The global economy rebounds in 2021 bolstered by improved business confidence and investors’ risk appetite, amid broadly accommodative monetary and fiscal policies. The pandemic continues to spread at varying rates globally, while vaccination campaigns are being reinforced. The International Monetary Fund (IMF) estimated that advanced economies could reach prepandemic output levels by 2022 while emerging and developing economies would do so later. The IMF, in its October 2021 World Economic Outlook, projected global economic growth for 2021 at 5.9 per cent, falling to 4.9 per cent in 2022. Uncertainty persists as to the strength of the economic recovery and the impact on financial markets subsequent to the emergence of new COVID-19 variants, which could heighten volatility and risks. The global financial markets were well supported as from the first quarter of 2021. Equity prices improved as the monetary policy stance in many large economies remained accommodative. Global long-term yields went up by the end of September 2021, after declining earlier, reflecting a rise in measures of interest rate risk and inflation compensation. Capital flows improved during the ongoing economic recovery sustained by global risk appetite. Going forward, as high inflation persists, a tightening of monetary policy in many economies could disrupt these flows.
Fiscal and monetary support in many countries moderated financial strains on the household and corporate sectors. Low interest rates, income support measures and loan moratoria have improved financial conditions, containing defaults on debts and preserving stability of the financial system. The resilience of the global banking industry to the pandemic-induced shocks enabled it to sustain the flow of credit facilities in most economies. Nevertheless, credit growth remained subdued, as banks were cautious given risks to the economic outlook, particularly in emerging economies.
In the midst of nascent economic recovery, risks to global financial stability have remained well contained. Policymakers are facing tighter policy space as they are confronted with various challenges. Besides pandemic-induced ones, climate change threats require more than ever pressing measures and actions, as they are increasing financial sector vulnerabilities. To safeguard financial stability, policymakers should lay greater emphasis on climate-related financial sector policies that will encourage an orderly transition.
The Mauritian economy rallied in the second quarter of 2021, with a real growth rate of 19.3 per cent. This growth momentum was projected to be sustained in the third quarter of 2021. Continued policy support from the monetary and fiscal authorities, progress in the vaccination campaign, as well as buoyancy of some major sectors propelled the recovery process. Moreover, the revival of the tourism sector, with the partial reopening of the borders as from mid-July 2021 and full level of Rupee excess liquidity in the banking system, as economic activity gathered pace. Further, risk to financial stability arising from possible liquidity constraints had also abated with ongoing economic recovery. Economic activities resumed rapidly following the second lockdown in March 2021, with the prompt roll-out of work access permits and easing of sanitary restrictions. This speedy resumption helped the household and corporate sectors to withstand the economic impact of the second wave of the pandemic, preventing further build-up of vulnerabilities. The annual growth of bank credit to the private sector generally trended upwards, rising from 4.4 per cent in March 2021 to 4.7 per cent in June 2021 and further to 8.6 per cent in September 2021, with increasing growth rates for both the household and corporate sectors. To accompany the recovery process and contain risks to financial stability, the Bank extended some of the measures under its COVID-19 Support Programme to continue providing assistance to households and corporates during the recovery phase. These measures contributed to cushion the impact on the asset quality of banks, as evidenced by the decline in the ratio of non-performing loans to total loans to 4.5 per cent as at end-September 2021, from 5.0 per cent as at end-March 2021. The Bank has already started work on the unwinding of the COVID-19 measures, which are under discussion at the level of the Task Force on Banking Sector Resilience.
The resilience of the banking sector improved in September, relative to March 2021. The capital and liquidity buffers held by banks allowed them to sustain the stresses of the pandemic-induced economic shocks and thus preserved financial stability. The Capital Adequacy Ratio went up to 19.6 per cent in September, from 18.7 per cent in March 2021, with improving profitability and a contraction in risk-weighted assets. The Liquidity Coverage Ratio improved to 259 per cent from 250.6 per cent during the same period. Profitability in the banking sector started picking up in 2021, impacting positively on returns on assets and equity. Other key financial soundness indicators of banks remained comfortably within prudential limits. The Bank evaluated the resilience of these capital and liquidity buffers to various hypothetical but plausible shocks using its stress testing framework. The results of the stress tests, using September 2021 data, showed that banks generally held resilient buffers enabling them to absorb greater shocks – such as shocks to economic growth, credit portfolios and liquidity – though a few banks exhibited some vulnerabilities. Of importance, the findings depicted an improvement in the resilience of the banking sector compared to March 2021, indicating the sector has stronger buffers to withstand risks to financial stability.
