) fund to help banks meet cash flow needs, an easing
of the cash reserve ratio and a six month moratorium on capital repayments for existing loans for businesses in affected sectors. On 23
March, the BOM announced a six month moratorium on household loans, a $300 million foreign-currency line of credit for businesses
that generate foreign-currency earnings, and a $100 million US dollar swap arrangement with commercial banks to support import-
oriented businesses.

Beyond the announced increase in public health spending, the government also announced a fiscal stimulus package to contain the
economic impact of the pandemic. The government will make equity investments worth up to MUR2.7 billion through the State
Investment Corporation to assist businesses facing financing difficulties because of the pandemic, with a separate equity financing
scheme for small and medium-sized businesses. The government also announced a wage assistance scheme to ensure all private sector
employees received their full salaries for the month of March, and later extended the assistance to cover the month of April. The
government will reimburse businesses after they've made their salary payments. The reimbursement will consist of 15 days worth of
wages for all employees that make up to MUR50,000 per year, with a cap of MUR12,500 per employee. The government also set up a
separate scheme for self-employed workers.

If the situation were to worsen and the economic and financial impact became more severe, the central bank and government would
likely announce additional support measures to mitigate the economic impact. During the global financial crisis, the government used
fiscal stimulus to limit the impact of the global recession, albeit at the cost of a higher debt burden. As a result, Mauritius avoided a
recession in 2008 and 2009.

Will slower economic growth have a knock-on effect on fiscal strength?

Mauritius’ high government debt and interest burdens are a key credit constraint relative to similarly rated peers (see Exhibits 2 and 3).
We expect fiscal deficits to widen from 3.2% of GDP in fiscal 2018/19 to 5.0% and 5.9% in fiscals 2019/20 and 2020/21 (fiscal years
end 30 June), respectively, as a result of higher spending and weaker revenue intake amid the economic slowdown, before gradually
narrowing to 3.0%-3.5% of GDP over the next several years.

Larger fiscal deficits will drive the government debt burden higher to just under 65% of GDP in 2020. Risks associated with a high debt
burden are contained because of the low share of foreign-currency-denominated debt and relatively large share of long-term domestic
debt.

3 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Exhibit 2 Exhibit 3
Mauritius's debt burden will increase, and remain higher than …and debt affordability will remain weaker
similarly rated peers… Interest payments, % of revenue
General government debt, % of GDP
Mauritius Baa-rated peers Mauritius Baa-rated peers
70 18

16
60
14
50
12

40 10

30 8

6
20
4
10
2

- -
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F

Source: Moody's Investors Service Source: Moody's Investors Service

Lower revenue and increased spending will result in a temporary widening of fiscal deficits

We expect lower tax revenue collection and higher spending to lead to a temporary widening of the fiscal deficit to at least 5% of GDP
in the next two fiscal years.

Slower real and nominal GDP growth in the first half of the fiscal year, as well as the sharp coronavirus-induced contraction in the
second quarter, have weighed on tax revenues. The government's projection of the unemployment rate reaching 17.5% in 2020, from
6.7% in 2019, poses further downside risks to income tax revenue intake, while weak corporate profitability will weigh on corporate tax
receipts. Overall, we expect tax revenue to slow by more than the slowdown in economic output, with revenue-to-GDP declining by
1.2% of GDP by fiscal 2020/21. Lower consumption will also lower value-added tax collections, and import duties will decline in part
due to lower oil imports.

The government's fiscal stimulus focused primarily on expenditures, with very few tax changes. The extension of the government's
wage assistance scheme and self-employment assistance scheme through the end of April will add about MUR5 billion (1% of GDP) to
spending in fiscal 2019/20. We expect some of this increased spending to be offset by lower capital expenditures, limiting the increase
in government spending in the current fiscal year.

We do not expect the government's fiscal stimulus measures to have a lasting impact on the level of government spending. Because
most of the stimulus spending is temporary, we think it will be easier to reverse as the economy begins to exit its lockdown and growth
recovers. Before the intensification of the coronavirus pandemic, the government intended to rationalize spending and announced
plans for a 10% reduction in spending for each ministry. We expect the government to delay these plans.

As the Mauritian economy stabilizes, we expect the government to gradually consolidate its finances, narrowing the fiscal deficit back
to the 3%-3.5% of GDP average of the past ten years. Assuming no permanent impact on growth from the coronavirus, fiscal deficits
in this range will be sufficient to stabilize government debt at around 65% of GDP, leaving it permanently higher than before (see
Exhibit 4).

