Mauritius, Government of -- Moody's upgrades Mauritius's government bond rating to Baa1

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.

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