An Optimism Needing to be Confirmed in Practice

Editorial

Moody’s Rating

Countries differ from each other on the degree of their economic and financial management. Depending on the rigour with which this goal is pursued, the country and its institutions are able to raise funds at different costs. The interest cost of borrowings is higher the less the rigour with which this management is undertaken. In certain cases, even access to funding is denied. Certain European countries find themselves in this category today.

There are mainly three internationally recognized rating institutions – Standard & Poor’s, Moody’s and Fitch – which make regular assessment of individual countries’ and their major financial institutions’ capacity to honour their debt obligations. It is no matter if they were caught on the wrong foot in their assessments when the financial crisis took the world economy by storm in 2007. They are the ones we have at the global level and we must make do with their opinions. Their assessment is done by a process called ‘rating’, which amounts effectively to a comparative grading of the concerned countries and financial institutions to meet their commitments. The more their capacity to honour their obligations, the better the grades or ratings they receive, the converse being the case when they are perceived as weak or risky. The grades awarded by the different rating agencies are not marked in the same manner but one can bring them to a common denominator of assessment and interpretation. Thus, a triple A rating or its equivalent is considered the best while the worst is below the C grade, which is referred to as ‘junk’.

Moody’s Investment Services (MIS) has been assessing Mauritius’ rating for a number of years now. Other than the country or sovereign rating, it gives out its rating of the two major local banks, namely the MCB and the SBM. Normally, a country’s institutions cannot have a better rating than the country itself. This is the reason why a lot of emphasis is laid upon the good governance of the public sector which will mirror down on the perception of local institutions as well if they, on their own part, are managed by the highest standards of prudence and forward outlook.

MIS has been reviewing Mauritius’ performance and outlook since March this year. The review result was issued on 26^th June with a sovereign rating of Baa1, which is equivalent to a B rating. This is an improvement on its earlier Baa2 rating (equivalent to a B- rating), which prevailed over several years in respect of Mauritius before this latest upgrade. The upgrade has been given taking into account three factors: strengthening of the country’s institutional framework; increased diversification of the economy; and significant progress towards reducing the government debt load.

According to MIS, the stronger institutional framework is attributed to the country’s successful record of economic growth despite the global recession. Its favourable view is based on the fact that growth was sustained in the country by drawing upon substantial revenue reserves set aside from tax collections raised during the earlier higher growing phase of the economy. The reserve fund has been subsequently employed to finance public sector investment projects serving to prop up positive domestic growth even when the country’s principal market, Europe, was hit. MIS considers that there has taken place diversification of the economy from a low-skilled exporter to a high-skilled service-based economy, with a shift of activity towards India and China, positioning Mauritius as a service provider to Africa. Finally, it gives credit to the successful reduction of the government debt burden by extending the maturity structure of the government debt and by bringing down the debt servicing burden by lowering interest rates.

Moody’s upgrade is accompanied by a stable outlook of its current assessment of the country’s rating. This means that it does not foresee for the immediate any factor that could reverse the rating given, even though there may be a need to review the rating assigned should Europe (as Mauritius’ export market) dive deep and enduringly into recession. A positive rating normally allows a country and its institutions to borrow at lower interest cost than before, both internally and externally. Thus, if Mauritius were to have recourse to external borrowing to raise the contemplated import cover of its reserves from 4.5 months equivalent to 6 months, Moody’s current upgrade of Mauritius could help raise those funds at relatively lower cost as investors’ confidence is expected to improve on account of the higher rating obtained.

This upgrade comes at a time when there is great uncertainty in the global economy and Europe’s currency union is under serious threat. It is also coming at a time when this rating agency has been casting a severe eye on the world’s major global banks. Not later than 22^nd June Moody’s downgraded 15 of the world’s major banks. These included big names like Citigroup, Goldman Sachs, J P Morgan, Morgan Chase, Bank of America, Credit Suisse, HSBC and Barclays.

Not later than Monday 25^th June last, the same agency pronounced a sweeping downgrade of 28 Spanish banks in the context of Spain’s real estate bust. In the case of Spain, the drama has yet to unfold. Europe’s leaders met yesterday to start moving in the direction they should have adopted a long time ago. They will decide to keep a consolidated watch at the Europe level on the how to salvage hobbling European banks deeply steeped in shaky government debts (and the indebted economies along with them) and to crystallize as fast as possible a centre of Europe-wide fiscal coordination in a bid to save not the currency but the European Union itself. In the case of the major global international banks, markets have shrugged off Moody’s negative rating considering that those banks have sufficient existing buffers despite their large exposure to volatility and risk of losses inherent in capital market activities. Time will tell whether or not Europe will stick together or spread the contagion of its constituents falling apart and bring the whole world to a meltdown. If such a scenario were to come about, ratings will not matter anymore since they are essentially a question of relative comparativeness among countries.

No matter how the situation unfolds eventually, it is a plus point in favour of Mauritius that an agency which has kept us at Baa2 for a long number of years, including during the days of high prosperity, has decided to lift us up. The three factors on which it has based its decision need to be acted upon in the time to come if we do not want to lose this opportunity. We need to sustain growth not only by leaning on funds that were picked up from taxpayers at one time but go on garnering more such funds in the public sector by keeping down waste in public expenditure to the minimum without losing potential tracks for raising revenue from those who can afford it. We need also to consolidate whatever action has been taken to move into higher value-added services not only by adding on to our skill base but by penetrating new and sustainable external markets as well. As for lightening of the government debt burden, it is perhaps time for sharing the burden. The private sector may raise funds on its own, taking advantage of the higher country grading, in order to invest more than what it has been doing so far in entities that should go more forcefully into the higher value-added services to India, China and Africa, among others. The more forcefully we act upon the newly injected optimism, the better we will be prepared to face an unfolding uncertain situation that the global economy has rarely faced. We need to take the bull by the horns.

* Published in print edition on 29 June 2012