This Selected Issues paper and Statistical Appendix provide background information and analytical support for key policy issues discussed in the 2004 Article IV Consultation discussions with Mauritius. The impact of the erosion of trade preferences on exports, growth, and employment is assessed under two scenarios—a moderate and an extreme scenario. To quantify the adverse impact of trade liberalization, the paper estimates various elasticities of GDP growth to exports, and unemployment to growth. The paper also analyzes the labor market institutions and low-skilled employment in Mauritius.

Abstract

This Selected Issues paper and Statistical Appendix provide background information and analytical support for key policy issues discussed in the 2004 Article IV Consultation discussions with Mauritius. The impact of the erosion of trade preferences on exports, growth, and employment is assessed under two scenarios—a moderate and an extreme scenario. To quantify the adverse impact of trade liberalization, the paper estimates various elasticities of GDP growth to exports, and unemployment to growth. The paper also analyzes the labor market institutions and low-skilled employment in Mauritius.

V. Developing a Corporate Bond Market in Mauritius: Some Lessons From Emerging Market Countries41

A. Introduction

117. Mauritius has an efficient and a relatively large financial system. Its banking system is profitable and generally sound. It also has a well-developed insurance and pension sector, a number of nonbank financial institutions, and a stock market with capitalization of about 34 percent of GDP in 2003. The basic financial sector infrastructure, such as payment, securities trading and settlement systems, is modern and efficient. However, like many emerging market countries, the financial sector is dominated by banks (see Table V.1). The still growing offshore financial sector does not actively participate in local financial activities, and has yet to be fully integrated with the economy.

Table V.1.

Financial System Structure

(At the end of June 2002)

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Sources: The Mauritian authorities; and staff estimates.

118. The development of a corporate bond market could significantly enhance Mauritius’s financial stability. Credit to the private sector is highly concentrated in the onshore banking sector. The onshore banks’ asset quality has presently come under pressure due to the economic difficulties facing the sugar and export processing zone (EPZ) sectors. Meanwhile, the pension and insurance companies are seeking longer-term assets that match the maturity structure of their liability portfolio. A well-functioning corporate bond market could improve the efficiency of the financial system by diversifying credit risk concentrated in the onshore banks, and can also provide a cheaper alternative to financing than bank loans for the corporate sector, which would ultimately facilitate growth in private investment.

119. The purpose of this paper is to draw on lessons from other emerging countries’ experience in developing a corporate bond market and highlight some important requirements for developing such a market in Mauritius. Emerging market experiences indicate that developing a well-functioning corporate bond market is a complex and long-term task. It requires a series of well-designed reforms and assistance from the government in order to create the appropriate market environment to encourage the supply of corporate bonds, to build investor base, and to ensure a liquid market. High savings, investment-grade sovereign rating, strong institutions, and its position as an established off-shore financial center make Mauritius a good candidate for the development of a corporate bond market.

120. This paper is organized as follows. The next section reviews the financial system in Mauritius and identifies its main systemic risks. Section C discusses the benefits of developing an efficient corporate bond market. Section D identifies factors that contribute to the development of an efficient corporate bond market in emerging market countries. In light of the emerging market experience, this section also discusses key issues that would need to be addressed for the development of a corporate bond market in Mauritius. Section E concludes.

B. The Financial system in Mauritius

Banking system

121. The credit risk of the corporate sector is largely concentrated in the banking system, and the sectoral credit risk exposure is high. Within the onshore financial sector, banks account for about two-thirds of total assets. Their share of credit to the private sector in total assets is about 50 percent (see Table V.2). The Mauritius Commercial Bank (MCB) and State Bank of Mauritius (SBM), the two largest domestically owned banks, hold 70 percent of total assets and 77 percent of total loans in the domestic banking system, respectively.42 The sugar, tourism, and textiles industries account for some 40 percent of bank credit, and the sectoral distribution of credit is relatively skewed (see Figure V.1). Among the large sectors, manufacturing, including the EPZ, account for the second largest share of nonperforming loans (see Figure V.2).

Table V.2.

Summarized Aggregate Balance Sheet of Category 1 Banks as of Februrary 29, 2004

(In thousands of Mauritian rupees, unless otherwise indicated) 1/

article image
Sources: Bank of Mauritius; and staff calculations.

