Banks Face Asset Quality Concerns Amid Economic Recovery
As economies around the world begin to recover from the pandemic, concerns are growing about the asset quality of banks. A recent report by the Bank of Mauritius highlights the need for a carefully managed exit strategy to ensure that banks continue to support the local economy.
Economic Recovery in Mauritius
The Mauritian economy, which contracted by 12.7% in 2020Q3, is showing signs of recovery, driven mainly by improving performance in sectors such as:
- Manufacturing
- Distributive trade
- Financial services
However, the tourism sector remains heavily impacted, with tourist arrivals down 94% year-on-year in March 2021.
Asset Quality Concerns
The report warns that asset quality is likely to deteriorate further over 2021, citing the exposure of banks to sectors most affected by the pandemic. Regulators have encouraged banks to support the local economy through their buffers, but the ability and willingness of banks to ensure a continuous flow of credit to the real economy will depend on their assessment of the credit quality of impacted borrowers as support measures are gradually phased out.
Economic Growth Projection
The Bank of Mauritius projects economic growth at 5.5% in 2021, driven by:
- Recovery in global demand
- Continued support from policy measures
- Re-opening of borders to international travel
This is expected to boost consumer and business sentiment and spur the tourism sector, with positive spillover effects on domestic growth.
Domestic Stock Market Performance
The domestic stock market has been displaying some vulnerabilities relative to the pre-pandemic picture, with listed stocks particularly those related to:
- Accommodation and food service activities sector
appearing vulnerable. Banking stocks retreated at the start of 2020Q4, reflecting prudential requirements imposed by the Bank’s Guidelines on Payment of Dividend for banks and non-bank deposit-taking institutions.
Market Volatility
The announcement of a vaccination campaign in December 2020 brought back confidence among investors, but the downgrade by Moody’s long-term ratings of two banks weighed on share prices in March 2021. The SEMDEX closed the first quarter of 2021 at 1,600.19 points, shedding 2.9% compared to end-2020Q4.
Foreign Investment
Foreigners continued to disinvest from the Stock Exchange of Mauritius during the period under review, with net foreign sales reaching Rs37 million in March 2021.
Conclusion
The report highlights the need for a carefully managed exit strategy to ensure that banks continue to support the local economy and maintain asset quality amid the ongoing economic recovery.