Economics and Finance in Mauritius (eBook)

Dr Indranarain Ramlall is a Senior Lecturer at the University of Mauritius. Prior to joining the University, he was a Credit Corporate Officer at the State Bank of India (Mauritius), and then a Fund Manager at Anglo-Mauritius Financial Services Limited. Dr Indranarain Ramlall previously worked within the Financial Markets Division and the Financial Stability Unit at the Bank of Mauritius (The Central Bank of Mauritius). At this time, he also served as a member of the Joint Working Group Committee on Debt Management and the Sub-Committee on Treasury Bill Allocation. He has participated actively in various international scientific conferences. His research interests include financial stability, central banking, risk management, investment analysis, econometric modelling and the economics of climate change.

Preface 7
Contents 8
List of Figures 11
List of Tables 14
Part I: An Overview of the Mauritian Economy 18
1: An Overview of the Mauritian Financial System and Its Economy 19
1 Introduction 19
2 An Overview of the Mauritian Financial System 20
2.1 Regulators such as the Bank of Mauritius and the Financial Services Commission 20
2.2 Banks 20
2.3 Insurance Companies 21
2.4 Leasing Companies 21
2.5 Derivative Company 21
2.6 Fund Management Companies 21
2.7 Other Companies 22
3 A Critical Assessment of the Mauritian Economy 22
Appendix 38
Banks 39
Non-Bank Deposit Taking Institutions 39
Money-Changers (Bureaux de Change) 40
Foreign Exchange Dealers 40
Bibliography 40
Part II: The Mauritian Banking Sector 41
2: Banking Sector Analysis 42
1 Introduction 42
2 General Analysis of the Banking Sector in Mauritius 42
3 Specific Analysis of the Banking Sector in Mauritius 44
4 A Holistic Assessment of the Mauritian Banking Sector 59
5 A Network Analysis of the Sector-Wise Distribution of Credit in Mauritius 63
Bibliography 67
3: Developing a Credit Risk Model for Mauritian Bankers 68
1 Introduction 69
2 Related Literature 70
3 Econometric Methodology and Hypothetical Relationship for Variables 71
3.1 Tenor (+) 75
3.2 Margin Cover (+) 75
3.3 Age of the Borrower (+) 75
3.4 Cost of the Loan (?) 76
3.5 Loan Arrears (?) 76
3.6 Dummy Variables: TownDum(+) PublicDum(?) &
3.7 Interaction Dummies/Variables 77
4 Empirical Results 78
5 Conclusion 82
6 Policy Recommendations 83
Appendix 84
Bibliography 86
Part III: The Stock Market in Mauritius 87
4: Stock Market Analysis 88
1 Introduction 88
2 Sectoral Market Capitalisation on the Official Market 90
3 Bank Financing Versus Equity Financing 92
4 Price-Earnings Analysis in SEM 95
5 Foreign Investment Analysis in SEM 97
6 Turnover and Volume Assessment 98
7 Performance of Indices on the Official Market 99
8 Predicting the Performance of Stocks Listed in the Stock Exchange of Mauritius 100
9 Challenges Present to SEM 103
Appendix 104
A Simplified Equity Risk Model of the Mauritian Economy 104
Components Used for Analysis 105
Bibliography 109
5: The Behaviour of Foreign Investments in the Stock Exchange of Mauritius 110
1 Introduction 110
2 Literature Review 112
2.1 Stock Exchange of Mauritius 116
3 Data and Methodology 118
3.1 Econometric Model Specification 119
3.1.1 Are Foreign Sales and Purchases Cointegrated? 120
3.1.2 Do Foreign Investments in SEM Impound on the Treasury Bill Market and on the Rupee Price of USD? 120
3.1.3 Do Foreigners Behave Like Feedback Traders or as per the Base-Broadening Approach or as per Price Pressure Hypotheses? 121
Feedback Trader Hypothesis 121
Base-Broadening Hypothesis 122
Price Pressure Hypothesis (Encapsulates Base-Broadening Hypothesis) 122
4 Results 124
4.1 Summary Statistics 124
4.2 Unit Root Tests 125
4.3 Focusing on the Three Hypotheses 125
4.3.1 Are Foreign Purchases and Foreign Sales Cointegrated? 125
4.3.2 Do Foreign Investments in SEM Impound on the Treasury Bill Market and on the Rupee Price of USD? 126
Do Foreigners Investing in the Stock Exchange of Mauritius Consider the Treasury Bill Market to be a Substitute for Their Investments? 126