The balance sheets have been adjusted from BOM data to show net loans rather than gross loans on the asset side.

Figure V.1.
Figure V.1.

Mauritian Onshore Banks: Sectoral Credit Distribution

(as of Feb. 2004)

Citation: IMF Staff Country Reports 2005, 280; 10.5089/9781451827804.002.A005

Sources: Staff calculations on the basis of BOM data.
Figure V.2.
Figure V.2.

Nonperforming Loan Ratios Per Sector as of December 31, 2003

Citation: IMF Staff Country Reports 2005, 280; 10.5089/9781451827804.002.A005

Source: Staff calculations on the basis of BOM data.

122. The stress tests conducted by the Financial Sector Assessment Program (FSAP) in 2003 indicate that credit difficulty is the main risk facing the Mauritian banking system, although the high levels of capital and profits of the system, and the practice of extensive collateralization, provide a comfortable buffer against high-probability shocks. The most important risk is that the onshore banking system is vulnerable to external economic shocks and a downturn in economic activity. To guard against deterioration in the quality of their portfolios, banks have been reducing their exposure to sectors where the risk is considered the highest (see Table V.3). For example, growth of the credit to the EPZ declined by 15.6 percent in 2002/03.

Table V.3.

Sectoral Growth Rate of Credit to the Private Sector

(In percent)

article image
Source: Bank of Mauritius and staff calculations.

123. The offshore banking sector has grown rapidly since the second half of 1997, but it is weakly integrated with the domestic economy. 43 The assets of the 14 “Category 2 banks”44 amounted to 94 percent of GDP in 2002, marginally less than the assets of domestic banks (see Table V.4). Offshore banks are allowed to collect foreign-currency denominated deposits from residents and can lend in foreign currency to residents and domestic firms. However, they do not have significant retail activity in Mauritius and have limited their domestic operations mainly to public sector borrowers. The offshore banks provide a wide variety of foreign-currency denominated services, including deposit taking, lending, foreign exchange dealing, trust fund management, asset financing, and securities custodial services.

Table V.4.

Summary Aggregate Balance Sheet of Category 2 Banks, as of February 29, 2004

(In thousands of U.S. dollars, unless otherwise indicated)

article image
Source: Bank of Mauritius.

Nonbanking financial institutions

124. Nonbanking financial institutions (NBFIs) are well developed in Mauritius, but they face a maturity mismatch and reinvestment risks. Contractual savings, represented by the total assets of pension funds and insurance companies, are large and amounted to MUR 70 billion (50 percent of GDP) in 2002. The sector covers the National Pensions Fund (NPF), the National Savings Fund (NSF), 22 active insurance companies, and 1,095 occupational pension funds created by statutory bodies and private sector companies. Savings institutions have a strong demand for long-duration assets to match the maturity structure of their liabilities. In particular, life insurance companies face considerable reinvestment risk arising from a persistent fall in interest rates.

Table V.5.

Assets of Contractual Savings Institutions, 2001–02

(In millions of Maurtian rupees, unless otherwise indicated)

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Source: FSC.

Insured and administered pension funds.

Table V.6.

Asset Allocation of Contractual Savings, 2000-02

article image
Source: FSC.

Domestic capital market

125. The development of the capital market has lagged behind that of the banking sector. The short-term money market has been inactive, and there is some market segmentation, with the major foreign banks not offering interbank credit to smaller local banks. The primary government bond market is functioning well.45 Treasury bills at 3-, 6-, 12- and 24-month maturities are all sold at weekly auctions.46 The yield curve is generally reliable. However, the secondary bond market is at early stages of development.

126. The institutional, legal, and technical infrastructure of the Stock Exchange of Mauritius (SEM) is well developed, but the market is characterized by low volume, poor liquidity, and lack of depth. The SEM, incorporated in Mauritius on March 30, 1989, as a private limited company, operates two markets: the Official Market, on which securities of listed companies are traded, and the Over-The-Counter (OTC) Market. Currently, there are 40 companies listed on the Official Market representing a market capitalization of nearly US$2.1 billion as at March 31, 2004. However, since the late 1990s, activities in the SEM have slowed. From 1999 to 2003, market capitalization declined from 37 percent to 34 percent of GDP, and the average turnover hovered around 6 percent, indicating that the market is small.

