While much has been made those last days about dire IMF forecasts on inflation, growth, the fiscal deficit and unemployment, policymakers must also focus on scenario analysis and probabilities when assessing the pros and cons of implementing various fiscal and monetary policies. As I have argued in my last article, Mauritius is not the US and it simply will not be able to print 5% to 10% worth of GDP of fiat currency to stimulate demand-side policies without risking a collapse of the exchange rate but there is room for unconventional policies and even some limited helicopter money.

That being said, those who think that a Government which is already reeling from a steep drop in VAT, petroleum tax-related revenues (lower demand gave the lockdown and slowing economy) and in general a likely double-digit fiscal deficit this year could essentially borrow 5% to 10% worth of GDP locally without crowding out private credit lending in a risk-averse environment and internationally without strong austerity demands, a longer period of economic stagnation and more pressure on the country’s sovereign ratings (with obvious impacts on GBC deposits) in the medium term are kidding themselves. We are in a tough spot and every week the credit situation in Mauritius continues to deteriorate. The recovery will be slow and we need patient capital in the form of equity and pref equity for larger firms, not more debt.

One area of potential concern right now is the more than 50 billion rupees sized corporate bond and structured notes market which benefited from the credit risk mispricing that comes with long periods of unchecked excess liquidity, flattering credit ratings and some naiveté. We need to be bold, be open to all approaches and implement these policies in a timely manner if we want to have a meaningful recovery. Key to our success will be related to how we handle credit risk in the system because if banks start to need to provision for more losses in the coming months as defaults rise, the recovery will be L shaped and we will be stuck in the abyss for a long time to come.

Firstly, the easing of monetary policy remains prudent and given the gap between the 3-month T Bill rate and the recently cut repo rate, there is more room for monetary policy to be eased further in the coming quarter which would help bring the Prime Lending rate lower still. While the upside risks to the inflation outlook locally have risen in the near term, monetary policymakers must look beyond the base effects driven by last year’s very low levels of inflation, the current temporary lockdown has driven disruptions and put their policy in the context of significant deflationary pressures globally. A rising inflation outlook in the near term, however, underpins the fact that there cannot be wide-scale use of helicopter money to pay wages for example.

The Government should use up the remaining Special Reserve Fund (SRF) transferred money, continue to borrow internationally and locally to subsidise wages for another month and then be very targeted in its wage subsidy schemes. It simply cannot maintain this support for long. The Government will then need to cut back on all low ROI capital expenditure projects and freeze all proposed wage increases of the civil service and public bodies. Indeed cuts at the highest levels may be warranted and politicians should lead by example with more significant cuts. In the medium term, the Government will need to broaden the tax base looking at land value taxation on the rentier economy, in particular, more closely, it will need to create a sovereign wealth fund that will build buffers so that it can use it in times of stress and it should also consider hedging at least 50% of oil imports over the next 18 months via swaps betting on a moderate recovery in oil prices.

On the credit side, small and midsized businesses should be given long term loans at near-zero rates equivalent to one year to two years worth of paid corporate taxes. The loans should be securitized, the Central Bank should then ask for Government guarantees on these securities. These measures should be taken on top of the current moratoriums on capital and interest. For larger firms with revenues exceeding MUR 200 Million, the SIC pref equity approach will not be large enough, optimal and nor is their good competence there to identify and execute distressed debt and capital restructuring strategies in a timely manner. These are some of the most complex matters in the private equity and credit markets. Over the last three months, the Bank of Mauritius has reduced the outstanding value of its monetary policy instruments from more than 120 billion to 102 billion. At the same time, the Rupee value of its assets has increased significantly given Rupee depreciation. This means that the Bank of Mauritius has been able to rebuild much of its lost capital base, enough at least for an exceptional MUR 5 billion second tranche SRF transfer to Government. This is perhaps the extent of helicopter money we can do.

The Government should then create an independently managed and apolitical special purpose vehicle (SPV), under a special Act passed by Parliament and bring this MUR 5 billion as equity. Then, the SPV would issue a 10-year bond on its own name with partial Government guarantees to the Bank of Mauritius and seek to leverage itself by a factor of 5x leading to a kitty of 25 billion MUR. In terms of liquidity management, the Bank of Mauritius would act as custodian to minimize liquidly impacts and money would only be disbursed into the system on a deal by deal basis.

The SPV would have a 7 to 10-year private equity/special situations type investment horizon and would target an internal rate of return in the low to mid-teens to be returned to the State upon exit. The SPV would be accountable to Parliament. It would build up a specialist and professional (and apolitical team including Board based purely on relevant experience and merit) which would provide patient capital in the form of common equity and convertible preferential shares and even other more senior debt if need be too distressing targets within the private and public owned corporate space where restructuring will be needed. The expert team would negotiate pricing with banks and would also reserve the right to appoint independent experts to sit on boards and review business plans and have a say in appointments and firings with a focus on performance. The focus of the SPV would be to not only generate decent returns which may be profitable to a cash strapped state (especially given the leverage) but to ensure that companies gain breathing room and impetus to be more performance-driven.

This is a specialist field and such structures are highly levered and I can only hope that policymakers are bold enough to recognize the need to keep politicians out, else it will be a disaster. Bad corporate governance in public entities is often the Achilles heel of this country. The implementation of unconventional monetary policy via this unconventional credit channel remains the best route we have so far when it comes to having a meaningful impact on the recovery. I can only hope that my former boss and now friend, the Finance Minister, listens to my advice