Mauritius: Navigating the Global Financial Crisis

Published on 5th September 2011

Photo courtesy
The road ahead for the Mauritian economy will be quite challenging. The next two years are likely to be challenging for our major trading partner, Europe, and considering our existing structural weaknesses, we shall certainly face many a challenge on the growth front. The purpose of this article then is to identify key risks to the growth outlook and to propose solutions that may better prepare us for the dark clouds gathering ahead.

The general strategy in a world where the west is in decline, the often read propaganda is that Mauritius aims to become a bridge between Asia and Africa. The fact is that we today only offer financial services based on tax arbitrage with very little value added. We do not have a high enough pool of educated human capital with a mere 40% enrollment rate in tertiary education.

We lack the specifics on our vision. Too many kids are failing our school system and within the secondary school system, there is too much memorization. The system depends on parents sending their kids to expensive tuitions to pass exams. Our universities lack quality and funding. We do not teach our kids how to think out of the box and to ask questions.

You cannot create a good human capital pool with those ingredients. We need proper policies that encourage women to get a tertiary education. We do not have the money to invest in our education system because the government tries to do too many things that it cannot afford to do and ends up with a system that is under-funded across the board.

Concentrate on your priorities

Most Mauritians have no clue about Africa and even at the corporate level, our groups may be big enough for Mauritius but they need to build partnerships both domestically and internationally in order to compete in Africa, for the South Africans and the Nigerians are much better in the game of finance than we.

In Mauritius there are a few families that each controls some large groups for the domestic market. The time for family competition is over if they wish to gain in Africa. Mauritius must become a nation of investors and for this to happen, groups need to work together in order to build the economies of scale required to compete with the giants of Africa.

To give a recent example, a bank quoted a $100 dollars per transaction price tag for me in 2011. Only those who lack vision will think that the banking sector has a prosperous future based on fee income. Go to Africa today, go deal with African banks, see how competitive they are at the negotiating table and compare this with Mauritius. We are miles behind but yet I am sure that some think that we are ahead of Africa in finance. Just read a research paper on any Nigerian company from a local Nigerian broker and compare this research quality to that of a local broker, miles apart indeed.

We are not aggressive enough and if I can dare say, some training in finance cannot hurt anyone, even if they have big posts. As the local economy slows towards the upper 3% range (growth) over the coming year or two, revenues generated from value added tax shall suffer while income tax revenues shall plateau out. The clear cut policy on the fiscal side is to reduce subsidies that mostly go to the middle class while increasing targeted spending and explain to the middle class that the money saved from lower subsidies shall mostly go towards improving the inadequate tertiary system available in Mauritius.

There is too much pork barrel spending in Mauritius, so many schemes that do not achieve much but only sound nice on paper. It is high time to cut the pork and control the cost of the civil service. Mauritius cannot give free education, free healthcare, free buses to students and the elderly, free roads for cars to drive on, free parks with a 15% income and corporate tax rate.

Of course some policy makers realize this and now wish to indirectly introduce all sorts of indirect taxes such as green taxes. These shall obviously be aimed at the middle class. Do not subsidize them but do not tax them more. What is the point anyway if whatever benefit is generated from subsidies is taken away in the form of taxation? These are political gimmicks. Rather than advertise itself as a tax arbitrage heaven, I would have loved to see investors put money here because they believe in the story and because the staff over here is competent and can add value.

We need to shift our focus now, for as double taxation avoidance (DTA) treaties get renegotiated, our structural weaknesses shall come to the fore. If you have ever dealt with a parastatal company after 15:30 hours lately, you would have been hard pressed to get a good service or get anyone on the other line at all. Parastatal bodies have become hotbeds for politicians to place their men, giving them high salaries without necessarily looking at their competence. We all know that this is how the system works in Mauritius, and while this does not mean that all those who have been politically nominated are incompetent, if Mauritius wishes to compete in the world, it cannot continue with this backward system.

Government should concentrate on giving basic services to people; I fail to see why there are so many public companies especially when many of them are so inefficient in the first place. Mauritius thinks that it can remain a welfare state while being a low tax jurisdiction in the new normal. Time has changed and we need to evolve with it. We are however so complacent because of our past success that I fear that only a crisis may eventually force us to do the right thing.

I also wonder if the fact that we are an ageing population makes us so slow to move and makes us so lacking on the specifics of a vision front. When I deal with Indian businessmen, they are younger, more aggressive and quite specific about what they wish to do. In fact part of the frustration that has driven the Anna Hazare movement has been the fact that young India is not in sink with the old guard Babus who control the country.