127. The corporate bond market has been functioning on the SEM for several years. Corporate debentures are traded by both the SEM as well as an OTC board in Mauritius. However, there has been no new issuances and trading activities are very low, partly because the government reversed its tax policy on interest payments a few years ago. The number of corporate debentures was 18 and 11 in December 2001 and December 2002, respectively. Total turnover value was MUS 1.81 million and 0.4 million, for December 2001 and December 2002, respectively, which only accounts for one hundred times the turnover value of equities during the same period.

Corporate sector

128. Surprisingly, in this small island economy, the corporate sector has a relatively large number of firms and a significant number of large firms. Summary statistics of the Registrar of Companies Financial, Incorporation, and Object databases show that the total number of corporations is about 10,000 in 2004. The number of large firms is about 450 and the number of medium firms is about 1,380.47 Although the main corporate source of financing is banking loans, the large firms may have an incentive to issue corporate bonds as an alternative corporate financing.

129. Banks and financial institutions enjoy strong and enforceable creditor rights, but the legal framework governing corporate insolvency48 needs to be updated. Nearly all corporate lending in Mauritius is done on a secured basis. Banks and financial institutions benefit from strong, preferential rights with respect to security and fixed and floating charges, but enforcement procedures are often slow and inefficient.

130. There is a need to improve creditor protection and increase the recovery rate of loans. A recent assessment by the World Bank (2004) concludes that, while the systems for creditor protection and credit recovery in Mauritius offer modern protection, court proceedings do not respond to the needs of a dynamic industry. Constraints in the systems and illiquid markets typically result in low recoveries, even for secured creditors.

131. The authorities have taken a number of measures to strengthen the governance of commercial entities. The Companies Act 2001, the new Listing, Rules, and the consolidation of financial regulation within the Financial Services Commission (FSC) have enhanced shareholder protections and contributed significantly to corporate governance improvements. In several areas, however, further reforms are necessary to enable shareholders to exercise better control over management and help protect against abuse, particularly in those cases where there is one dominant family or group that owns a controlling interest in the company’s stock.

C. Benefits of an Efficient Corporate Bond Market

132. Advantages of a well functioning corporate bond market have been reviewed extensively in the literature. Boot and Thakor (1997) show that a financial system in its infancy will be bank dominated, and that bank lending declines as the financial market becomes more sophisticated. Hakansson (1999) compares the development of the economic structure between an economy with a well-developed corporate bond market and an economy in which bank financing plays a central role, suggesting a corporate bond market as a better way to control financial risks. Noel, Rebello, and Wang (2003) suggest that bond financing is a highly desirable choice for an economy in the long run because agents learn about the structure of security returns through trading experiences, and gravitate toward strategies that generate the highest payoffs. This results in the emergence of a financing hierarchy in which securitized debt dominates bank loans and other financing choices. Herring and Chatusripitak (2000) also conclude that the absence of a bond market may render an economy less efficient and significantly more vulnerable to financial crisis.

133. A corporate bond market can reduce the credit risk concentration in banks. In the absence of a corporate bond market, a major proportion of debt funding for corporations has to come from the banking sector. With a corporate bond market, however, the credit risk of the corporate sector could be born by a large number of market participants, including households, NBFIs, and foreign investment firms. A much cited quote by Alan Greenspan (2000) is that bond markets can act like a “spare tire,” substituting for bank lending as a source of corporate funding at times when banks’ balance sheets are weak and banks are rationing credit.49

134. In the case of Mauritius, bank credit to the private sector has continued to decline during the last several years, and there is excess liquidity in the banking system, partly because of the cautious attitude of banks toward credit risk. Medium-term growth is likely to slow to around 4 percent per annum, relative to the historical average growth rate of 5.5 percent. To sustain economic growth in the medium term, it is necessary for the economy to diversify the credit risk currently concentrated in the onshore banks’ balance sheets.

