For a diversified debt mix

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In his second rejoinder, Sunil Benimadhu does not really address the issues that I have put forward. Two main points of disagreement that he lightly dismisses are the need for Mauritius Government bonds to be Euroclearable in the medium term, and on having a professional debt management office which would also look into the issuance of international bonds priced in foreign currency (Eurobonds). He makes a gloomy case that Mauritius would face unfavourable pricing in the international markets.

A government with vision must start thinking beyond the Covid-19 crisis. As I have previously highlighted, Mauritius needs to develop the inter-bank repo market, which is the oil of any liquid bond market, to reduce the number of outstanding bond issues and to increase the average size per issue in order to create a liquid and much less fragmented bond market. This will take time.

Many central banks, to give a boost to the bond market of their country, have created a special trading desk in order to provide inventory and an exit route to primary dealers. A stock exchange does not add value when it comes to Over-The-Counter traded bonds beyond convenience listing. Dealers will price liquidity risk within their bid-ask spreads, especially if the market is fragmented and investors have a buy and hold mentality.

Once they get the basics right, countries make their local bonds available on Euroclear, not on the local stock exchange which is used for convenience listing purposes. So Mauritius should first fix the structural problems of its bond market. It is when the latter is connected to global liquidity pools that we will truly see the benefits. To get there, we need a roadmap.

True, a Eurobond must have a minimum issue size, typically USD 500 million, in order to be included in the JPMorgan Emerging Market Bond Index, but this is not a goal for tomorrow. We must gradually build our USD curve first and meet a certain issue size. We have done precious little internationally.

Note, however, that our external gross public sector debt stock has reached Rs 91 billion, an equivalent of USD 2.2 billion, and is still rising. Unless we believe that the Mauritian economy will stop growing, the problem of minimum issuance size for index inclusion will be solved by itself over time. Not being part of an index does not preclude a country from issuing foreign currency bonds.

When it comes to debt pricing, Africa is the worst example to take to compare with Mauritius which is rated Baa2. If African countries were the base case, then no country in the world would issue Eurobonds. Eurobond pricing actually depends on the credit risk profile of the country, and obviously Mauritius is not rated as Senegal, Nigeria or Kenya. Mauritian Eurobonds would not be priced at African rates because of Covid, but surely like many other Baa2 countries (Panama, Indonesia, Philippines). Mauritius could currently get a dollar 10-year fixed rate at the low to mid 3% yield area, and this would be even cheaper in euro – definitely far lower than non-investment grade African sovereign yields.

International bond issues are an important building block in the funding strategy of any developing country. Such an approach ensures proper pricing of fixed income securities, sets a benchmark for credit risk pricing that is globally recognised, and diversifies the funding sources of the issuer. It also generates international press coverage and marketing for the issuer.

Debt management strategy is dynamic and tactical, not accounting-oriented, hence the need to have a professional agency to decide on a diversified debt mix that is optimal. A country cannot have recourse only to domestic debt and foreign government loans. Mauritius needs to present a good mix of local and foreign debt including Eurobonds, and a sustainable debt path to the market.

The cost of debt is measured in terms of not just interest rates but also of sovereignty considerations. There is no free lunch with government-to-government deals which are opaque and come with geopolitical strings. The likes of the International Monetary Fund also come with their own conditions set.

Right now, Mauritian bonds are yielding negative real interest rates across the short and medium end of the yield curve. Pension funds, in particular, wish to increase their foreign investments because a large part of their investment portfolio is in domestic government securities. They need higher bond yields or international diversification to match the liabilities, the more so as the local equity market has performed badly for five years. Since pension funds with negative funding gaps eventually go bust, one should not assume that they will keep on buying low yielding local bonds forever while the government is on a borrowing spree.

Furthermore, at a time when local banks are increasingly risk averse and concerned about the credit concentration risk of large corporate borrowers, the health of companies in moratoriums and the struggles of retail borrowers, policy makers should be careful about crowding out domestic lending to the private sector.

Incidentally, knowing that it cannot just borrow domestically, the government has been increasing its external debt since 2020 in order to partly offset the decline in its foreign exchange reserves (foreign currency goes to the central bank which in return gives government rupees). It can achieve the same objective by borrowing from foreign markets. Either way, it improves the country’s import cover and partly quells fears about an accelerated depreciation of the rupee, given the moderate international reserves buffer. Change in official reserves and balance of payments are related to each other. As Mauritius recorded an overall balance of payments deficit of USD 536 million in the year 2020, it would have been worse had the government relied only on domestic borrowing.

Finally, Sunil Benimadhu is right to regret the failure to establish a strategic partnership between the Stock Exchange of Mauritius and the Johannesburg Stock Exchange. If this project had materialised, Mauritian stocks and even Exchange Traded Funds would have been more liquid than they are today, and the discussion closed…

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