Faltering exports, slowdown in investment to plague Mauritius economy

Weaker exports, falling investment and the revisions to Mauritius’ tax treaty with India will all play into a harsher economic environment for the paradise island run by the unpopular MSM-ML-OPR regime.

This comes on the back of the Mauritian Prime Minister Pravind Jugnauth’s claims that the economy is doing fine due to the World Bank’s signature reviews that defined the Mauritius economy as growing.

The country is facing a combination of weak demand in key European export markets and a stronger currency bolstering imports and this will see the current account balance widen in 2017.

The harsh economic situation will yet be another burden for the people which is already stuck with a slow employment rate, the rise in commodity prices and stagnant salaries.

However, analysts expect that the country’s current account will begin to narrow thereafter, with exports declining.

“We expect that exports will continue to decline in 2017, after having already struggled so far this year, with total exports down 5.3% year-on-year (y-o-y) in May – the most recent data available,” said BMI.

However, analysts, today said Mauritius will experience a sharp widening of its current account deficit in 2017 on the back of weaker demand for its exports in key markets.

Faltering Exports

“Even so, the impact on the country’s wider economic outlook will be muted, as this trend will reverse in 2018/19 when recovering growth in key export markets will see the deficit begin to narrow gradually,” said BMI.

It said Mauritius will see further weakness in exports for the remainder of 2017, due to low demand amongst its key trading partners, increasing the country’s current account deficit.

Slowing investment into the ocean economy – following the changes to Mauritius’ double tax treaty with India – will see the financial account surplus narrow over our short-term outlook, although fixed investment will remain stable.

Although these dynamics are likely to weigh on the country’s stock of foreign reserves, this is unlikely to undermine the stability of country’s external position, especially as pressure begins to decline from 2018.

Exports slowed due to weaker demand in Europe, especially in France and the UK – Mauritius’ top two export destinations – that collectively accounted for 26.9% of Mauritius’s exports in 2016. Q117 trade figures showed a 5.7% y-o-y decline in exports to France and a 22.4% decline in exports to the UK. Indeed, the sectors which have seen the biggest declines are those that export primarily to Europe such as clothing (down 16.7% y-o-y in Q117) and crude materials (down 10.0% in May).

The trend will continue well into 2018 as the government in place seems to have lost the plot and is not able to devise new plans to beef up exports and bring new foreign direct investment or FDI into the country.

The experts said the trend will not shift on the basis of the UK and France experiencing only tepid growth, leading to weaker consumption thus less import, which will impact Mauritius.

But this will begin to change from 2018 as France’s economy will see accelerating growth (see ‘A Turning Point For The French Economy?’, June 21), as will the UK’s from 2019.

This means the Mauritius government will depend solely on increased demand for Mauritian goods.

A series of construction projects – which include the Port Louis to Curepipe railway – will likely keep the import momentum going thought it will slow from 2018 onwards, as weaker real GDP growth across much of the economy will feed through to lower demand for consumer goods imports.

Mauritius has courted Chinese investment and sought to join the “maritime silk road”, which offers some scope for further construction projects in the coming years. We have not yet factored this into our forecasts as the nature, viability and timing of any projects are not yet clear.

Falling Investment V/S Sustainable Position

Revisions to Mauritius’ tax treaty with India will likely see a steady decline in the former’s financial account surplus over the coming years. Under the treaty, investments made in India from Mauritius would be taxed at a lower rate, not a higher Indian rate of capital gains tax. Revisions to the treaty will gradually eliminate this advantage between April 2017 and April 2019, said the analyst firm.

“This will remove one of the key supports of the financial sector in Mauritius, as it had been the main conduit for foreign investment into India due to its favourable tax status. We have already seen investment decline in Q117 but we expect it to fall off dramatically from Q217 following the implementation of the new agreement.

“That said capital investment into projects such as the Curepipe-Port Louis railway will ensure that the surplus does not shrink too far and that the pace of decline is gentle. In light of this we expect that Mauritius’ reserves will decline, but at a manageable rate as they start from a relatively high position of 9.2 months import cover in Q117,” it said.

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