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Moody's upgrades Mauritius's government bond rating to Baa1

June 27, 2012 | Moody's Investors Service

London, 26 June 2012 -- Moody's Investors Service has today upgraded Mauritius's foreign- and local-currency government bond ratings to Baa1 from Baa2. The rating outlook is now stable. The rating action concludes Moody's review for possible upgrade initiated on 16 March 2012.



The main triggers for the upgrade are:



1.) the strengthened institutional framework, which is expected to further bolster the Mauritian economy's demonstrated resilience to shocks;



2.) the increased diversification of the economy into the high-value-added service sector as well as a growing conduit for foreign investment into Africa and Asia; and



3.) the government's significant progress in reducing its debt-servicing burden and improving its debt structure by lengthening maturities.



RATINGS RATIONALE



The main driver behind the decision to upgrade Mauritius' rating is the clear strengthening of the institutional framework, which is expected to permit the economy and public finances to circumvent a protracted negative impact from any shocks emanating from Europe, the country's largest trading partner. The rating agency observes that aggressive countercyclical measures kept the economy growing even during the global recession in 2009.



Buffers such as the National Resiliency Fund and the National Pension Fund as well as precautionary multilateral lending programmes have been established that will allow renewed countercyclical spending as needed in coming years without leading to renewed fiscal deterioration. Moody's points to the government's multi-year Public Sector Investment Programme (PSIP), which includes 8% of GDP spending in capital expenditures each year until 2016. The PSIP will primarily act as a countercyclical tool in order to counter the increasingly uncertain prospects of global growth. Additionally, the PSIP will help to redress critical supply-side constraints that will allow the Mauritian economy to be ready for the next global rebound.



The second main driver behind today's upgrade is the progress being made in diversifying the Mauritian economy, in part through the attraction of foreign direct investment (FDI) from multiple sources. FDI now is partially financing the structural current account deficit that appeared following the collapse in sugar and textile exports in the mid-2000s. Mauritius has undertaken various steps, including broadening its economic cooperation with China and India, and is actively transitioning the economy from a comparatively low-skilled exporter to that of a highly-skilled service-based economy. Progress in this area will mitigate the economy's external vulnerabilities, thereby maintaining its favourable external debt metrics even as the current investment push is widening the current account deficit.



The authorities are also positioning Mauritius as the main service platform for investing in Africa, which should bear fruit over the medium term. The Mauritian authorities are multiplying the number of taxation treaties they are negotiating with African countries in order to replicate the success they experienced with a similar treaty with India. The government is also in the process of internationalising the stock exchange from an equity-centric to an international multi-class asset-trading platform.



The third driver is the renewed positive trend in Mauritius's debt dynamics, after a temporary increase in debt was recorded during the global financial crisis. With short-term debt having shrunk to 22% of the total debt stock compared with 30% in 2007, rollover risk has diminished substantially. The government can rely almost entirely on the very liquid domestic debt markets, and its external exposure is modest, albeit increasing vis-a-vis multilateral lending. It should be noted that its debt affordability (the interest-payments-to-revenue ratio), has also improved from 21.7% in 2007 to 14% in 2011, primarily as a result of lower interest rates and better tax collection.



Although both Mauritius's affordability ratio and current debt stock still compare unfavourably with those of Baa-rated peer countries, Moody's remains cautiously confident that improvements in Mauritius's debt dynamics are likely to continue. In particular, the rating agency expects the country to borrow from multilateral and bilateral lenders on concessional terms over the next few years in order to finance its PSIP, while at the same time alleviating its overall debt service. Moody's views positively the Mauritian government's commitment, as stated in the amended 2008 Debt Management Act, to lower public-sector debt to below 50% of GDP by 2018 compared with 57% at the end of 2011.



Moody's has today also upgraded Mauritius's foreign-currency ceilings for bonds and deposits to A2 from Baa1 and to Baa1 from Baa2, respectively. The country ceilings for local-currency debt and deposits were adjusted to A1 from Aa2 to better capture the default correlation between the government and other domestic entities through their joint dependence on the real economy which remains relatively small.



WHAT COULD MOVE THE RATING UP/DOWN



A significant and permanent reduction of Mauritius' vulnerability to external volatility and shocks would exert positive pressure on the rating.



The Mauritian economy's relatively strong performance during the global financial crisis is attributable to extensive government intervention. As a small export-dependent economy, Mauritius is vulnerable to changes in global demand, in particular changes originating from its main trading partner, the European Union. Should external demand fail to recover sufficiently, Moody's warns that a further shock could lead to Mauritius recording substantial debt-metric deterioration, a scenario which would exert downward pressure on the rating.



PREVIOUS RATING ACTION & METHODOLOGY USED



Moody's last announcement affecting Mauritius's sovereign rating was implemented on 16 March 2012, when the country's ratings and ceilings were placed on review for possible upgrade. The action prior to that was taken on 14 December 2007, when Moody's downgraded Mauritius's local-currency bond rating to Baa2 from Baa1. At the time, the foreign-currency government bond rating and all the ceilings were confirmed.



The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.



REGULATORY DISCLOSURES



For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.



The ratings of rated entity Mauritius, government of were initiated by Moody's and were not requested by this rated entity.



Rated entity Mauritius, government of or its agent(s) participated in the rating process. This rated entity or its agent(s), if any, provided Moody's access to the books, records and other relevant internal documents of the rated entity.



The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.



Information sources used to prepare each of the ratings are the following: parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.



Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.



Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.



Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Company: Mauritius

Full company nameThe Republic of Mauritius
Country of riskMauritius

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