A resort in Mauritius                            Photo courtesy

With tourist arrival figure looking up despite the global slowdown, you may wonder why major hotel groups are complaining so much about the lack of air access. There is certainly a lot of lobbying that is being done via the media, and unfortunately there are a lot of misconceptions out there.

In 2006, major hotel groups thought it wise to expand in far off places such as Morocco and Maldives, and to build at the local level more four and five star hotels. Maldives was perhaps not such a bad idea, but Morocco has so far been another story.

Those who approved such projects had unfortunately not realized how the world was changing and that recession was just around the corner. Our hotels entered the global recession of 2008 highly leveraged and suffered for it. It is too simplistic to blame the lack of air access on Air Mauritius, for it cannot run losses to please hotel groups when the supply of rooms has been exceeding demand in recent years.

Furthermore, was the idea to concentrate on the 4-5 star segments the right thing to do when consumers in a slowing global economy are seeking value? Why do so many hotels put prices in euro on the menu? Is this good marketing to make the Frenchmen understand how expensive our product really is? Has the tourism authority branded Mauritius properly if we are not getting the right kind of tourists?

The fact also is that only around 45-50% of all tourists who come to Mauritius as per the statistics actually go to our 4-5 star hotels. The rest go to the 3 star segments or rent out bungalows. Mauritians who live abroad and visit the island stay with their relatives.

Two of the three major hotel groups are entering the current global economic slowdown with high debt levels and low interest coverage ratios. Many are at the mercy of tour operators, in fact the entire industry is.

Right now, large groups are engaged in a discounting war and are killing each other off in terms of bottom line. The coming high season is a make it or break it for the hotel sector, for the occupancy ratios of these newly built or renovated 4-5 star hotels cannot stay at current levels forever.

When I talk about vision, it is clear that when one looks at the supply and demand dynamics of the industry, we did not have any. Mauritius is an expensive destination and has lost its competitive edge. We need to shift towards niche segments of the travel industry and remember Indians like to party, but right now our hotels encourage them to sleep at 12 a.m.

Chinese tourists are not like Europeans: they do not like to sun bathe, for dark skin is not well respected there. Asians like to drink and gamble, and yes some travel to such exotic places as Thailand, Bali, the Maldives for women too. Do we offer this? The demographics of Europe are not the same as that of Asia, and this changes the product demand entirely. There is barely any great nightlife in Mauritius and Asians, I assure you, have found and will find the island beautiful but expensive and boring.

The real estate sector

Back in 2006, the former Finance Minister did something quite intelligent by taxing interest earned on deposits as this forced a lot of money out of fixed deposits into alternative asset classes. Money flowed into equities and into real estate. Negative real interest rates also helped matters further. The Mauritian Diaspora and South Africans were also encouraged to invest in real estate. Real estate prices increased, land prices doubled in certain areas while the stock market soared to new heights. For those who had money, there was a positive wealth effect that was obviously not sustainable.

Around that time I started to write about how rental yields in the commercial real estate sector were quite low when compared to the 10-year government bond yield and that valuations were over optimistic. Back then, I received many emails from so called experts who tried to convince me that Mauritius being a small island, the arrival of a mere 10 to 15 companies would be enough to make projects profitable. Boy, were they wrong! Returns realized in the commercial real estate space have been well below expectations.

Then the sugar companies decided to get in on the fun after coming off their Integrated Resort Scheme building high. They were not making much selling sugar but had a lot of land. The shopping paradise concept was always a dumb idea and was heavily promoted then. Again I warned about the valuations and that we would not have so many tourists visit so many of the malls that were planned. I also mentioned that Mauritius did not have the economies of scale to compete as a shopping paradise, and that valuations were again too optimistic. Today I hear of many complaints from tenants, some shopping malls are converting themselves into office buildings while others are under water.

Some have argued that land prices around the shopping mall may go up in value and hence the developer may still make money. I would not disagree assuming that there will be so many Mauritians and foreigners who will still be buying land. I highly doubt that expected returns shall be realized. I maintain that large scale shopping malls will face pressure on margins and that the tenants will be the worst victims when they start losing money. This shopping paradise model is better left in the drawer and forgotten, for it shall turn out to be a shopping hell.

