Moody’s Downgrade Risk Rises

Source: L'Express

Mauritius was downgraded by Moody's in July 2022 to Baa3, only one notch above sub-investment grade, but with a stable outlook. In January 2025, Moody's maintained the Baa3 rating, but revised the outlook to negative, on the grounds of "uncertainty about Government's ability to reverse recent fiscal deterioration". In January 2026, Moody's acknowledged progress in the implementation of difficult fiscal reforms, and estimated a budget deficit of 6.4% of GDP for 2025-26, down from 9.3% in 2024-25. Moody's also noted that its 2025-26 deficit figure was "still well above the Government's 4.9% target", largely due to exclusion of the expected Chagos deal revenue of Rs10bn, or 1.3% of GDP, which it regarded as uncertain.

Moody's further projected that the government deficit would decline to 4.5% in 2026/27, with government (Govt) debt stabilizing at around 82% of GDP at June 2026 and June 2027. Public sector debt is broader than Govt debt, and includes liabilities of public enterprises, estimated at around 10% of GDP. While Moody's expressed hope that 2025-26 Budget execution results and 2026-27 Budget announcements may help reduce uncertainty on fiscal consolidation, it clearly warned that "delays in fiscal consolidation that lead to persistently high deficits, causing debt to at best stabilize at high levels, would be likely to result in a rating downgrade".

High deficit and debt

The fiscal deficit for 2025-26 is unlikely to fall below 7% of GDP, particularly in the context of the Iran conflict and the ensuing global oil crisis. Even if Govt debt in June 2026 is projected at 81% of GDP - slightly lower than forecast by Moody's, but still close to current levels -, Moody's will determine that Govt debt has at best stabilized at a high level. A combination of high levels of deficit and debt will inevitably heighten the risk of a country downgrade. This risk could be mitigated by a 2026-27 Budget that commits to major fiscal reforms and delivers meaningful deficit reduction.

Government deficit and debt

The last Budget estimates plan for a deficit of 3.2% of GDP in 2026-27, assuming Chagos revenue of Rs10 bn. However, Moody's will likely treat Chagos revenue in 2026-27 as uncertain once again. A deficit reduction from 7% in 2025-26 to 3.2% in 2026-27 will require a fiscal adjustment of 3.8 % points of GDP, or around Rs27 bn. The fiscal effort in 2025-26 represents around 2.3 % points of GDP, or about Rs13 bn. A drastic fiscal correction in 2026-27 - twice higher than in 2025-26 -, while increasing payments for the PRB salary increase and for price stabilization, is plainly improbable.

Shielding Mauritius from a Moody's downgrade will be extremely challenging, in view of the "persistently high deficits, causing debt to at best stabilize at high levels". Moody's has also cautioned that "the crystallization of contingent liabilities without corresponding asset recognition would also likely lead to a downgrade". Contingent liabilities of public bodies and stateowned enterprises, especially those linked to the State Trading Corporation's price stabilization and subsidy mechanisms for petroleum products, could materially increase Govt debt.

Govt debt is also burdened by the prospect of capital impairment at the Mauritius Investment Corporation (MIC). In June 25, Govt was driven to inject Rs3 bn of fresh capital in the Bank of Mauritius (BoM) following an MIC impairment of over Rs5bn in 2024/25, arising mainly from exposure to Airport Holdings Ltd (AHL). A full audit of MIC to estimate future potential losses is still awaited, despite an official statement that AHL's valuation had been artificially inflated through fictitious goodwill. Moody's also highlighted the dampening impact of fiscal consolidation on growth outcomes. Moody's forecast of GDP growth for 2026 is 3.5%, compared to the recent official growth estimate of only 3%. The spillover effects of the Iran crisis, especially through weakened external demand for our goods and services, are expected to further constrain economic activity.

Differing views

A more recent and distinctive view is that the fiscal and debt situation has grown beyond control, and the country should best come to terms with the inevitable prospect of a credit downgrade. Recent political upheavals in the governing multiparty alliance are undermining the scope for mobilizing public support for stringent fiscal measures. An exclusive focus on Moody's to address fiscal challenges could generate deep social tensions and instability. A more gradual fiscal adjustment path by phasing corrective measures over a longer period is therefore being advocated, even if it means a temporary loss of our investment grade status.

