REVIEW OF DEVELOPMENTS IN MAURITIUS
The economy in 2014: Resilient but slightly below potential
Even though 2013 had ended on an unpredictable note amidst widespread uncertainties impinging on business sentiments, most analysts had predicted that 2014 would be a relatively better year in terms of growth and economic climate – in Mauritius and elsewhere. As it turned out, the much-awaited recovery has proved to be rather uneven globally and below expectations, especially in Mauritius’ main trading partner economies. Worse, economic recovery has not materialized in the ailing Euro area despite signs in late 2013 that panic was beginning to subside.
The impact effect on the Mauritius economy is visible: output will remain slightly below potential yet again in 2014. The real GDP growth rate of 4.0% expected by policymakers at the time of the budget presentation in November 2013 would most probably level down to around 3.5% by end 2014 according to Statistics Mauritius. Whilst this is below expectations, however, it appears to be more encouraging than in 2012 (3.4%) and 2013 (3.2%).
Indeed, despite the smouldering economic landscape of the Euro zone, the economy of Mauritius has remained relatively resilient. It has successfully stayed away from recession over the years due to a combination of effective policy responses and stimuli in various forms, and at various levels, to support the local economy. Most macroeconomic fundamentals have fared relatively well. No banks or major companies have closed down since 2008 as a result of the global meltdown. In both 2013 and 2014, all key economic sectors have acted as engines of growth except the construction sector.
“In both 2013 and 2014, all key economic sectors have acted as engines of growth except Construction.”
The economy remains open and business friendly, with a transparent and predictable investment regime. International trade in goods and services represents some 115% of GDP and has remained a key contributor to the performance of the domestic economy. Mauritius is also classified by UNDP as a high human development country with a relatively high standard of living. In terms of governance, public-sector management, political stability, competitiveness and some other notable indicators, it has consistently ranked Number One in Africa during the past few years. In the World Economic Forum’s (WEF) Global Competitiveness Report 2014-2015 released in September 2014, for instance, Mauritius has moved up six positions to 39th place and consolidated its lead in the region, surpassing South Africa by a solid 17 places.
“Despite the smouldering economic landscape of the Euro zone, the economy of Mauritius has remained relatively resilient.”
Other achievements in 2014 include: a reduction in the unemployment rate from 8.0% to 7.8%; an inflation rate contained at 2.8%; a reduction in the budget deficit to 3.2% (down from 3.5 % in 2013); rising FDI (some USD 260m in the first semester of 2014 alone) but also rising outbound FDI (reaching USD 137 m in 2013); a slight improvement in the current account deficit; and continued accumulation of foreign exchange reserves.
Caveats: No place for complacency
Against this backdrop, the Bank believes the authorities still need to step up efforts to strengthen the basic requirements for long-run sustained economic growth. This entails the pursuit of the reform agenda, which appears to have stalled. Economic issues that need to be addressed include labour market reforms, fiscal consolidation, an ageing population, efficiency of state-owned enterprises, sustainability of the social protection system, income inequality and, most importantly, the development of knowledge-intensive sectors.
Regarding the latter, the Bank views it a priority to speed up the transition from an efficiency-driven to an innovation-driven economy. Mauritius lags behind in terms of innovation as depicted in the Exhibit below. Whilst the key driver to a high-income economy remains the capacity of the country to innovate, Mauritius ranks deceptively low in key innovation indicators of the WEF (91st, 93rd, and 101st out of 144 countries in Quality of scientific research institutions, Availability of scientists and engineers, and university industry collaboration in R&D respectively.)
Figure 1: Stage of development, Mauritius v/s Sub-Saharan Africa
Source: The Global Competitiveness Report 2014-2015, World Economic Forum
Other major economic issues requiring immediate attention include the falling investment rate and the all-time low savings rate; continued depression in the construction sector; excess liquidity in the financial system; loss of competitiveness of key economic sectors; and the problem of youth unemployment.
Performance of key economic sectors: All positive except construction
GDP at basic prices is expected to grow by 3.5% in 2014, which is about a percentage point lower than what was predicted at the beginning of the year. This performance has been achieved against the backdrop of subdued demand in Mauritius’ key trading partner countries and recession in the Euro zone. As in 2013, all keys sectors have contributed positively to the growth of the economy, except construction.
Figure 2: Annual growth rate (%) by industry, 2014
Figure 3: Contribution to GDP growth, 2014
Source: National Accounts Estimates, Statistics Mauritius (September 2014 issue)
The leading contributors to GDP growth in 2014 are expected to be ‘Financial and insurance activities’ (0.5%) and ‘Wholesale et al’(0.4%).