The Bank conducted a Survey on Economic Perspectives and Financial Stability Implications with the banking industry in October/November 2021. The main findings pointed to rising optimism among banks as to a pick-up in economic activity over the next year accompanied by improving profitability. Most banks anticipated expected credit losses to stabilise, with even an improvement in asset stage classification. They projected favourable liquidity position for the upcoming year. Almost half of the banks indicated that the main challenges going forward are climate-related risks that could impact income and credit portfolio, and operational risks arising from cybersecurity vulnerabilities. They indicated that they have put in place various risk mitigating strategies, including higher investment in IT infrastructure and systems. The Bank recognised that climate change and environmental degradation can have economic consequences which can pose major risks to the financial system. To prepare the financial system to better face these challenges, the Bank launched its Climate Change Centre on 14 October 2021 to affirm its response to climate-related risks. Furthermore, cognisant of downside risks from advancing digitalisation, the Bank has taken several initiatives to further enhance efficiency, safety and resilience in the payment ecosystem. The National Payment Systems Act was amended in August 2021 to provide for the establishment of the National Payment Systems Committee that will act as an advisory body to the Bank in the exercise of its oversight function in respect of the national payment systems. The Committee will also serve as a forum for cooperation, thereby supporting the achievement of sound and efficient payment systems in Mauritius.
The Bank has, in August 2021, been assigned the function of the macroprudential authority of Mauritius in terms of section 5(1)(ba) of the Bank of Mauritius Act 2004 (Act). This new responsibility complements its mandate to ensure the stability and soundness of the financial system of Mauritius, as laid down in section 4(2)(b) of the Act. The main objectives of macroprudential policy are to prevent the build-up of systemic risks in the financial system and reinforce the resilience of the financial system to shocks so as to preserve financial stability. While macroprudential policy is certainly not new to the Bank, this statutory mandate requires the design and deployment of a robust macroprudential policy framework to assess and monitor systemic risks in the whole financial system. To that effect, the Bank is currently reviewing its macroprudential policy framework as well as consolidating its structure to manage risks to financial stability in line with international standards.
The non-bank financial services industry broadly recovered its growth momentum. Amid economic uncertainties, the Non-Bank Deposit-Taking Institutions adopted a prudent approach and redeployed their funds towards less risky assets. They were assessed to be sound and adequately capitalised, complemented by prudent risk management policies. The long-term insurance industry has shown better resilience to the effects of the pandemic so far in 2021, after growing at a slower rate in 2020. The pandemic had moderate impact on the total gross premium earned by life insurers. The overall performance of the general insurance business was relatively undeterred. The value of assets in the pension scheme industry kept a general upward trend, despite market volatility and historically low interest rates. The performance of financial markets since the first quarter of 2021 amplified the growth in pensions assets whilst vulnerabilities in the pension industry remained well contained. The global business sector maintained its growth momentum. This progress was achieved despite risks stemming from the effects of the pandemic worldwide and the listing of Mauritius by the Financial Action Task Force (FATF) in its list of jurisdictions under increased monitoring and by the European Union and the United Kingdom in their list of high-risk countries. The global business sector is projected to expand by 5.0 per cent in 2021, a significant rebound from the contraction of 10.3 per cent in 2020. Mauritius successfully exited the FATF list of jurisdictions under increased monitoring in October 2021, after completing its Action Plan well ahead of the set timeline. As from November 2021, the United Kingdom also removed Mauritius from its list of high-risk countries under its UK Money Laundering and Terrorist Financing (Amendment) (No. 3) (high-risk countries) Regulations 2021. It is expected that Mauritius will be removed from the European Union List of high-risk countries in the near future. These developments uphold the reputation of the Mauritius International Financial Centre as a robust and credible jurisdiction and reinforce the integrity of the financial services sector of Mauritius including its global business sector. The delisting’s are important milestones for the Mauritius International Financial Centre.
