For the thousands of Mauritian families who wish to see their children leave the country and work abroad in England, Australia or in Canada one day, it seldom occurs to them to think that ours is an already ageing country with a birthrate that has already fallen to 1.5 children per family versus the 6 children of a few decades ago. Indeed calling for greater immigration at a time when youth unemployment is still high may sound counter intuitive.

Mauritius is slowly but surely getting greyer, and if simple forward looking simulations done by the International Monetary Fund are to be believed, our population will decline by thirty percent by the end of this century with the demographic challenge accelerating post 2020. This demographic time bomb, if not reversed, will likely result in fewer working age adults contributing more of their incomes towards various pension schemes to finance those who are retiring, and a retirement age which will eventually need to be indexed to life expectancy. With the dependency ratio expected to deteriorate over time, savings and investments will also face rising challenges leading to growth sustainability issues.

The Basic Retirement Pension (BRP) is funded from government funds, but the National Pension Fund (NPF) from assets that are invested. Falling domestic long term bond yields, which in itself leads to a higher net present value of future liabilities, will impact on the NPF and on all private schemes.

A dynamic strategic asset allocation framework for pensions

There are two ways in which one can better match assets to liabilities in finance. One can try to constrain the growth in future liabilities by improving the demographics or by increasing the cost to those who are contributing and by extending the time it takes to receive the payoff. This is where the linking of the retirement age to life expectancy comes into play, enhancing the returns on the asset side in real terms over time by a more modern and dynamic strategic asset allocation framework for pensions which are linked to market performance.

While it remains important for all pension schemes in Mauritius to be linked to market performance over time to a certain degree at least, the current state of the domestic capital markets and the lack of large scale liquid foreign exchange hedging instruments versus the Mauritian Rupee create limitations when it comes to international diversification. One must also understand that since pension funds typically have a heavy bond portfolio, lower bond yields will lead to lower returns over time as the old bonds mature and are replaced.

On the international front, global bond markets have a modest outlook at best unless one goes down the credit curve while global equities, especially those of Japan and Europe, whilst still favourable over time, are likely to face more drawdown risk in an environment where the US Federal Reserve begins to hike interest rates late this year or early next year. Over time, there is no doubt that one must take more risk to match rising liabilities and use derivatives such as dollar strategies on equities to limit “la casse” in bad times. Liability driven investing requires a skills set which remains lacking especially for international portfolios domestically, and the relative small size in US dollar terms does create limitations in attracting the interest of large scale managers with segregated versus pooled mandates (which are more basic).

Domestic equities have their limitations, and corporate results, when adjusted for fair value gains on property and land revaluations, are not stellar. While banks appear to be relatively cheap compared to other sectors of the Mauritian market, one can only hold so much of them in a diversification context. On the real estate side in Mauritius, oversupply in office space has led to unattractive rental yields relative to the cost of debt (negative carry). Basically a modern strategic asset allocation framework that is more dynamic can certainly help improve returns, but it will not be a magic wand. One should not expect the same returns on local equities and domestic bonds as was witnessed between 2006 and 2012 anymore.

On the liabilities side, it may be politically difficult to go for a targeting approach to the BRP, for example focusing more on the poor or even indexing retirement to life expectancy. Then beyond the pension problem which we will face in the coming decades, it is quite clear to any businessman, large or small, that the domestic market for almost anything is quite saturated. Costs are rising slowly but surely every year, but revenue growth remains dampened because the 1.2 million individuals of this country are already consuming all they can. We need more scale in Mauritius, we need more people. Countries with deteriorating demographic trends do not tend to do well at a time when we need to compete with the rest of the world for exports.

Take construction as an example. If I were to tell you to invest in housing in a country where housing ownership is already close to 90% and where the population is ageing, you probably would move somewhere else. Maybe that is why the construction sector is in recession? Too many projects chasing too few people at still high prices?

Then there is the problem that we do not like to talk about. Even with the average of 1.5 children per family in Mauritius, which is quite weak, the distribution is skewed, that is, the number of children per family can be broken down in terms of income distribution and even race and religion in Mauritius. The problem is that many of the fewer adults which we will be having will be coming from increasingly disadvantaged backgrounds, a challenge for this value added economy we plan to create, and yes, we certainly need to move towards more targeted spending in Mauritius when it comes to education.

A modern well targeted immigration policy

Mauritius needs to perhaps genuinely consider its immigration policy. I am not talking about getting a few rich foreigners looking to park their money over here by buying a real estate under the Integrated Resorts Scheme or the Real Estate Scheme and obtaining a residence permit, for we have seen that the people, when it comes to consumption, do not add much beyond the initial foreign direct investment. I am talking about a framework that all ageing countries must consider, a modern well targeted immigration policy that focuses on replenishing the Mauritian population in areas where we lack skills.

We want to build smart cities, and hence we will need more people, considering the local demand constraints and already high house ownership. While it is true that Mauritius has gradually relaxed rules for skilled labour to come here, the rules remain too restrictive, and there is no reason why we, who tend to immigrate out to seek citizenship elsewhere, cannot allow those who come here and work here to seek the same. Of course, we need to formulate a well-targeted immigration policy. If tomorrow IBM wants to come to Mauritius as an example, they will ask you: “I need 300 IT engineers, do you have them in the skill set I need?” The answer will be no, we do not have them in the quantum.

We genuinely have a lack of skilled labour in certain sectors, and one of the many reasons why we have youth unemployment is skills mismatches. At least when getting companies here and relaxing immigration rules further, we could focus on attracting young innovative and skilled labour and companies which may also hire a certain percentage of the native population. Yes there will be issues, and people will complain that the foreigners are taking the big posts and so on, but then again these issues pale in comparison to the status quo, a demographic time bomb and a saturated market. As Mauritius ages, it faces the risk of being increasingly less innovative, which is certainly the last thing we need right now.

We want small and medium enterprises to grow, but their market is too small, and before they can even dream of moving abroad, they need to have a certain degree of scalability domestically. Mauritius is also an interesting country to live in. Meet a small business owner, and he likely has two things in common with another business owner, a BMW and big salary accompanied by a nice overdraft facility. Yes I am generalizing somewhat, but the reality of cost increases leading to margin compression is real when you talk to most businesses here.

One way or another, Mauritius needs many times its population to grow. Just drive around Grand Baie at night or Flic en Flac, it is dead everywhere most of the week. Restaurants are empty, and prices are rising even in euro terms! Mauritius, like it or not, will have no choice but to open up its doors as it did a century and a half ago, or else risks remaining too small to achieve anything tangible as an African hub in this new world order.

By Sameer K Sharma

The author is a chartered alternative investment analyst and a certified financial risk manager. This article reflects solely the personal views of the author.

Courtesy: Conjoncture, a Bilingual Journal of Pruliconseil