“Manufacturing”, “ICT”, “Professional, scientific and technical activities” and “Human health and social work activities” are to contribute 0.3% each to GDP. “Construction” sector on the other hand, with a contraction of 6.7%, is expected to take a toll on GDP with a negative contribution of 0.4% to GDP.
Status of exports: Slow diversification away from EU into Asia and Africa
Since the beginning of the financial crisis in 2008, emphasis in Mauritius has been on reducing the dependence of Mauritius on its traditional trading partners such as UK and the euro area. Successive Government budgets have sought to provide assistance to encourage enterprises to diversify away from EU and into the Asian and African markets. As depicted in the Exhibit below, the share of exports to the EU has fallen from 64.4% in 2007 to 57% in 2013. This is expected to reach around 52% in 2014. In parallel, exports to Asia have increased to 10.5% in 2013, up from only 4% in 2007, thus suggesting that incentives such as additional flights to Asia and targeted assistance to exporting enterprises may have played a role to diversify the export base.
“The share of exports to the EU has decreased from 64.4% in 2007 to an expected 52% in 2014.”
Figure 4: Directions of Merchandise Trade: Exports (f.o.b) in 2007
Total: US$ 2.2 bn
Figure 4: Directions of Merchandise Trade: Exports (f.o.b) in 2013
Total: US$ 2.3bn
Source: Trade Policy Review, World Trade Organisation, September 2014
Importance of RTAs and economic diplomacy for Mauritius
Whilst the interaction with Asian markets has been positive, trade with regional countries and Africa has remained erratic over the years and slow to pick up despite the substantial network of IPPAs and DTA Agreements with African countries. The share of Africa in total exports has increased marginally from 11.2% to 18.3% between 2007 and 2013. Exports to South Africa have declined significantly due to the depreciation of the Rand. Between the first semester of 2013 and 2014, the value of exports to South Africa has fallen by 11%. On the other hand, merchandise trade to the United States is expected to increase further following the recent successful extension of trade preferences under AGOA.
The authorities have now signified their intention to be more aggressive to capitalize on Mauritius’ impressive network of regional trade agreements (RTAs) to boost trade with regional trade blocs and Africa in general. Mauritius forms part of the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC), the Indian Ocean Commission and the Indian Ocean Rim Association for Regional Cooperation. The network of RTAs currently comprises 6 agreements with a total of 24 trading partners. Almost all tariff lines are covered, except in the case of Pakistan whose agreement is rather limited in scope.
The 24 trading partners are: Burundi, Comoros, Djibouti, Egypt, Kenya, Libya Arab Jamahiriya, Rwanda, South Sudan, Madagascar, Seychelles, Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe, Turkey, European Union and Pakistan. As to the 40 IPPAs which have been signed so far, 17 of them have yet to come into force. 37 out of the 54 DTA Agreements are already in force.
The performance of the import and export sectors relative to each of the 6 agreements is summarized in the table below. It reveals the heavy dependence of Mauritius on the treaty with EU even though this has adopted a declining trend in recent years.
“The network of RTAs currently comprises 6 agreements with a total of 24 trading partners.”
|Mauritius’ merchandise trade arising out of its six regional trade agreements in 2013|
|Merchandise trade with:||Exports as a % of total exports||Imports as a % of total imports|
|1. COMESA member states||8.8%*||3.3%|
|2. SADC member states||9.0%||7.2%|
|4. European Union (28 countries)||57.0%||22.3%|
*Monthly to Madagascar
DTA Agreements with India under threat…yet again
FDI: Even more critical
FDI flows have been playing a decisive role in recent years to compensate for declining domestic investments and to finance the ballooning current account deficit. The exhibit below shows the evolution of FDI during the past seven years.