135. For investors, an efficient corporate bond market provides long-term investment opportunities, and for the issuer, it lowers the cost of financing. The nonbank financial institutions, such as life insurance companies and pension funds, can reduce the maturity mismatch of assets and liabilities by investing in corporate bonds. For the issuer, by allowing firms to finance longer-term debts, corporate bonds enable the firms to invest in larger projects such as infrastructure and utilities, where substantial outlays may be required for some period of time before positive rates of return are realized. In addition, firms may reduce their financing costs by borrowing directly from investors, bypassing commercial banks. Also, while firms still go through underwriters, brokers and dealers to raise funds, the competition among these intermediaries is more intense compared to that of commercial banks, thus reducing intermediation costs.

136. The continued widening of interest rate differential between the average T-bill yield and the average bank lending rate increases demands for cheaper corporate financing in Mauritius (see Figure V.3). Given balance sheet concerns, onshore banks are reluctant to reduce their lending rates, despite the presence of excess liquidity. In addition, the corporate bond market could potentially position itself between the government bond yields and the bank lending rate.

Figure V.3.
Figure V.3.

Differential between Average Bank Lending Rate and Average T-bill Rate

Citation: IMF Staff Country Reports 2005, 280; 10.5089/9781451827804.002.A005

D. Factors Contributing to the Successful Development of a Corporate Bond Market

137. This section identifies a number of factors that appear to have been important in explaining the development (or lack of development) of corporate bond markets in emerging markets. The discussion is centered on six broad areas.

Institutional and legal framework

138. A crucial aspect of a well-functioning market is its legal framework and legal enforcement. Many successful countries, during their initial stage of development, adopted a legal system that incorporated an investor protection clause. Protection clauses define the limits of legal obligation for bankrupt issuers to repay their dues, and delineate procedures for enforcing them. Such a mechanism, similar to Chapter XI of the Bankruptcy Code in the U.S., gives companies protection from their creditors, while allowing investors to assess rationally the risks they face.

139. The legal framework should include information disclosure requirements on a regular basis. The authorities should ensure that corporate accounting standards are consistent with international practice, a lesson from the 1997 Asian crises. Even prior to the crises, these countries had operated large corporate bond markets. It was only revealed ex post that, due to the government’s implicit guarantee to the corporate sector (“too big to fail”), coupled with a poor credit rating mechanism, accounting standard, and reporting requirements, these bonds were mostly de facto bank loans.

140. Sound corporate governance is also critical for corporate bond market development. Better corporate governance can be implemented through several mechanisms, including improved laws, enhanced regulations and supervisions, and stronger enforcement of private contracts.

141. In Mauritius, creditor protection should be given the top priority based on the lessons from emerging market countries. The authorities need to improve the legal framework, which will address weaknesses mentioned in the 2004 ROSC assessment. In addition, sufficient creditor protection provisions and information disclosure requirements should be included in the current draft of the Security Act.

Developing the benchmark

142. An efficient government bond market increases the efficiency of pricing of corporate bonds. Market participants often use yields on certain “benchmark” issues to construct a term structure of risk-free returns, which are used in the pricing of a wider range of financial instruments, including and especially corporate bonds. Investors and issuers in such countries are more experienced with operations of securities markets, and are thus more likely to participate in the corporate bond market where a government bond market is active. The experiences of Asian countries indicate that the absence of an efficient government bond market could lead to a distorted corporate bond market development. In the case of Korea, the corporate bond market had been active prior to the crisis, despite a relatively underdeveloped government bond market. Without the benchmark yield curve provided by a large public debt market, especially in the shorter end of the curve, the pricing of corporate bonds was distorted, resulting in active trading of lower quality debts at high prices. This has been cited as one of the factors that triggered the financial crisis in 1997/98.

143. The operation of an efficient money market is also an important precondition for developing corporate bond markets. Schinasi and Smith (1998) argues that money markets provide an anchor to the short end of the yield curves and are critical for the pricing of bonds and bond derivatives.

144. In the case of Mauritius, the authorities should attempt to build a yield curve on the money market and establish a connection with the primary bond market. In doing so, the authorities should lengthen the maturities of current money market instruments from the existing one week to three months’ maturities. Also, further efforts are needed to improve the liquidity of the secondary government bond market. Along with the recent stock exchange listings of government bonds, efforts should be geared toward increasing competition by allowing more dealers to enter this market.

