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Country Report Mauritius

Country Report

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Subdued external demand from Europe is taking its toll on Mauritius´ economic performance, but it did not hinder the government in finding the room for significant fiscal consolidation.

Strengths and weaknesses

Strengths

Stable democracy

The strong democratic institutions, the well-developed multi-party system and the high level of social development make Mauritius a politically and socially stable country, forming  a solid basis for sustaining sound relations with international partners and for attracting foreign funds.

High adaptive capacity, supported by a strong reform track record

Mauritius’ reform drive has transformed the country into one of the most attractive business environments in Africa and diversified the economy away from its single-crop (sugar) agricultural basis. The inclination to reform should help Mauritius to continue to adjust to global circumstances and keep attracting foreign investors.

Weaknesses

Very open and interconnected economy is vulnerable to external developments

The importance of exports (53% of GDP) and the high dependency on imports of fuel and food make Mauritius very vulnerable to global events. The structural current account deficit is mainly financed from easily reversible capital flows, rendering Mauritius vulnerable to changes in market sentiment. Furthermore, a part of these flows is related to offshore activities, which could be affected by an alteration of the current network of double tax avoidance treaties.

Narrow export base

Though Mauritius has a relatively diversified economy, traditional sectors make up for more than 60% of merchandise exports, while service exports are dominated by tourism (45% of  service exports). Given the large share of exports, developments in these sectors have a significant impact on the overall Mauritian economy. 

Key developments

1. Economic growth fairly resilient to sluggish European demand amid diversification

Economic growth slowed to 3.3% in 2012, from 3.6% in 2011, as the economic woes in Europe continued to weigh on the economic performance of Mauritius. The share of exports destined for Europe has decreased significantly in recent years, but still accounts for more than two thirds of Mauritian merchandise exports and of tourism receipts. The external balance is often a growth driver as exports usually exceed imports (see figure 1). Export growth slowed in 2012 to 4.2% yoy from 4.7% in 2011 (in nominal terms the slowdown was dramatic; from 18% to 4%), and is expected to reach only 2.4% in 2013. The government's efforts to diversify towards other markets is paying out, but not fast enough to uphold growth. This development can be seen in the tourism sector. The number of tourists grew by only 1% and economic output in the sector stagnated, but this can be considered a good performance given the 8% drop in arrivals from Europe. This was compensated by an upsurge in arrivals from emerging markets. The Mauritian government has also focused on diversifying towards a knowledge based economy to reduce dependency on traditional sectors. The results are starting to show, as in 2012 growth was driven by increased economic output in the financial and the ICT sectors, while traditional sectors either contracted or stagnated. Last but not least, lower inflationary pressures has allowed the vigilant Bank of Mauritius to adopt a moderately accommodative monetary stance to support growth. Looking forward, the bleak perspectives for Europe will keep dragging on economic growth in 2013, expected to come in at 3.2%, while in the medium term a global recovery should support annual growth rates of around 4%. Data available for 2013 is supportive of the forecast: tourist arrivals grew a mere 1.5% in the first quarter, diverting away from Europe and exports slowed down. Fortunately, some room was found for monetary stimulus in the first half of 2013, though limited.

Figure 1: Economic growth decomposition
Figure 1: Economic growth decompositionSource: EIU
Figure 2: Significant fiscal consolidation
Figure 2: Significant fiscal consolidationSource: EIU