Figure 5: Foreign Direct Investment (FDI) flows (2007-2013)
|2007||2008||2009||2010||2011a||2012a||2013b||Share of total in 2013 (%)|
|Total FDI in Mauritius (USD million) By sector||367.0||402.6||275.3||451.5||448.5||680.7||310.3||100.0|
|Real estate activities||121.8||159.5||134.8||110.8||182.1||252.4||193.2||62.3|
|of which - IRS/RES/HISc||89.0||93.0||64.9||65.8||116.6||141.3||149.9||48.3|
|Financial and insurance activities||129.3||160.9||42.9||150.4||68.6||184.2||23.4||7.5|
|Agriculture, forestry and fishing||0.6||15.8||0.0||0.0||7.5||4.2||22.1||7.1|
|Wholesale and retail trade; repair of motor vehicles and||1.2||3.6||9.1||4.0||20.9||24.8||10.7||3.4|
Source: Trade Policy Review, World Trade Organisation (September 2014)
The results in 2014 are expected to be better than 2013 given that FDI flows have already exceeded USD 260m in the first semester. Most investments originated from France and South Africa. Of particular interest is the reduction of FDI from China, probably due to the completion of a number of major infrastructure projects. As in previous years, the real estate sector has remained the biggest recipient of FDI, accounting for some 40% of the total - USD 106m, 65% of which has been directed to Integrated Resort Scheme (IRS) projects.
It is also noteworthy that the new trend of outbound FDI seems to be gaining momentum. During the first semester of 2014, it has increased to some USD 330m (up from USD 222m during the same period in 2013). Over 40% of outbound FDI went to the African region, mostly to Kenya and Madagascar, and in specific sectors such as accommodation and food services, financial services, and real estate.
“FDI flows have been playing a decisive role in recent years to compensate for declining domestic investments and to finance the ballooning current account deficit.”
Banking sector health check and monetary developments
Using the Financial Soundness Indicators (FSI) as a tool to assess the health of the banking sector, the IMF concluded in its Article IV 2014 Report that “the Mauritian banking system is healthy at the aggregate level,” with a capital adequacy ratio well above the regulatory minimum of 10%. The overall liquidity ratio increased from 17% to 20% between end-2012 and June 2013 but the IMF notes that this has not fully recovered to the pre-crisis level (2008 and 2009). The analysis also demonstrates that the decrease in liquidity was caused mainly by the global business (Segment B) sector while the onshore (Segment A) sector managed to maintain its liquidity ratio.
Figure 6: Mauritius - Financial Soundness Indicators
Source: 2014 Article IV Consultation – Staff Report, IMF Country Report No. 14/107, May 2014
“The Bank of Mauritius has announced that, from now onwards, it intends to adopt a formal inflation-targeting approach.”
Excess liquidity in the financial system
For several years, the financial system has remained plagued with excess liquidity, which amounted to MUR 10.9bn in September 2014, slightly down from a high of MUR 11.8bn six months earlier. It is feared that this problem of excess liquidity may have been undermining the monetary policy transmission mechanism, thus thwarting the effectiveness of monetary policy. In response, the Bank of Mauritius and the Ministry of Finance and Economic Development (MoFED) have publicly announced their intention to curtail the problem by inter alia “preparing a Memorandum of Understanding to set an inflation target while reining in excess liquidity.” The Bank of Mauritius has announced that, from now onwards, it intends to adopt a formal inflation-targeting approach.
Figure 7: Excess Cash Holdings by Banks in Mauritius (Rs million)
Source: 2014 Article IV Consultation – Staff Report, IMF Country Report No. 14/107, May 2014
Another bold move was undertaken in July 2014 when the Government issued a 5 year Savings Bond for MUR 2bn at a coupon rate of 6 percent per annum – much higher than prevailing savings deposit rates - targeted towards individual investors. Sometime later, Government further issued 3-year Savings Notes for an amount of MUR 2bn at a coupon rate of 5.25% per annum. Other measures taken to mop up excess liquidity in the system include: hiking of the fortnightly average CRR from 8% to 9% as well as the daily minimum CRR from 5.5% to 6.5%.
The path to high-income status
Mauritius is an upper-middle income country aspiring to reach high income status in the next six years. The Bank commends this new ambition of the country as well as its renewed cooperation with the World Bank Group to attain this goal.
Figure 8: The road to a high-income economy
GNI per Capita (USS) closer to high income threshold but widening distance with high income countries
Our ambition to raise the status of Mauritius to a high-income country and the current income per capita from USD 9,900 to USD 12,700 would require much higher growth path, from the current 3.5% - 4% to 5.5% - 6.0%. This can only be achieved if we embark on a new set of bold reforms to address the structural weakness of our economy so as to foster growth.
As depicted below, the IMF has slashed its growth forecasts for Mauritius to some 4% annually until 2019, which is largely insufficient to meet the aspirations of the business community and the population in general. The pursuit of a new and bold reform agenda coupled with new strategic direction for the economy could change the paradigm altogether and lead Mauritius to a high-income economy earlier than planned.
Figure 9: Macroeconomic projections, 2006-2019
Source: Article IV Consultation – Staff Report, May 2014