Credit risk assessment

145. The presence of reputable international credit rating agencies is recognized as an important factor for the success of a bond market. It contributes to eventual development of a well-functioning domestic credit rating system, which would increase the transparency of issuance and the transferability of corporate bonds, either in the primary or in the secondary market, and deepen the corporate bond market. Establishment and development of independent domestic credit agencies would provide sharper differentiation of credit risks within the domestic market.

146. The pricing mechanism of corporate bonds can improve through measures such as the standardization of bond contracts, stock exchange listings, rating requirements and proactive ratings by some institutional investors in the market. For example, since April 2000, the Thai authorities have required compulsory credit ratings for most corporate bonds to promote a credit culture and to discourage private placements from ending in the hands of unsophisticated retail investors. In the absence of credit rating agencies, as in the case of Chile, pension funds have played the role of rating agencies and have become the “price makers” in the market.

147. In the case of Mauritius, the establishment of a credit information bureau would improve loan qualities by allowing lenders to assess better the credit risk of firms. This should be followed by the eventual introduction of independent domestic credit rating agencies. Meanwhile, further efforts are needed to promote education and training on credit risk assessment. The presence of international rating agencies could contribute significantly during the early stages of developing credit risk assessment skills.

Building the investor base

148. One of the major obstacles in building an investor base is the crowding out effect of government bonds. In the case of Brazil, its debentures market faces major hurdles in becoming a reliable source of financing for the corporate sector because government securities are attractive to domestic investors (low credit risk, ample secondary market liquidity, high real yields, and in many cases, protection against exchange rate, inflation and interest rate risks through indexed bonds). Only local firms willing to pay rates in excess of 20 percent on three-year debentures are able to bid for domestic investors’ funds.

149. Low and stable inflation, supported by credible monetary policy, is also important in building the investor base. When the government bond yields are sufficiently low under a stable, low inflation environment, the individual and institutional investors become motivated to invest in corporate bonds. However, if inflation is not stable, a reversal of the interest rate cycle might lead to excessive adjustments in bond prices, especially in the markets where hedging instruments are unavailable or highly illiquid.

150. Governments have often been involved in broadening the investor base during the initial stages of corporate bond market development. In the case of Korea, the government enacted the Securities Investment Trust Business Act, and presidential decrees and enforcement ordinances to introduce contractual-type investment trust companies (ITC) as a vehicle to mobilize domestic capital to build investor base. Commercial banks in Korea also introduced an investment vehicle, the bank trust accounts, and employed this new tool to enter the trust businesses. As a complementary measure to developing an investor base, the Korean government devised a safety net to encourage investor confidence by adopting a bond guarantee scheme during the early stage of development. In the case of Malaysia, which has also one of the largest corporate bond markets in emerging markets, the government established the Cagamas Berhad, the national mortgage corporation, in 1987, to develop a secondary mortgage market and at the same time promote the development of the corporate bond market.

151. Banks can contribute to increasing demand for corporate bonds. In some countries, banks are major holders of corporate bonds. For example, in Indonesia, banks hold the majority of corporate bonds, and this was the case in Argentina, Brazil, Chile, and Malaysia. Banks may hold a smaller portion over time as institutional investors develop. Banks typically hold a large share of short-term government debt to meet liquidity requirements and they dominate the short-end of the bond market.

152. NBFIs, such as pension funds and insurance companies, also play an important part in the development of a corporate bond market in the medium term. For example, the Chilean pension reform in the early 1980s had a significant positive effect on the development of the long-term corporate bond market. This was so because pension funds (and also insurance companies) were in need of a larger asset base and longer term assets to reduce the mismatch of their asset/liability portfolio. The issuance of corporate bonds in Chile rose from less than US$100 million in 1995 to over US$10 billion in 2003.

153. It is also important to develop the retail investor base in the long run. In order to widen the retail investor base, both Hong Kong SAR and Singapore have initiated programs designed to place a portion of the assets of the mandatory provident funds in the hands of private fund managers. Hong Kong SAR’s Mandatory Provident Fund trustees have received more inflows than expected when the system started in December 2000; one-third of the funds is invested in the bond market. In Singapore, demand for bonds has also been generated by farming out part of the assets of the Central Provident Fund to private asset managers, and by the placement of investment mandates of the government and other government-linked entities with private sector fund managers. Issuing bonds in smaller bills would also extend investment opportunities to individuals and enlarge the investor base, especially in Mauritius where the household saving rate is very high.