However, giving up on our country's credit rating is a hazardous approach. A major loss of investor and business confidence could lead to large capital outflows, especially in the global business sector. The financial services industry would be severely hit, and a worsening forex situation riding on a distinctly higher oil import bill could trigger a collapse of the rupee. The central bank's forex reserves may prove insufficient to buffer such a substantially adverse shock. The current high level of BoM gross international reserves is of misleading comfort, as it also includes forex balances of commercial banks, BoM foreign borrowings, as well as recent gold revaluation gains.

Still, there is a greater readiness to live with a Moody's downgrade, albeit reluctantly, and to reintroduce exchange control to counter a possible forex crisis. Morocco has overtaken Mauritius this year in the Global Financial Services Index to become Africa's leading financial centre, despite being rated below investment grade and operating under a regime of capital controls. India's Gujarat City is also ranked above Mauritius as a financial centre although India maintains capital controls, and its ranking was lower than in the previous year even after graduating to investment grade status in 2025. However, it should be noted that the Mauritian financial services sector does not allow for direct comparison with other financial centres, due to its much larger size relative to GDP, and the specific nature of its activities.

Despite differing viewpoints on the Moody's downgrade risk, Mauritius has little choice but to pursue a credible medium-term programme of fiscal reforms and scale down the fiscal deficit and public debt to sustainable levels. Some progress has been made by the faithful application of International Monetary Fund (IMF) recommendations on pension and other fiscal adjustment measures in the last IMF Art. IV mission report, but there is still a long road ahead. The compelling issue is that Govt expenditure remains disproportionately high, at one third of GDP, well above the historical level of a quarter of GDP. Moreover, social benefits and employee compensation account for half of total Govt expenditure, while Govt capital spending represents only 5%.

The country needs a strong economic leadership team, driven by a dedicated minister of finance, to design, evaluate and implement corrective fiscal policies, supported by strategies and mechanisms for close and active consultations and dialogue with the population - trade unions, civil society, and others. The wide gulf between electoral promises and current realities cannot be bridged solely by official pronouncements. Countries, such as Jamaica, which have successfully reduced their high public debt levels over time, offer instructive examples to emulate for national consensus-building on fiscal reforms. Ensuring broad public support for painful economic measures also calls for the provision of adequate financial protection for the most vulnerable income groups.

Growth Prospects

Strengthening growth prospects while curbing fiscal profligacy is crucial. Mauritius faces a critical juncture, with a shrinking population and labour force, weak productivity gains, low investment rates, and stagnant net exports of goods and services. Investments remain overly concentrated on property development, a relatively less productive activity.

Recent public investments have prioritized the transport sector, but excluded port development, while investments in other essential infrastructure have been lagging, leading to shortages in power and water supply. Public and private investments in infrastructure must be vigorously expanded, and the management of public utilities must open up to private sector participation to foster innovation, improve service delivery and enhance cost efficiency.

Besides investments in infrastructure, emerging sectors offer new investment opportunities to boost growth. Over past decades, sugar, textiles, tourism and financial services have in turn propelled the economy to new heights. Sugar and textiles have since shown a clear decline, and the Tourism sector is faring less well than in competing Indian Ocean destinations. Bold reforms are needed to increase value added per tourist instead of only tourist numbers, notably by focusing more on the potential beyond hotel establishments. Financial services too will eventually hit a wall if global business activities are not structured for greater substance.

Looking ahead, promising growth potential can be realized in new sectors such as biotechnology and life sciences, and also in information technology and AI-related services. Past initiatives to promote the development of pharmaceutical activities included the setting up of the Mauritius Institute of Biotechnology.

More recently, one of the largest global companies engaged in the discovery, early-stage development and safe manufacture of novel drugs and therapeutics has invested in Mauritius to breed primates for export to the U.S.. The Trump tariffs now offer an added incentive for pre-clinical testing on primates in Mauritius, laying the basis for higher value-added activities within the life sciences sector.

Other clinical research organizations are already conducting human clinical and therapeutic trials in Mauritius on behalf of international pharmaceutical companies. To capitalize on these opportunities, Mauritius should actively encourage such foreign investments with the adoption of appropriate regulatory frameworks, and targeted tax and other incentives. Over time, Mauritius could position itself within a prized segment of the value chain of a fast expanding, AI-driven, global life sciences industry.