#386  With a view of reducing our exposure to foreign currency risk, we are making early    repayments of some USD 120m (approx. Rs 4.20 billion) of external debt
This initiative from the Minister of Finance does appear laudable at first sight but after some mental tinkering, its appeal diminishes significantly. I can hear many pointing to a reduction in public debt of the order of USD 120m as being very positive but that would be misleading. My understanding of things, in this context, is that the government plans on replacing foreign held debt with domestic held debt. The debt level won’t budge; the only things that will change are the identity of the debt holders and the financing costs of the debt. By so doing, is this government laying the groundwork for a significant depreciation of the Mauritian Rupee?
For the uninitiated, when foreign currency risk is mentioned in the context of public debt management, it invariantly refers to a broad based depreciation of the local currency. Assuming that one US Dollar currently returns Rs. 35, USD 120m is equal to Rs 4.20 billion. But if the Mauritian rupee was to hypothetically depreciate by 20% against the US dollar, then one US dollar would return Rs. 42 and the USD 120m debt would then be worth Rs. 5.04 billion such that the public debt, measured in Mauritian rupees, would have increased by Rs. 840m due to the 20% depreciation of the local currency.
Current prevailing interest rate differentials between Mauritius and the developed world also point towards a depreciation bias rationale from local stakeholders. South Africa currently pays 4.42% to finance USD-denominated debt which has been earmarked for repayment in 2044 while Mauritius services MUR-denominated debt maturing as early as 2036 at 6.50%. The reason? Interest rates are at historical record low levels in the developed world as they struggle to regain economic growth dynamism. In the US, the base interest rate is below 0.50%, in the UK, it is at 0.25% while in the Eurozone, it stands at 0.00% while in Mauritius, it is at 4.00%! If it wasn’t for the concern that foreign held debt would balloon our public debt metrics when the Mauritian rupee depreciates, it is difficult to find any other rational reasons for why the government of Mauritius would be in such a hurry to repay foreign debt in an environment where it is cheaper to borrow abroad than on the domestic market.
The older generation will surely remember the context which brought the massive devaluation of the Mauritian rupee towards the end of the 1970s and at the start of the 1980s. Sa letan la inn vinn ankor?