154. Measures such as favorable tax treatment for investors, and issuance of securitized bonds, are also effective in attracting investors. Singapore has implemented various kinds of tax incentives to participate in the debt market, that benefit both residents and nonresidents. In particular, foreigners have been allowed to borrow from domestic banks in order to invest in the domestic corporate bond market, and have been granted tax exemptions on interest income earned. With regard to securitized bonds, Chile has experienced a strong increase in these bonds, rising from an issuance of below US$50 million in 1999 to over US$1.4 billion in 2003, by starting with mortgage loans and expanding it to car loans, credit card, and university credit.

155. In the case of Mauritius, the government should harmonize the tax treatment of interest income on all financial instruments, and aim to remove tax and other barriers that discourage the issuance of corporate bonds and the active presence of institutional investors in corporate bond markets. Mauritius should also take advantage of its foreign clientele network from the OFCs, both as the issuer (as in the case of Switzerland) and as the investor to boost corporate bond market activities. Stock listings of corporate bonds can also be explored as a venue to expand the retail investor base.

Building the issuer base

156. Various government strategies have been introduced to boost the supply of corporate bonds. Attracting more issuers can be difficult for a small economy. It becomes even more difficult if the economic outlook is bleak, because firms are not willing to increase investments. Some countries facing similar limitations began by encouraging statutory boards and government-linked corporations to tap the bond markets rather than opt for direct bank lending. The financial centers of Hong Kong SAR and Singapore have encouraged statutory boards and government-linked corporations to issue local bonds to help develop the market.

157. The government can play a proactive role in attracting foreign issuers. In the case of Singapore, the government has been actively encouraging issues not only from Singapore but also from foreign issuers. After the development of the market infrastructure and the establishment of a benchmark yield curve, the Singapore authorities removed some of the remaining restrictions that prevented the internationalization of the Singapore dollar. The recent liberalization measures complement previous efforts to attract foreign asset managers and strengthen Singapore’s position as the main Southeast Asian financial center. It has been emulating Switzerland, where foreign entities are active issuers of Swiss franc bonds.50

158. Banks can become a large issuer of bonds. In several countries, such as Brazil, China, Germany, India, and Indonesia, banks use bond markets to supplement deposits as a source of funds. Banks may also act as underwriters for corporate bond issues, promising to take up any shortfalls if corporate bonds cannot be sold at an agreed minimum price (maximum yield). Banks then take on market risk rather than credit risk. Over 90 percent of bonds in Hong Kong are underwritten by banks.

159. Credit guarantees can help issuers with low credit ratings to issue higher-grade bonds to gain access to the market. Many countries have introduced bond guarantee schemes for credit enhancement purposes. In such cases, banks became the guarantors and earn fee income by guaranteeing full or partial repayment on corporate bonds.

160. Asset securitization may allow private entities to free up more capital and financial resources. In particular, the issuance of asset-backed securities (ABS), can prove useful to borrowers without a well-established track record to raise funds through the bond market, and which may be particularly relevant to young, second-tier companies new to the bond market and without a high credit profile. Many companies in Mauritius could fall under this category. The jurisdictions that have adopted a formal ABS issuance framework include South Africa and Singapore. Argentina has also seen strong growth in ABS issuance following introduction of securitization facilities, with ABS issues growing by six times over the period 1998-2000.

161. In the case of Mauritius, the onshore banks can become the initial issuers of corporate bonds to finance their assets. Consideration should be given to extend this privilege to the offshore banks. The development of asset-backed securities, including mortgage securitization, could provide liquidity to lenders. This would assist lenders in diversifying their credit risk and allow them to lend on a longer-term basis without maturity mismatches.

162. A relatively large number of big firms in Mauritius’s corporate sector can potentially become the main issuer base for the corporate bonds in the long term. Credit enhancements, such as collateral and guarantees, could lower the costs of new issues and help firms access the corporate bond market. However, about 40 domestic firms listed in the SEM, which have already had some track records for assessing credit risk, could become the initial issuers of the corporate bond market.

