Updating Moody’s April 2019 Report

More on the Economy & Global Business Sector

If we go by the updated figures on the FDI flows to India and by Moody’s logic, the so-called “resilience” of the economy will be taking some knocks and will be subject to considerable uncertainty

By Rattan Khushiram

The latest Moody’s report, dated April 2019, has assessed our fiscal strength and debt affordability as moderate. It also finds that the high debt levels and interest burden are a constraint on the rating and are above similarly rated peers. It notes that “fiscal deficits have averaged 3.0% of GDP between 2012 and 2018, falling below 3% only once in 2012, reflecting the government’s expansionary fiscal stance in recent years and… at 57% of GDP in 2018, government debt exceeds the Baa median of 51%.”

Please note that Moody’s budget deficit figures are appreciably underestimated by off-budget capital project expenditures incurred in state-owned Special Purpose Vehicles (SPVs) and companies, and other public entities, such as Metro Express Ltd, totalling more than Rs 20 billion in 2018/19. Moreover, Moody’s public debt analysis focuses only on General Government debt, and does not cover public enterprises which amounted to 7.7% of GDP as at December 2018. But readers do recall that our foreign borrowings have been channelled through State Bank of Mauritius (SBM) and Mauritius Telecom (MT).

An Indian Exim Bank line of credit of USD500 million, or over 3% of GDP, is being routed via SBM, for the Metro Express and other projects, and a China Exim Bank line of credit is being extended to MT, for the Safe City project. Public sector debt (PSD) inclusive of public enterprises debt amounted 64.5% of GDP as at December 2018. These PSD figures do not include the contingent public debt liabilities in relation to BAI, as well as Betamax and City power. A full consolidation of all these may lead to a public debt figure exceeding 70% of GDP. If Moody’s were to take these into consideration, rather than a rating of Baa1 stable, it is more likely that we would have been downgraded.

The following note of Moody’s give us more reasons to doubt the Baa1 rating:
“The 2016 amendments to the DTAA with India made Mauritius less attractive than it used to be for channelling equity investment in India, but still attractive relative to other competitor jurisdictions such as Singapore. Moreover, Mauritius has a competitive advantage relative to other financial centres on interest income related to debt, with a withholding tax rate at 7.5% (versus 10% in one of the main competitor jurisdiction, Cyprus) something which will offer a new and separate impetus for financial inflows.”

As shown in the ‘FDI flows to India’ Table, the loss of share of Mauritius in FDI inflows to India to the benefit of Singapore disproves the above statement about Mauritius still being relatively more attractive. The tax advantage of Mauritius on debt instruments is true on paper, but has not in practice been acted upon by operators so far. One reason could be that India also recently gave special facilities to Indian corporate groups to borrow directly abroad at preferential and low interest rates.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India, is the main source of FDI statistics in India. Total FDI (gross) comprises mostly of equity inflows (around three quarters), but also includes re-invested earnings and other capital. The country-wise source of FDI into India is available only for FDI equity flows, as shown by data from the Department of Industrial Policy and Promotion, India.

The Indian financial year stretches from April to March. As from Oct-Dec 2017, FDI equity flows into India from Mauritius have weakened again, as in FY 15/16. The share of Mauritius in FDI equity flows into India has dropped significantly to 18% in Apr-Dec 2018, while Singapore’s share rose to 39%. It should also be noted that the diversion of FDI to the benefit of Singapore seems to have stabilized, with Singapore now ranking as the topmost equity investor into India, and accounting for more than twice the FDI equity going into India from Mauritius.

With Singapore grabbing Mauritian investment business, a situation of weak growth in investment flows into India will compound the difficulties faced by the Mauritian global business sector. If we go by the updated figures on the FDI flows to India and by Moody’s logic that “should changes in the tax regime to satisfy international demands lead to a sudden reversal of capital inflows, pressure would be felt in the banking sector and balance of payments”, the so-called “resilience” of the economy will be taking some knocks and will be subject to considerable uncertainty.

* Published in print edition on 19 April 2019