4 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

Exhibit 4
Government debt will stabilize at 65% of GDP, higher than previously anticipated
Gen. gov. debt/GDP Gen. gov. financial balance Gen. gov. primary balance
2.0 70

1.0
60
0.0
50
-1.0

-2.0 40

-3.0 30

-4.0
20
-5.0
10
-6.0

-7.0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F

Source: Moody's Investors Service

Larger fiscal deficits are unlikely to increase government liquidity risk as the government has ample access to domestic sources of
financing. The government has relied entirely on domestic financing for its net financing needs. We expect the government to meet
most of its net financing needs through domestic sources, primarily long-term bonds and Treasury bills to banks and other financial
institutions. The foreign financing the government has received in recent years, including low-interest loans from the governments
of China (A1 stable) and India (Baa2 negative), have been less than amortizations of external loans, resulting in a declining share of
foreign-currency-denominated debt.

Rigid spending structure will limit government's ability to reverse the rise in the debt burden

A relatively rigid spending structure will make it difficult for the government to reverse the rise in government debt through an
expenditure-led adjustment. Although the fiscal stimulus measures will be easily reversed, Mauritius entered the coronavirus crisis with
a very rigid spending structure, which will challenge the authorities' efforts to reduce the debt burden beginning in 2022.

The government's focus on social spending programs and transfers make any spending-led adjustments to bring the deficit below 3%
of GDP very difficult. In terms of recurrent spending, public sector wages (6.1% of GDP) and social benefits (6.4% of GDP) are the two
largest spending items. High levels of social spending have been matched by improvements in tax collection, such that the operating
deficit has narrowed to around 1.5% of GDP in recent years from 2% of GDP in fiscal 2015/16. Capital spending, at 2% of GDP, is the
main driver of the fiscal deficit.

How will weaker growth prospects and lower tourism earnings affect the current account balance?
Mauritius' external balance will come under pressure as a result of lower export earnings and weaker global demand, which will reduce
exports. We expect tourism to be one of the sectors hit hardest by the coronavirus outbreak, with tourist arrivals and earnings declining
by at least 35% in 2020. A decline in gross tourism earnings will contribute to a widening of the current account deficit to 8.6% of
GDP in 2020, from 6% of GDP in 2019.

Tourism industry already fragile as growth began slowing in 2019

Tourist arrivals began to slow in 2019, declining for the first time since 2009 (see Exhibit 5). We expect a much more severe
contraction in tourist arrivals in 2020, and the coronavirus pandemic may leave permanent scares on international travel that result in
tourist arrivals well below 2019 levels for several years.

Chinese tourist arrivals, which account for just 3% of total tourist arrivals, declined sharply in 2019 and we expect this trend to
continue in 2020. Mauritius stopped all flights from Shanghai beginning on 31 January, and later broadened the cancellation to all
flights from China and Hong Kong (Aa3 stable) on concerns over the coronavirus. But Europe will account for the majority of the
slowdown in tourism flows this year given that it is by far the largest source market for tourist arrivals in Mauritius – accounting for
60% of total tourist arrivals. France alone accounted for 22% of total arrivals in 2019 (see Exhibit 6).

5 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
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Exhibit 5 Exhibit 6
Tourist arrivals grew steadily over the past decade, but began to Mauritius relies heavily on Europe as a source market for tourist
slow in 2019 and will decline significantly in 2020 arrivals
Number of tourist arrivals and % change year-over-year Breakdown of tourist arrivals by country, 2019
Tourist arrivals % change, year-over-year (RHS)
1600 20%
Other France
1400 22% 22%
15%
1200
10%
1000

800 5% Germany
9%
600 Other Asia
0% 11%
400
China
-5% 3% United Kingdom
200 10%

0 -10% Africa
23%
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Sources: Statistics Mauritius, Moody's Investors Service Sources: Statistics Mauritius, Moody's Investors Service

Sharp decline in tourism earnings will contribute to a wider current account deficit