Developing efficient primary and liquid secondary markets

163. A successful launch of a primary corporate bond market depends heavily on the cost of issuance of bonds. In Hong Kong SAR, for instance, the cost of public issuance is estimated to be four times that of the private placement, and this has been cited as one factor that constrains the development of corporate bond markets. In the case of India, the lengthy issuance procedure has contributed to the dominance of private placements.

164. Many countries continue to face relatively inactive secondary markets, even after successful launch of bond markets. Very often, the system lacks transparency in the market-making process, thus inducing institutional investors to hold securities to maturity. The secondary market is, thus, prone to experience low liquidity and market fragmentation, often together with information asymmetry, and the corporate bond market faces pricing anomalies. Regulatory restrictions that prevent banks from doing repurchase agreements with corporate bonds are also seen as an obstacle for the development of a liquid secondary market. Many countries are tackling the problem by first fostering government bond markets to establish a solid benchmark yield curve and to familiarize market participants with bond trading. Some emerging markets have introduced credit derivatives markets to foster active trading in the secondary market. In the case of Singapore, the authorities opened up the liquid swap market to offshore banks and securities dealers, and provided market players with a hedging mechanism by launching the three-month Singapore dollar interest rate futures contract and Singapore Government Securities bond futures contract. The country has also made the infrastructure more conducive to market development by encouraging the use of e-bond technology and business.

165. To improve regulation of corporate bond markets, many jurisdictions are trying to encourage more organized, stock exchange-based trading of bonds, as it is viewed as being better regulated. A stock exchange listing can serve a useful function in secondary markets for bonds, even if most trading occurs on the OTC. Exchange listing provides an important safeguard for small investors, and therefore contributes positively to liquidity of the overall market. However, bond markets typically remain a wholesale market, and the OTC may play a more important role. In some countries, the authorities have taken steps to formalize OTC activities, with a view to achieving some benefits of exchange-based trading within an OTC setting.

166. In the case of Mauritius, issuance procedures for corporate bonds should be simplified and transparency strengthened in the current draft of the Security Act and other related laws. Although private placement has a low cost compared with public issuance, Mauritius should exercise caution on private placement, especially if it wants to develop a regional corporate bond market.

167. It is expected that Mauritius would have difficulties in increasing liquidity on the secondary corporate bond market. The standardization of the corporate bond contract is helpful for liquidity of the secondary market. In addition, developing a credit derivative market can contribute to increased liquidity.

E. Conclusion

168. Mauritius is both well placed and in need of developing a corporate bond market. The well-developed financial sector, the good legal system, sound corporate governance, a relatively large corporate sector, and strong public institutions serve as good foundations to develop such a market. In addition, institutional investors such as NBFIs are seeking long-term investment opportunities. Furthermore, Mauritius’s corporate sector needs a lower-cost financing option than currently dominant bank loans. Also, the corporate bond market allows firms to issue longer-term debts for larger projects and other capital-intensive investments necessary for long-term growth. Finally, the development of a corporate bond market is also timely, given the current low interest rate environment and widening differential between average T-bill yield and average bank lending rate.

169. However, developing an efficient corporate bond market in Mauritius requires a well-designed strategy, long-term reform efforts, and an active government role. In light of the emerging market experiences discussed in the previous sections, the following factors are critical: (i) improving the legal framework; (ii) developing the benchmarks;(iii) improving credit risk assessment skills;(iv) enlarging the investor base; (v) building the issuer base; and (vi) developing efficient primary and secondary bond markets.

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  • Schinasi, G. and T. Smith, “Fixed-Income Markets in the United States, Europe, and Japan: Some Lessons for Emerging Markets,” IMF Working Paper, 98/173.

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    • Export Citation
  • Thomas H. Noel, Michael J. Rebello, and Jun Wang, 2003 “Corporate Financing: An Artificial Agent-Based Analysis,” The Journal of Finance, Volume 58, Issue 3, p. 943.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Yago, G. and S. Trimbath, 2003 “Beyond Junk Bonds: Expanding High Yield Markets”, (Oxford University Press).

  • World Bank, 2004 “Report on Observance of Standard and Codes: Mauritius, Insolvency and Creditor Rights System”.

Table 1.

Mauritius: GDP Real Growth Rates by Industrial Origin, 1999-2003

(Annual change in percent)

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Source: Central Statistics Office, National Accounts of Mauritius.
Table 2.