Monetary policy

One of the main problems that I see with monetary policy in Mauritius today is this over-reliance on International Monetary Fund (IMF) growth forecasts. Since the beginning of this year, I have been one of the few that has been warning against the coming crisis. I do not understand what it is with some economists over here to simply base their assumptions on what the IMF says, but any meaningful reading of what the IMF has forecasted over the last decade at least would have been enough to make wise men check other sources as well. When I read some of those economic reports, I sometimes wonder, if all I will read is what I have already read in the IMF reports, what is the point of reading on anyway?

The Bank of Mauritius’ Monetary Policy Committee (MPC) statement of three months ago was full of IMF this and IMF that, and of course this was all wrong. The fact is that the US economy will be hard pressed to grow by more than 2% this year and the next as fiscal stimulus is rolled back and structural weaknesses come back to the fore. France, a major trading partner, is not growing at all, the United Kingdom has not seen growth for three consecutive quarters, Germany’s manufacturing sector is beginning to slow, the periphery region is in recession, and these economies depend so much on government spending as a percentage of GDP that austerity will negatively impact on growth and still leave a high debt to GDP ratio.

China is showing signs of weakness, especially in exports and labour costs have been rising steadily due to second round inflationary effects. India may have seen some better than expected industrial data recently but there is no way that the government target of 8.2% growth will be met this fiscal year.

This is why for months now I have been stressing the fact that growth was more important than inflation as the latter would be transitory in nature in a slowing global economy and last I checked, commodity prices have certainly peaked off already. Now I do not expect a collapse of commodity prices from current levels, for monetary policy in the west remains quite inflationary and the risk of another quantitative easing (QE) is still moderately high, but clearly the balance of risk has always remained on the growth side.

The problem with monetary policy is that in order to set an appropriate rate that aims to calm second round effects, forecasts on which policy is based on must be accurate. An economist does not just copy and paste what the IMF says in a research document but must analyze different sources and propose an educated opinion based on his/her training.

The Bank of Mauritius (BoM) has a team of competent economists and I am sure that they can do better than just telling me what I have already read in an IMF Article 4 report or global outlook report. We should not view the IMF forecasts as the world of God. It is hence important to diversify our sources when formulating policy based on forecasts. We also need to strengthen our statistical gathering capabilities at the local level. In the rest of the world there are statistics on every segment of the economy, and all of this is released weekly and monthly.

In Mauritius, despite our small size, this is simply not done. For example, the BoM has often talked about a recovery in the export sector basing their conclusions on the Central Statistics Office figures. Leaving the methodology aside, one must understand that these figures have been influenced by higher input costs and more importantly that the industry itself is highly vulnerable to last minute cancellations. If there is one thing in Europe that is not doing well these days, it is the retail sector. As governments are spending there, consumers are not picking up the left over slack.

While many may be complaining about the Rupee, at the end of the day, the MUR/USD rate is tracking the EUR/USD chart quite closely and things have been stable so far. I have a very negative outlook on the euro although I expect the euro to weaken only gradually over the next three years. I always say that if you are bearish on Europe, you cannot be bullish on Mauritius and the chart below is but proof of that obvious relationship.

If I were advising the Governor or the MPC as an economist, I would not be recommending any further tightening, and besides I do not really understand what normalization means when economies are ever changing in different states. Inflation will moderate slowly but surely and will get back to the comfort zone sometime by the middle of next year while growth shall remain a concern when compared to potential output. The risk to this outlook would be a QE3, but there is tremendous division within the Federal Reserve for that and QE2 has done precious little to stimulate the US economy.

I would also recommend that, rather than constantly have interbank rates and the bank rate play around below the lower band of the repo corridor, a more flexible corridor be set by the MPC. It is not uncommon for some central banks that operate in systems with structural excess liquidity to set both repo and reverse repo rates. Furthermore any rule to limit bank holdings of government bonds to 16% does not make any sense to me, for if there is no demand at the local level for loans and if banks’ credit risk departments do not feel comfortable in giving out those loans, we should leave such things to the private sector.

We should certainly let the private sector do its own thing, so to speak, for they are in the business of making profits and if they are not lending, it must be for a good reason. You cannot keep on lending to the same old sectors over and over again.

To be continued.

By Sameer Sharma, a chartered alternative investment analyst and a certified financial risk manager, is the Head of International Funds at IPRO Fund Management.

Courtesy: Conjoncture.

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