“Risks of further economic decline are real in the next two to three years”

Interview – Dr Vinaye Ancharaz, International Economic Consultant

* ‘We cannot speak of an economic recovery so long as tourism remains in tatters. And tourism is unlikely to rebound anytime soon’

* ‘The vast majority of the people are yet to embrace an alternative. They are thirsty for new blood’


Economist Vinaye Ancharaz comments on Moody’s latest downgrading of Mauritius yet finds a paradox in its view of governance, whereas we have been witnessing continuous institutional decay. He cautions about expecting a rapid bounce back of the economy, and is dismayed that people have no alternative political options to the undesirable existing ones, and hopes for the emergence of a newer and perhaps younger generation of patriotic politicians to take the country forward.


Mauritius Times: On March 4th, Moody’s downgraded Mauritius’ rating one notch to Baa2, with negative outlook. In its report Moody’s states: “The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased (…) The issuer’s institutions and governance strength, have materially decreased. The issuer’s susceptibility to event risks has not materially changed.” In plain language, what does all this mean?

Dr Vinaye Ancharaz: Let me begin by placing in perspective Moody’s latest review. The last time Moody’s changed Mauritius’ credit rating was in June 2012 when the rating was upgraded by a notch to Baa1, with stable outlook. This changed to negative outlook in April 2020 and, less than a year later, on 4th March 2021, the rating was reviewed downward to Baa2 and the outlook switched to negative.

In its report, Moody’s cites the ‘weaking in fiscal and economic strength’ due to the Covid-19 pandemic as the key reasons for the downgrade. On the other hand, the third point – that institutional strength and governance have materially decreased – was raised in earlier discussions but it appears that it was not retained in the final analysis. To the contrary, Moody’s credits governance for its positive influence on the country’s credit rating. To be honest, I am surprised by this statement. It seems that Moody’s is underrating the significance of a series of recent events that have revealed the true scale of institutional decay across the country. Perhaps they are cautious so as not to inflict a harsher punishment on the government.

To come back to the main reasons for the downgrade, these are attributed to the ongoing pandemic. In truth, the seeds of the current economic decline have been sowed much earlier. Even before the pandemic hit in March 2020, there were clear signs of the economy running out of steam. Economic growth in 2019 had slumped to 3% compared to a steady 3.8% the previous three years, with tourism contracting by 1% and growth in the manufacturing sector slowing down to 0.5% in 2019. And despite some progress in curbing unemployment, one out of every four youth was unemployed at the end of 2019. The fiscal situation had also seriously deteriorated, with persistent budget deficits and an ever-mounting national debt. In particular, Moody’s cites the mode of financing the 2021 fiscal deficit – that is by drawing down the central bank’s reserves, which is tantamount to ‘helicopter money’ – as a major factor in their decision to downgrade the country’s credit rating.

The pandemic has only made these metrics incrementally worse: GDP contracted by over 15% in 2020, and the official government debt ratio shot up to nearly 75% of GDP at the end of fiscal year 2020. If Special Purpose Vehicles and the debt obligations of state-owned enterprises were factored in, then notwithstanding the colourful devices adopted with the Covid-19 Act, the debt ratio would probably cross the 100% threshold.

* Two other things that are highlighted by Moody’s are: first, Mauritius’ debt burden which increased to 73.4% of GDP at the end of fiscal year 2020, above the Baa-rated median of 63.8%, and likely to peak “at just over 80% of GDP in 2021, before gradually declining”, and second is the risk of a slower recovery of the tourism sector – it says that “a return to pre-pandemic tourist arrivals is likely several years away”. Does this mean that the risks of economic deterioration are very real for the next two to three years or even further down the line “with a potential increase in social risk” before the economy reverts back to the pre-Covid situation?

The negative outlook means that things are unlikely to improve in the near term. As I have said in previous interviews, things are bound to get worse before they get better. Let us recall that the world started this year on an upbeat note as vaccines against Covid-19 were approved and mass vaccination campaigns started… only to be tempered by the discovery of new variants of the virus in South Africa and the UK later in January 2021. These variants raised doubt about the effectiveness of the vaccines developed so far. And now, as the vaccines have been shown to work against existing variants of coronavirus, and an ambitious vaccination programme rolled out in Mauritius, new cases have emerged, raising fears of another lockdown! The point is that we are living in extremely uncertain times, and risks of further economic decline are real in the next two to three years.