Do Foreigners Influence the Rupee Price of the US Dollar While Investing in the Stock Exchange of Mauritius? 130
4.3.3 Do Foreigners Behave Like Feedback Traders or as per the Base-Broadening Approach or as per Price Pressure Hypotheses? 131
Do Foreigners Behave Like Feedback Traders in the Stock Exchange of Mauritius? 131
Do Foreigners Behave in a Manner Consistent with the Base-­Broadening Hypothesis and the Price Pressure Hypothesis? 136
5 Conclusion 140
6 Policy Recommendations 144
Appendix 145
Unit Root Tests 145
Bibliography 145
6: The Impact of US Subprime Crisis on SEMDEX 148
1 Introduction 148
2 Brief Literature Review 149
3 Granger Causality (Lead-lag Effects) 150
4 Unit Root Tests 150
5 Cointegration Analysis 153
6 Results 153
7 Conclusion 154
8 Policy Recommendations 154
Appendix 155
Bibliography 163
Part IV: Monetary Policy in Mauritius 164
7: Monetary Policy Analysis 165
1 Introduction 165
2 Current Monetary Policy Framework in Mauritius 166
3 Tools for Monetary Policy Implementation 168
4 Schema of the Interactions Among Households, Banks and Public Debt in Mauritius 169
5 Monetary Policy Channels of Transmission Mechanism in Mauritius 171
5.1 Strong Exchange Rate Transmission Channel 173
5.2 Weak Interest Rate Transmission Channel 174
5.3 Weak Asset Price Channel 175
5.4 Credit Channel 176
5.4.1 Bank-Lending Channel-Lenders Viewpoint 176
5.4.2 Balance Sheet Channel-Borrowers Viewpoint 176
5.5 Expectations Channel 177
6 Conclusion 178
Bibliography 178
8: Money Demand Analysis in Mauritius 179
1 Introduction 179
2 Theoretical Underpinning 181
3 Mauritian Economy and Monetary Policy Conduct 183
4 Data and Methodology 185
5 Empirical Results 192
6 Conclusion 196
7 Policy Recommendations 200
8 Appendix 201
References 203
9: Impact of Debit and Credit Cards on Currency in Circulation in Mauritius 206
1 Introduction 207
2 Literature Review 208
3 Debit and Credit Cards Usage in Mauritius 210
4 Econometric Models 212
4.1 First Model 212
4.2 Second Model 214
5 Empirical Results 214
6 Conclusion 218
7 Policy Recommendations 220
8 Appendix 221
Bibliography 221
10: A Posthumous Note on the Lombard Rate in Mauritius 223
1 Introduction 224
2 Brief Literature Review 224
3 Data and Methodology 225
3.1 Unit Root Tests 225
3.2 Cointegration Tests Between Lombard Rate and the Yields of Treasury Bills 226
4 Results 227
4.1 Predictive Power 228
4.1.1 91 Days Treasury Bills and 182 Days Treasury Bills 228
4.1.2 91 Days Treasury Bills and 364 Days Treasury Bills 229
4.1.3 182 Days Treasury Bills and 364 Days Treasury Bills 230
5 Conclusion 230
6 Policy Recommendations 231
7 Appendix 232
Bibliography 235
Part V: The Business Sector and Its Financing Structure in Mauritius 237
11: What Drives the Capital Structure of Non-­Listed Mauritian Firms? 238
1 Introduction 239
2 Pecking Order Theory 240
3 Model Specification 242
3.1 Non-Debt Tax Shields (NDTS) 243
3.2 Size 245
3.3 Growth (GRO) 245
3.4 Profitability (PRO) 245
3.5 Tangibility of Assets (TANG) 246
3.6 Liquidity (LIQ) 246
3.7 Investment (INV) 247
3.8 Age (AGE) 247
4 Results 247
5 Conclusion 253
6 Policy Recommendations 255
Bibliography 255
12: Capital Structure Analysis of Exporting and Non-exporting Mauritian Firms: A Pre- and Post-crisis Investigation 258
1 Introduction 259
2 Literature Review 261
2.1 Underpinning Theories of Capital Structure 261
2.2 Empirical Evidence 263
2.3 Rationale for Study and Associated Benefits 266
3 Model Specification and Data 267
3.1 Non-debt Tax Shields (NDTS) 270
3.2 Size 270
3.3 Profitability 271
3.4 Tangibility of Assets (TANG) 271
3.5 Liquidity 272
3.6 Investment 272
3.7 Age 272
4 Results 273
4.1 Strategic Variables: Sales, Tax and Equity 273
4.2 Results for non-strategic variables 273
5 Conclusions 278
6 Policy Recommendations 280
Bibliography 280
Part VI: Hedging in Mauritius 284
13: What Factors Drive Hedging Among Mauritian Firms? 285
1 Introduction 286
2 Reasons Motivating Firms to Hedge 287
2.1 Financial Distress Costs Hypothesis 287
2.2 Underinvestment Hypothesis 288
2.3 Tax Convexity 288