2. Consolidation during challenging times reinforces commitment to sound fiscal management

After expansionary fiscal policy helped cushion the impact of the financial crisis and subdued demand from the European market, Mauritius managed to consolidate its government finances in 2012. The fiscal deficit was roughly halved from 3.2% of GDP in 2011 to 1.8% of GDP in 2012. Furthermore, the Mauritian government thereby outperformed its own budget deficit forecast of 3.8% of GDP for 2012. The good performance was driven by a reduction in subsidies and transfers, as well as government consumption. It was positive that capital expenditure, which grew by 21% yoy, was not affected, as this is needed to tackle current bottlenecks in the economy. The budget for 2013 aims to strike a balance between sustaining economic growth and sound macroeconomic management and is projected to run a deficit of 2.3% of GDP, a marginal increase caused by higher capital spending and the wage bill raise implemented in January 2013. Considering the fairly elevated level of the public debt, at 58% of GDP in 2012, the commitment to fiscal consolidation is reassuring. The favorable debt structure, characterized by a low share of short term debt (18%), a high share of domestic debt (82%, while 24% is held by the fully funded National Pension Fund) and mainly concessional external debt, provides some comfort. Nevertheless, disappointing fiscal metrics could affect investor confidence and Mauritius should thus maintain its goal to reduce public debt down to its statutory target of maximum 50% of GDP by 2018.

3. Slender majority in parliament causes political noise, but forms no threat to stability

In 2011, the Mouvement socialiste militant (MSM) party switched camps to join the opposition, leaving the labor-led ruling coalition with a thin majority of 5 seats. Despite this development, the government still has enough capital for policy making, as indicated by the adoption of unpopular legislation on labor and judicial aspects in 2013. The opposition is determined to use the thin majority to their advantage and has used every opportunity to undermine the government’s credibility with respect to its ability to run the country and to induce early elections through a vote of no confidence. Given the ability of the prime minister, Navin Ramgoolan, and his cabinet to weather the economic slowdown and maintain support so far, it is expected that they will complete their term, which ends in 2015. However, the chance of early elections cannot be excluded, but they are not expected to threaten the political stability in the country. They will also not have a significant impact on the direction of economic policy, because the differences between the two camps on this aspect are minimal. 

Factsheet of Mauritius
National facts of MauritiusSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank

Background information

Mauritius, a small island economy in the Indian Ocean, is characterized by a high degree of openness, as both exports and imports of goods and services account for more than 50% of GDP. Agriculture is the smallest sector, but traditional products are still important for exports. A strong reform agenda in the past decades has led to the development of thriving industry (24% of GDP, mainly textiles) and services (72% of GDP, mainly tourism and financial services) sectors. The financial sector is particularly large because, being a tax haven, Mauritius has attracted a lot of offshore business and serves as a gateway for investments into especially India (40% of global FDI into India is routed through Mauritius) and Africa. FDI inflows and outflows were each roughly 600% of GDP in 2012. International pressure and/or renegotiations of current bilateral treaties, especially the double tax avoidance agreement with India, could affect these activities. However, the wide reach of the country´s network of treaties and the good and cooperative relation with relevant partners provides some mitigation against this risk. Furthermore, India is unlikely to take any decision on the renegotiation before the 2015 Indian elections. Despite increased diversification, Europe is still the most important export market for Mauritius, while developing Asia is the main source of imports.
Politics in Mauritius are fundamentally stable, characterized by shifting coalitions and peaceful changes of power, despite the ethnical background of the parties. The next national elections will be held in 2015. Mauritius is also one of the most socially developed countries in Africa, as the social indicators also reveal.

Economic indicators of Mauritius
Economic indicators of MauritiusSource: EIU

Notes

[1] IMF data series
[2] In line with new methodology applied by the Bank of Mauritius, the EIU data regarding the Balance of Payments and the foreign debt has been revised significantly in the past year. The Balance of Payments now includes flows related to offshore activities, which has resulted in significant revisions of the capital accounts from 2010 onwards. Since these series of data are still being revised, they should be interpreted with caution. According to the revised EIU series it would seem that Mauritius has incurred massive capital flight since 2010. This is however not the case. As the sum of net capital flows ( direct, portfolio and other) is positive, it would seem the large other capital flows are related to how capital flows related to offshore activities are classified. To provide an insight into the capital flows directly related to business in Mauritius (excluding offshore activities), the IMF series for the financial account has been included. This data also indicates that capital is not flying out of Mauritius.

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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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