Mauritius: GDP at Current Prices by Industrial Origin, 1999-2003

(In millions of Mauritian rupees)

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Source: Central Statistics Office, National Accounts of Mauritius.
Table 3.

Mauritius: Real Growth Rates of Expenditure on GDP, 1999-2003

(Annual change in percent)

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Source: Central Statistics Office, National Accounts of Mauritius.

Includes purchases of ships and/or aircraft.

Table 4.

Mauritius: Expenditure on GDP at Current Prices, 1999-2003

(In millions of Mauritian rupees)

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Source: Central Statistics Office, National Accounts of Mauritius.

Includes purchases of ships and/or aircraft in 1999 and 2001.

Table 5.

Mauritius: Real Growth Rates of Gross Domestic Fixed Capital Formation, 1999-2003

(Annual change in percent)

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Source: Central Statistics Office, National Accounts of Mauritius.

Includes purchases of ships and/or aircraft.

Table 6.

Mauritius: Composition of Gross Domestic Fixed Capital Formation at Current Prices, 1999-2003

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Source: Central Statistics Office, National Accounts of Mauritius.

Includes purchases of ships and/or aircraft.

Table 7.

Mauritius: Sugar Cultivation, Yields, and Output, 1999-2003

(Area in thousands of arpents; yields in metric tons per arpent harvested; and production, accruals, and consumption in thousands of metric tons, unless otherwise indicated) 1/

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Sources: Mauritius Chamber of Agriculture; Central Statistics Office; and IMF staff estimates.

One arpent = 1.043 acres, or 0.4221 hectare.

Mills and estates, including legally separate companies under same ownership.

Difference from area cultivated is attributable mainly to replanting and rotational/fallow periods.

Reflects millers’ 26 percent share of sugar produced as compensation for milling, as adjusted for mill efficiency.

Fiscal-year data relate to 12-month period ending in June of current year.

Total crop from harvest beginning approximately one month before the start of the fiscal year indicated, less the output in June immediately before the indicated fiscal year, plus the June output of the next crop, most of which is produced in the next fiscal year.

During 2001/02, 17,050 tons of sugar were imported for local consumption. Imports for the 2002/03 period were 32,000 tons for local consumption.

Table 8.

Mauritius: Sugar Exports, 1998/99-2002/03 1/

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Sources: Mauritius Sugar Syndicate (MSS); and Bank of Mauritius.

Fiscal year from July to June. Data differ somewhat from those presented by the MSS on a crop-year basis, which refer to disposal of a given year’s crop (from June when harvest starts, to the following June).

The Special Preferential Sugar Agreement was signed on June 1, 1995 between Atlantic, Caribbean, and Pacific (ACP) sugar-supplying countries and the European Union to compensate for the European cane refiners’ deficit for a period of six years, to 2001. It provides Mauritius with the right to export a variable tonnage of approximately 80,000 tons of sugar.

Table 9.

Mauritius: Ex-Syndicate Sugar Prices, 1998/99-2002/03 1/

(Mauritian rupees per ton)

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Source: Mauritius Sugar Syndicate.

Marketing years.

Paid to planters but not to millers.

Table 10.

Mauritius: Revenue and Expenditure of Sugar Estates with Factories, 1999-2003 1/2/

(In millions of Mauritian rupees, unless otherwise indicated)

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Sources: Mauritius Chamber of Agriculture; Mauritius Sugar Authority; and IMF staff estimates.

Based on companies’ audited accounts, in which accounting practices vary somewhat, supplemented by questionnaire returns.

Accounting-year basis. Mainly calendar years, except Illovo and Mon Trésor (April-March). Revenues include receipts (partly estimated) from current year’s crop through following June 30.

Less Mauritius Sugar Syndicate marketing expenses and cesses; before export taxes and insurance premiums. Reflects actual final price, whereas company accounts are closed using an estimate.

Income on other crops and nonagricultural activities.

Figure does not include additional receipts relating to the Lllovo deal.

Producers are requested to credit an aggregate amount of MUR 175 million to a modernization and agricultural diversification reserve for each of the years 1994-2003. Transfers from this reserve are allowed on approved investments.