The local stock exchange

If one were to look at the prowess of the Mauritian stock market compared to various global indices, one would perhaps subscribe to the advertised notion that Mauritius is faring reasonably well in uncertain times. Indeed, the local market may be in negative territory year to date, but it is not like it has crashed or anything! All is well in paradise. Of course, the story is slightly more complicated than the headlines and that some may find disconcerting.

Still today, 100 shares can make many a stock price move substantially. It amazes me when if stock X has fallen throughout the whole day, someone can simply put a 100 share order at the last minute and make the price go up so substantially or noticeably in 2011. It certainly smells funny sometimes and if you like I have your retirement money in this market, we do need to raise our voice and ask for better.

Transaction costs in this market are too high, and these create a buy and hold mentality by large institutions and allow such sad things as 100 shares to move many stock prices noticeably higher or lower. While I am personally happy for the Stock Exchange of Mauritius (SEM) wanting to become an international platform, one must get the local market to become more liquid and efficient first. Transaction costs in Asia, Europe and the United States are close to zero today while they stand at 1.25% per transaction in Mauritius (the Financial Services Commission, the Central Depository System and the SEM take a big commission out of this total pie). Market makers and low transaction costs go together, and yes this is one of the reasons why the derivatives market never took off here.

Now some institutions are able to get brokers to discount from their share of the 1.25% commission, bringing the transaction cost to around 75 to 90 basis points (bps) per trade, but even this is still comparable to African markets such as Ghana (80bps), Kenya (90bps), Nigeria (90bps), Morocco (60bps) and Egypt (35bps). The average Mauritian on his part pays a higher fee as mentioned above and in African terms pays slightly less than what he would have paid if he were hailing from Cote d’Ivoire (150bps). Certainly, we can do better than the above if we aim to become “the next Singapore.”

There are in my view two main problems with the SEMDEX (the index) today. First, it is not replicable easily if you are a large institution, for many stocks that form part of it are too illiquid. Second, the index itself is too concentrated with the largest 5 stocks making up a vast chunk of the entire market cap. Concentration and liquidity risk are quite high although I seldom hear anyone too concerned about it.

What I find frustrating about the Mauritian stock exchange is that I never hear it talk about how it will make the local market more efficient and transparent, how it will strive to improve liquidity, how it will lower those high transaction costs in line with global standards. There was a foreign IPO recently in the market that was only able to raise half of what was expected. Of course, if IPOs fail, it can also be due to the company itself, but if this is the vision of an international platform, then I can only wish our country good luck.

Conclusion

I have always found it interesting how so many people shared my views but did not like sharing it in public or are scared to do so. If the system is bad, I see no reason why we cannot openly talk about it and propose alternatives. If Mauritius is to move forward, then we need to encourage greater debate and be more open to criticism.

Mauritius needs to get its act together in order to compete with the world, for times have changed now. Just like in India, I sometimes get the sense that the old guard is content and never wishes to rock the boat until things get nasty, and since so far nothing really nasty has happened, they let things go. Not wanting to move forward will not be enough anymore if we wish to be a prosperous nation. I will be one of the few to perhaps say it so consistently, but 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. Mauritius as a paradise is a myth if you meet the thousands of struggling families at the end of every month waiting for their salaries to come in. Paradise is a myth when you see low volume driven inertia in the stock market.

Paradise is a myth when you see so many dreaming about making it to the big times by gambling and playing the lotto. And yes paradise is certainly a myth when fees charged by the financial services sector are so uncompetitive in the global scheme of things. Let us not kid ourselves by hiding behind DTAs and our status as a low tax jurisdiction, for we are worth more than this. We need to change and fast. Our companies need to get together and form domestic partnerships at the local level, assemble the best possible team locally and move towards Africa and India. Foreign partnerships too must be aggressively considered.

Africa is home to 60% of the world’s arable land, and Sub Saharan Africa shall be the only region in the world that shall accelerate in terms of growth over the next three years. Africa offers tremendous opportunities in the consumer space, in agriculture and in the financial sector. Mauritius needs to become a nation of investors, and we need to add alpha, not just beta at alpha prices.

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