A decline in gross tourism earnings will weigh on export receipts and foreign-currency earnings, contributing to a widening of Mauritius’
current account deficit (see Exhibits 7 and 8). In 2019, gross earnings from tourism accounted for 34% of total goods and services
exports, or almost 13% of nominal GDP. However, leakages of foreign exchange from tourist receipts are high, meaning the overall
impact on the balance of payments will be more muted. For instance, a 35% reduction in gross tourism receipts would reduce gross
tourism earnings by 4.4% of GDP. However, a portion of each dollar earned on tourism-related industries goes toward imported goods
and services, known as spending or import leakages. Assuming a 40% leakage ratio, the impact declines to 2.75% of GDP.
Exhibit 7 Exhibit 8
Tourism represents a growing share of export earnings Current account deficit will widen as a result of lower tourist
MUR millions earnings, only partially offset by lower energy import prices
% of GDP
Tourism receipts Non-tourism exports 0.0
200,000
-2.0
180,000

160,000 -4.0

140,000
-6.0
120,000
-8.0
100,000

80,000 -10.0

60,000 -12.0
40,000
-14.0
20,000
-16.0
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F
2012 2013 2014 2015 2016 2017 2018 2019

Sources: Statistics Mauritius; Moody's Investors Service Source: Moody's Investors Service

Under our current baseline scenario, we expect most of the negative impact from lower tourism earnings to be offset by lower fuel
imports, which accounted for 20% of total imports in 2019, or about 7% of GDP (see Exhibit 9). The BOM estimates that every $10
decline in oil prices reduces the current account deficit by 0.5% of GDP. Based on our oil price forecast of $43 per barrel in 2020 (from
an average of $64 per barrel in 2019), lower fuel imports will reduce the current account deficit by about 1% of GDP.

6 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
 MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

As a small-island economy, large trade deficits have translated into current account deficits averaging 5% of GDP over the past five
years. Moreover, large financial inflows, into the off-shore financial sector and the domestic economy, mean Mauritius has enjoyed
a positive balance of payments position, resulting in an increase in international reserves. At just over $7 billion at the end of March,
international reserves cover 12.6 months of imports (see Exhibit 10).

Nevertheless, if the global pandemic persists into the second half of 2020 and results in a deeper and more prolonged global recession,
Mauritius could experience a decline in foreign direct investment (FDI) inflows as well, weighing on its external accounts. FDI into the
real estate sector accounted for about 80% of all FDI excluding global business corporations, or 3% of GDP, in 2019. Part of this FDI is
related to investment schemes offering citizenship to foreigners who invest in local real estate. A slowdown in FDI would reduce a key
source of current account financing, and potentially result in a drawdown on international reserves.
Exhibit 9 Exhibit 10
Lower oil prices will reduce Mauritius' import bill Mauritius's sizable stock of international reserves provides a buffer
MUR billions and % of GDP against a temporary shock
US$ million and months of import coverage
Imports Fuel imports Fuel imports (% GDP) - RHS Gross Official International Reserves Import coverage (months, RHS)
200 9% $8,000 14

180 8% $7,000 12
160 7% $6,000
10
140
6% $5,000
120 8
5% $4,000
100 6
4% $3,000
80
3% 4
60 $2,000

2% $1,000 2
40

20 1% $0 0
Jan-14

Jan-15

Jan-16

Oct-16
Jan-17

Jan-18

Jan-19

Oct-19
Jan-20
Apr-14

Oct-14

Apr-15

Oct-17

Apr-18
Jul-14

Jul-15
Oct-15

Apr-16
Jul-16

Apr-17
Jul-17

Jul-18
Oct-18

Apr-19
Jul-19
- 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sources: Haver, Moody's Investors Service Sources: Bank of Mauritius, Moody's Investors Service

7 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
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Moody’s related publications

» Rating Action: Moody's changes the outlook on Mauritius's rating to negative from stable; affirms the Baa1 ratings, 1 April 2020

» Credit Opinion: Government of Mauritius - Baa1 negative: Update following outlook change to negative, 1 April 2020

» Credit Analysis: Government of Mauritius – Baa1 negative: Annual credit analysis, 22 April 2020

» Sector In-Depth: Sovereigns - Global: Coronavirus and oil price shock magnify weaknesses highlighted in negative 2020 outlook,
20 March 2020

» Country Statistics: Mauritius, Government of, 3 June 2019

» Outlook: Sovereigns - Sub-Saharan Africa: 2020 outlook negative as existing credit challenges compounded by worsening external
environment, 13 January 2020

» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019

Endnotes
1 On 10 April, the Prime Minister, Mr. Pravind Kumar Jugnauth announced an extension of the lockdown measures until 4 May.

8 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services
rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1220284

9 7 May 2020 Government of Mauritius: FAQ on credit implications of the coronavirus outbreak