Mauritius will offer banks a credit line in euros and dollars to protect exporters and its financial system should the euro area crisis escalate, the island state's central bank governor said on Saturday. Institutions like the African Development Bank have been urging policymakers on the continent to rebuild buffers that were run down after the 2008/09 global financial crisis in order to withstand shocks from the crisis in the euro zone.
Bank Governor Rundheersing Bheenick said the crisis had already affected the $10-billion-a-year economy, after the rupee firmed against the euro, potentially having an impact on exporters and the vital tourism industry. The governor said a sharp weakening of the euro was affecting firms in the export sector, meaning non-performing loans could rise if the euro zone crisis lasted another two-to-three years.
The central bank is offering a line of credit in foreign currency denominated in either the euro or the dollar to allow export enterprises to refinance debt where charges become unbearable, Bheenick told Reuters by telephone. "Where there is an exchange rate risk, the line of credit through commercial banks could also go for refinancing of existing debt and also restructuring of debts," he said. "If we have major corporate failures this could spread throughout the banking system. We don't want to take any risks."
Bheenick did not say how much would be available to the banks through the credit line. He said foreign exchange reserves had declined slightly over the past month to 4.5 months' worth of import cover from 4.6 months' worth, adding the bank wanted to rebuild them to 6 months' worth, in line with regional guidelines. The Indian Ocean island nation is a member of the Southern Africa Development Community (SADC) trade bloc. The central banker said the estimated overvaluation of the rupee had increased over the last two quarters but it was still mild.
"Faced with the declining reserve cover, we also have some concerns over the appreciation of the domestic currency although it is not too worrying," he said. "We will go to the market to see how much we can mop up. The intention is to have a prudent reserve cover while combating unwarranted appreciation of the rupee. It is getting slightly out of line now."
The rupee was 2.6 percent stronger than the euro in the year to date, trading at 36.98/37.36 on Friday, after hitting 35.59 on May 31, a level it last traded close to on 31 December 2005, when it traded at 35.44. Bheenick said some $900 million were required in order to raise the foreign exchange reserves to six months worth of import cover. Mauritius is diversifying its economy away from the sugar, textiles and tourism sectors into offshore banking, business outsourcing, luxury real estate and medical tourism.
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