With the CSO recently revising 2019 Mauritian GDP growth downwards from its mid 3% range estimate to 3% at market prices, Mauritians must understand that the Mauritian economy was fundamentally weakening prior to entering the crisis despite a volley of Government sponsored demand side stimulus over the past few years from negative income taxes, the enactment of the minimum wage and pension fund increases.  The economic model of pushing an increasingly indebted and ageing Mauritian household to consume mostly imported items had already peaked out and while politically marketable, the policies failed in boosting growth.  The “pushing Mauritians to consume model” when added to long periods of excess liquidity and to the bricks and mortar approach to growth also led to higher corporate and household debt which together reached close to 70% of GDP last year.  Despite having an increasingly levered economy at more than 135% of GDP (including public debt but excluding the massive unfunded liabilities such as the BRT), low levels of productivity that comes with our economic model meant that we have not been getting the growth pick-up we expected despite all the debt. The flows that came from foreigners looking to benefit from Mauritian taxation be it via the financial sector or via the real estate sector when added to tourism receipts created an illusion that “la cigale” could keep on singing forever.  Without meaningful structural reforms to our economic model and to the political system of spoils however, It was eventually going to end badly for us.  The virus has simply accelerated this process. When added to the populist measures taken by the Government in 2019, there is simply no fiscal space left for large scale fiscal stimulus right now beyond very narrowly targeted measures.  The strength of non financial corporate and household balance sheets also lacked adequate buffers when entering the current crisis.  

At the core, too many non financial Mauritian corporates still follow a conglomerate “control everything” structure which turns them into Jack of all trades and master in none.  When we look at free cash flow after net changes to working capital and CAPEX and at metrics like return on capital employed, when we strip off fair value gains from revaluation of assets when land gets converted with a stroke of a pen on earnings or when we induce moderate shocks to DSCR metrics, they do not look that great on average. There is typically an over reliance on debt given its risk mispricing and an unwillingness to open up the capital structure.  This is precisely why the growth in corporate debt has been outstripping nominal GDP growth in Mauritius for at least the past 5 years and it is why a few weeks into the lockdown, many banks are already receiving requests from large and mid sized companies alike for overdraft extension requests on top of the moratorium on capital and interest. What many firms need however beyond letting the banks also share some of the pain they helped sustain over the years is patient capital and new ideas.  They need equity not more debt.

While many observers in Mauritius have recently been calling for helicopter money from the BoM tower in order to fund 10% of GDP type fiscal stimulus, such a wide scale drop of liquidity into the system would lead to a collapse of the exchange rate.  It is true that inflation risks globally are low and that Mauritius imports the bulk of its inflation from abroad and it is also true that the BoM must very quickly engage in unconventional monetary policy but Mauritius is not the US and it does not have a global reserve currency in order to be able to engage in unconstrained helicopter money drops.  The BoM purchasing regularly issued Government bonds in QE fashion would only have zero impact on Government debt if the law is amended to such an extent that the balance sheet of the central bank of the country and of the Government get consolidated into the balance sheet of the Republic of Mauritius.  This would invariably come at the complete cost of a loss in central bank independence even on paper.  Giving politicians unhindered access to the printing press would make temporary measures become permanent.  So what can be done?

The low hanging fruit right now is for the Government to redirect the remaining MUR 11 Billion from the special reserve fund transfer towards fiscal measures aimed at sustaining wages in order to avoid a social crisis and the complete collapse of demand which would make the recovery less significant.  Given the depreciation of the Rupee and an observed drop in the liabilities of the BoM which is not rolling over its securities in the same quantum as before, a further MUR 3 Billion to MUR 5 Billion can be printed and given to Government. While helicopter money beyond this may make the exchange rate collapse, the Bank of Mauritius could take a middle ground approach as well.  It could offer a special line of credit to Government of a large amount at the three month T Bill rate which is currently yielding  0.91% in a rules based fashion with strict central bank oversight for fiscal stimulus purposes as long as the 12 month ahead forecast inflation rate does not go above 3%. As the economy recovers, the facility would be gradually withdrawn.  A third option would be for the Government to issue a perpetual bond to the BoM, a one time shot which would mean that the principal would be paid back decades or a century from now when its real value would be almost nothing.  A perp would not be accounted as debt in the traditional sense.  

Beyond Government funding options, there is much more the central bank and Government can do to help keep the economy in as few pieces as possible to help forge a more meaningful recovery.  Small and mid sized non listed businesses could be loaned money equivalent to X years of past taxes paid to the MRA by the Bank of Mauritius through banks (for faster processing) with Government guaranties.  These long term Government guaranteed loans would be a moderate form of debt restructuring (soft default) and would be conditional on keeping people employed.  

For larger companies, the Bank of Mauritius needs to sit down with banks and construct a heat map and a case by case action plan depending on the current cash flow projections and capital structure of each firm in a neutral data driven approach aimed firstly at keeping companies and jobs, not shareholders and banks happy.  The reality is that many sectors will take time to recover.  Tourists will not be coming back soon and in many cases such companies need patient equity capital.  In a crisis it is not easy to find other buyers which is why the Bank of Mauritius should think out of the box and adapt what the Bank of Japan has been doing for years with some adjustments I.e go through an independently managed special purpose investment vehicle which it would fund via the printing press.  In turn troubled large companies will be made to engage in rights issues on the stock exchange which the investment vehicle would then purchase. The BoM or any politician should not interfere in the management of the special purpose vehicle but only ask that it maximize shareholder value over 7 to 10 years be it by selling the shares at a higher price post recovery gradually or by finding a new/existing equity partner willing to add value into the business at a fair price.    Such quantitative easing will do a world of good to corporate capital structures and have limited impact on the exchange rate.  Patient capital would buy this economy time to recover and prevent “la cigale” from dancing in the winter to come.