Government debt – both in absolute terms and as a percentage of GDP – has kept growing since this government came to power in 2014. In the space of six years, the public debt has more-than-doubled and, with the repealing of the statutory ceiling of 65% under the Covid-19 Act of May 2020 – a rather convenient excuse –, the sky is now the limit for government debt. For this reason, I am very sceptical of Moody’s claim that the public debt will decline after peaking at 80% of GDP in 2021. Already, there are rumours of the government contracting some Rs25 billion of loans from Japan and India. At this rate, Mauritius will end the year with a debt overhang of over Rs500 billion, or some Rs500,000 per capita. To me, it is clear that we are living beyond our means and we are jeopardising our children’s future.

The current situation is also detrimental to the hospitality sector, which contributes some 10% to GDP and employs 13% of the workforce directly. However, given the deep linkages of the tourism industry with the rest of the economy, the significance of this sector to GDP and employment could be three times higher than suggested by official estimates. Consequently, as Moody’s notes, we cannot speak of an economic recovery so long as tourism remains in tatters. And tourism is unlikely to rebound anytime soon. Even if international borders open in June 2021, tourist arrivals will take months to reach their pre-Covid-19 levels – for several reasons. The industry will take time to adjust to a new normal; travel restrictions in our main markets will keep the tourists away from our shores, especially if there is a change in preferences in favour of short-haul destinations; and, finally, the tourism industry is highly sensitive to income, and the global economic decline would likely have changed people’s priorities.

Once again, Moody’s plays down the social risks that the worsening economic situation may engender, citing the protection offered by the welfare state and the generally low level of inequality in the country. However, this analysis ignores recent street protests against the government; it also ignores the growing frustration among those left to survive on the Rs5100 doled out to them. And while Mauritius boasts a fair distribution of income, unemployment among certain segments of the population could have increased inequality. Time will tell.

* The private sector has been saying that economic recovery hinges on the reopening of our borders, whilst the Government is taking a bet on the Covid vaccine , which it believes will help speed up the pace of economic recovery. Is it as simple as that?

It is never that simple. Reopening our borders is not a panacea to all the economic woes that the pandemic has inflicted on us. Tourism will take time to recover, and there’s a danger that it may not recover to pre-Covid-19 levels ever! Vaccination will provide a shield of safety to the population, but it will be months before we could achieve herd immunity – more so since there is resistance on the part of some people to get vaccinated.

Obviously, we need to pursue both avenues, but we need to do more. Tourism will need rebranding and the product will also need to be tailored to the local people who provided a lifeline to many hotels in hardship. It is time that we gave serious thought to sustainable tourism rather than obsessively promoting the current model of mass tourism at great economic and environmental costs.

The pandemic has also highlighted the need for food security, and I’m convinced that, with appropriate reforms, the country can feed itself and become an exporter of agro-processed products. More than ever before, now is the time to rethink our economic model to make the country more resilient and sustainable.

* Another comment made by Moody’s relates to the government’s fiscal policy response to the coronavirus shock – “one of the largest among Moody’s-rated sovereigns”, which entailed an expansion of social protection schemes aimed at supporting household income and minimizing job losses, together with support to large corporations and other businesses”. In other words the government did what was possible in the circumstances, but are there other options available to the government to turn around an already bad economic situation?

Indeed, the government responded to the pandemic with a panoply of economic and social measures, including wage and income support, enhanced credit support to SMEs, equity investments in troubled firms, moratorium on loan repayment, tax and utility payment deferrals, etc.

Altogether, the fiscal stimulus package amounts to an estimated 7% of GDP. This is paltry when compared to what some governments are doing to support their economies. Germany, for example, has injected 33% of its GDP in economic stimulus; South Africa 9%. It is clear that, in our case, the government’s response to the pandemic was limited by the available fiscal space, which has been systematically depleted in recent years through reckless spending and unsustainable borrowing. This situation forced the government to dig into the central bank’s reserves, with severe economic consequences: soaring inflation, continued depreciation of the rupee and, not least, the Moody’s downgrade, which in turn will impact our future borrowing capability as well as our attractiveness as an investment host.

Moreover, we are now discovering the systemic looting that some government agencies resorted to under the cover of confinement, costing taxpayers billions and eroding confidence in a number of institutions. Elsewhere, millions have been spent on projects of dubious economic value. The most startling of these in my view is the Rs400 million publicity stint at Liverpool in empty stadiums! Whoever got that idea was probably thinking that anyone who saw the ad would rush to take the next available flight to Mauritius, who cares if the pandemic was still raging on!

So, the government’s response to the pandemic has not only been weak; it has also been substantially wasted. There are always options to change things around. The government, it seems, has fallen prey to incompetent people in decision-making positions. These people must go, for a start!

* With a second Covid alert announced last Saturday and general apprehension about yet another lockdown possibly in the pipeline, things might get complicated if the propagation of the virus is not rapidly contained. What will be the cost of another lockdown to the Mauritian economy?