2.4 Managers’ Motives 289
2.5 Country-Specific Features 289
2.6 Size 290
2.7 Corporate Governance 290
3 Characteristics of Mauritian Firms 291
3.1 Characteristics of Local Firms 291
3.1.1 Concentrated Ownership Structure 291
3.1.2 Derivative Products (Forwards) Collected from Firms 291
3.1.3 Chronic Depreciation on the Back of Ongoing Deficit 293
3.1.4 Price-Takers 293
3.1.5 Complacent Hedging Behaviour-Risk Borne by Consumers 293
3.1.6 Underlying Risk Exposure 294
3.2 Relevance of Hedging Theories in Mauritius 294
3.2.1 Tax Hypothesis 294
3.2.2 Financial Distress Costs Hypothesis 295
3.2.3 Underinvestment 295
3.2.4 Managers’ Motives 295
3.3 Substitutes for Hedging in Mauritius 296
3.3.1 Corporate Governance 296
3.3.2 Foreign Currency Debt 297
3.3.3 Dividends 297
3.3.4 Operational Hedging 297
3.3.5 Practical Side of the Picture 298
4 Data and Econometric Model 299
4.1 Contribution to the Empirical Literature 300
4.2 Hedging Model 300
4.2.1 Financial Distress Cost Hypothesis 302
4.2.2 Expertise in Hedging 302
4.2.3 Profitability 302
4.2.4 Tangibility of Assets 302
4.2.5 Size 303
4.2.6 Liquidity 303
4.2.7 Growth Opportunities 303
5 Results 304
5.1 Actual Sample Size and Heteroscedasticity 305
5.1.1 Univariate Analysis 305
5.1.2 Multivariate Analysis 305
Decision to Hedge 305
6 Conclusion 311
7 Policy Recommendations 312
Bibliography 313
Part VII: Financial Stability Risk Assessment in Mauritius 317
14: Developing a Financial Stability Model for Mauritius 318
1 Introduction 319
2 Literature Review 320
3 Data and Methodology 322
4 Analytical Parts: Discussion of FSSI Components 325
4.1 Bank of Mauritius Z-Score and Capital Ratio 325
4.2 Banking Sector: Mauritian Commercial Bank Ltd (MCB) 325
4.3 Exchange Market Pressure Index 327
4.4 Tourism Sector Stress Index 329
4.5 Payment System Stress Index 329
4.6 Balance of Payments Stress Indices 329
4.6.1 Current Account Deficit and External Debt 330
4.7 Government Debt Stress Index 330
4.8 Money Markets 331
4.8.1 Interbank Market Stress Indices 331
4.8.2 Bid–Cover Stress Index 332
4.8.3 TED Spread Stress Index 332
4.9 Monetary Policy Conditions 333
4.9.1 Monetary Conditions Index (MCI) Stress Index 333
4.9.2 Broad Money Multiplier Stress Index 334
4.9.3 Excess Cash Holding Stress Index 335
4.10 External Shocks 335
4.10.1 Net International Reserves Stress Index 335
4.10.2 Import Cover Stress Index 335
4.10.3 Oil Stress Index 335
4.10.4 Trade Finance Stress Index 336
4.11 Stock Market 336
4.11.1 SEMDEX Stress Index 336
4.11.2 Net Foreign Investments Stress Index 337
4.12 International Drivers of Mauritian GDP: A Cyclical Component Perspective 337
5 Results: Mauritius Financial System Stress Index (MFSSI) 338
5.1 Has the Crisis Altered the Earning Capacity Structures of Commercial Banks? 339
6 Conclusion 340
7 Policy Recommendations 342
Appendix 343
Bibliography 365
Part VIII: House Price Modelling in Mauritius 368
15: Determinants of House Prices in Mauritius: A Hedonic Price Model à la Quantile Bootstrapped Approach 369
1 Introduction 370
2 Literature Review 371
3 Data and Methodology 373
3.1 Valuation Methods 374
3.2 Econometric Model 375
3.2.1 Environmental Features 378
3.2.2 Intrinsic Features 379
3.2.3 Neighbourhood: Inside and Nearby Attributes 382
3.2.4 Owners’ Characteristics 384
3.3 Key Econometric Issues 385
3.3.1 Functional Form: Gauging on Non-linearities Via Concavity or Convexity Analysis 385
Semi-Log Model (Semi-Log Is Also Known as Log-Linear) 386
3.3.2 Multicollinearity 387
3.3.3 Identification and Exogeneity Issues 387
3.3.4 Spatial Econometrics 388
4 Results 388
4.1 Environmental Features 389
4.2 Intrinsic Features 389
4.3 Neighbourhood: Inside and Nearby Attributes 393
4.4 Owners’ Characteristics 394
4.5 Semi-Log Results 396
4.6 Chief Implications Drawn from the Study 397
5 Conclusion 399
6 Policy Recommendations 403
Appendix 404
Bibliography 416
Part IX: Stylised Facts and Vision for Mauritius 421
16: Stylized Facts About the Mauritian Economy 422
17: Author’s Vision for 2030 428
Bibliography 436
Index 456