The economic costs of another lockdown will of course be significant but not as large as the first. This is because the country is still in ‘quasi-lockdown’ as some sectors are only partially operational. However, there are various other costs that cannot be ignored.

Small businesses in the retail and food sector will be severely impacted; schools will be closed again and children will waste additional months of their life; and recovery will be delayed. The government may not have the means to deal with another lockdown…unless it keeps digging into the Bank of Mauritius coffers.

* On the political front, a lot of people were saying ‘Vaut mieux Navin’ in the wake of the unravelling of the different plots pertaining to the murder and alleged suicide cases as well as to the procurement exercises during last year’s lockdown. In the wake of the implosion of the ‘L’Entente PTr-MMM-PMSD’, it would seem that that feeling has moved on with the people again saying like in December 2019: ‘Vaut mieux Pravind’. A week is indeed a long time in politics, isn’t it?

Indeed, a week is like eternity in politics where things can change in minutes! However, I don’t think that the recent events have made Pravind more popular – on the contrary! It’s important that we don’t mix and confuse two things.

On the one hand is the cascade of corrupt and criminal practices that is unfolding every day. People are sick and tired of the government. There is a feeling that the country has reached a level of rot from which there is no return unless the current government is booted out. Public funds are being appropriated by crooks and cronies; institutions are being manipulated; and no means is being spared to cover up. The people are crying out for change, and the sooner it comes, the better for the country.

On the other hand is the opposition with its own issues. While the vast majority of the people have rejected the MSM government, they are yet to embrace an alternative. They are thirsty for new blood, but they are equally confused about who they want to see as the future Prime Minister. My view is that the political culture of the country does not favour new parties. At the end of the day, therefore, the people may be faced with an unpalatable option: to choose the least bad among the undesirables.

* However, the MMM-PMSD leaders’ clumsiness as seen in the manner in which they went about to chuck Navin Ramgoolam out of the ‘L’Entente’ and from the prime ministerial race has ended up making him stronger within the LP, but not necessarily at the national level yet because it would appear a large crowd from the LP-MSM common vote bank would be still supporting the present MSM-led government. What’s your take on that?

Again, it’s important that we differentiate the reality from the façade. True, we saw an apparently united Labour party after the break-up of the L’Entente. However, anyone with some brain knows that many people in Labour are just tagging along – because they have no choice. That does not mean they support their leader. They may just be too afraid to voice out – lest they are power-ejected.

One MP dared say that the LP’s leadership must be contestable, and then his absence at the recent post-L’Entente meeting of the party became glaringly conspicuous. Just like in the past, Dr Boolell learned at his expense that a shrinking fan base is not enough to evict the leader. If the Labour party had democratic structures whereby the leader was elected by majority vote, Navin Ramgoolam would not be leader – not anymore.

* When you talk to different people, the feeling that comes across is that they are fed up with the way politics is being conducted locally; and their frustration appears to be growing with no change taking place at that level or with regard to the faces leading the political parties. What about people operating within the structures of the mainstream parties? What do you think would be their feelings?

I think some people in political parties are equally frustrated. They are frustrated with the fact that the common people cannot make out the good politician from the bad.

Politicians as a class never commanded much respect from the people in any case, but this has become worse in light of recent cases of corruption, nepotism and outright embezzlement of taxpayers’ money. But it’s important for the public to know that there are well-meaning politicians out there who are genuinely concerned about the country and put the national interest before their self-interest.

The country needs young, dynamic and competent people. Quite a few of them are in mainstream political parties. The public should single them out and vote with discernment. We should have learned our lesson from a tradition of ‘votez bloc’: we end up electing incompetent and unscrupulous politicians who become a scourge for the entire political class!

* The government should be happy with all that’s happening within the opposition ranks, and it should be able to keep going until the end of its mandate – except if things get really bad on the economic and social fronts. Should this happen, do you think it would be able to withstand the heat?

Indeed, the MSM must be celebrating the collapse of the L’Entente, which had become a threat to their rule. Now, unless the flurry of ongoing court cases results in some dramatic outcomes, the government may last unchallenged until 2024. However, my worry is that, if they stay until the next elections, they may come back again!

It seems that the MSM has found a rare winning formula, and they will apply it – to greater effect – in the 2024 elections. This formula is no secret. They will raise the Basic Retirement Pension to Rs13,500 before the end of their term, and promise to double it again during their next term! They will offer lollies to public officers, police officers and taxi drivers, and they will brag about the major infrastructure projects that they realized during their current term. Who cares where the money is coming from so long as it gives them a semblant of a feel-good factor?


* Published in print edition on 9 March 2021

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