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The process of creative destruction is the essential fact about capitalism - Joseph Alois Schumpeter.
To many foreign observers, Mauritius is portrayed as either a highly envied tourist destination or an
opaque tax haven. The latter is largely exaggerated as much effort has been done in order to make
Mauritius be a presentable and respected financial centre. Since the independence in 1968, the
country achieved a real transformational change of its economy, diversified its sources of revenue
and most importantly reached a fairly good redistribution of wealth. It is fair to admit that the
economic progress since the last 40 years is visible and for such a young democracy this change
demonstrate the capacity of its people to work together for a better future and also the ability of a
selected few political leaders to be forward looking. But is it right to say that Mauritius will
experience the same kind of economic prosperity for the next 20 years? Are the right economic and
political decisions been taken to enhance economic growth? Is the country at the mercy of dogmatic
fights and useless political moves? Some of the answers can be found in the global vision of political
leaders but the main reason for economic prosperity for a little economy as Mauritius remains
investment or a supply side framework.
To be able to attract investments at large, Mauritius will need to show a good track record of
economic performance. If Mauritius was an asset class, would a macro money manager view it as
potential investment opportunity as a whole?
Global Metrics
In 2013, the country grew by 3.2% in real terms with an inflation rate of 3.5 % along with a budget
deficit of 3.7%. By looking at these numbers, the question is the following; is the growth being
financed by a budget deficit? This assertion is only partially correct but it has the advantage to give a
quick overview of the situation and we can ask the following questions: Is Keynesian economics* still
adapted to the country? If this is the case, the efficiency of this policy can be doubted as there is a
barely multiplier effect by looking at these figures. So, what is the quality of growth generated by
Mauritius? Is this performance sustainable or its just a mere conjunction of factors? The following
analysis will explain and elaborate more on the aspects which affects the different components
which, in my opinion, is crucial to achieve economic prosperity.
Debt Analysis
Mauritius is, unfortunately, not blessed with immediate exploitable natural resources. The very basic
economic analysis shows that an economy will not be subject to economic cycles, only if its
consumption matches exactly its production. This is not the case, so to remedy to this issue,
borrowing and lending of capital help to consume or produce more is needed but in return this
economy will be impacted by booms and bursts. Credit, hence, debt becomes an important element
to judge a countrys room to manoeuvre.
The debt dynamics can be calculated as follows:
Dt= ((1 + It) / (1 +Gt)) Dt-1 Pt
Dt = Debt at time t.
a negative relationship between inflation and productivity. The following diagram shows the spread
between productivity and inflation. In a virtuous environment, this spread should increase.
Figure 1
In Figure 1, it is showed that there has been a gradual deterioration of this spread. This can be
explained mainly by a fall of the productivity gains and an unstable rate of inflation. On average, the
productivity gain has been of 2.5 %( rough linear average) on the above period and the inflation rate
around 5.7%. Productivity gains are not acting as a buffer against inflation and/or some other
factors are fuelling prices. On the other side, the wage index has been decreasing since 2008 but at
an increasing rate (well above the productivity gains). This shows that inflation is mainly due to
demand pull factors. Notably, there has been commodity prices inflation and a major financial crisis
between 2008 and 2010. But this does not explain the frequent increases in salaries which are to put
on the back of unstable prices. If productivity gains are not acting as a buffer and if the rise in
commodity prices was just temporary, how the dynamics of the Mauritian economic growth are
explained?
A glimpse at the monetary policy
Mauritius is not self-sufficient and imports a large variety of core products for its consumption and
production. Thus, the country is impacted by external shocks which could increase the price of these
goods. However, external shocks are exceptional events their effects disappear in the long run. The
current monetary policy of the country showed that there have been constant cuts in the repo rate,
from 9.25% in 2006 to 4.65% today. The Central Bank of Mauritius, applying its open market
operations, has constantly pumped in money in the monetary system to stimulate the economy. The
transmission mechanism of monetary policy is a very subtle subject and in this case, the idea of the
Bank of Mauritius (BoM) was to act on bank rates for the domestic market and exchange rate to
favour exports. Unfortunately, it would presumptuous to say that market share was gained during
this period. Additionally, the situation is now aggravated by the excess liquidity in the system mainly
because of foreign loans contracted by local economic agents and this should normally lead the BoM
to a monetary sterilisation. A guided monetary policy is essential for a country to achieve a
sustainable economic prosperity. Inflation should be the main factor which should be monitored and
then special attention should be given to economic growth. The role of a Central Bank is not to
implement sound economic policies but its role should only to create the optimal financial
environment for the success of political and economic decisions. A closer look to some micro
economic figures shows that there has been a 72% increase in stock prices since 2006, the property
prices rose by 34 % when the economy has been growing since the last 6 years around 4%. Normally,
corporate profits rate of return should be equal to the economic growth more or less. Increased
profitability is due to either new market share gained and/or leverage, which most of the time is
beneficial to any company. However, there is a level which transforms traditional investment
vehicles into safe haven assets even if there are no such things today and thus lead to a
misallocation of resources.
Figure 2 below summarises the conjunction of factors which would eventually impact the future
growth if they are not being addressed.
Figure 2
Fall in Productivity
gains and
uncontrolled
Inflation rate.
Accommodative
Monetary Policy.
Encourage bubbles
on financial assets
and Real Estate.
Non
growth (or
one off)
producing
assets.
Excess capacity
environment,
Positive wealth effect
and poor credit
monitoring from
financial institutions.
Deterioration
of Debt/GDP
ratio, balance
Sheets and
quality of
collateral.*
Increase Income
inequality;reduce
savings and economy
relying on
consumption.
Competition for
loanable funds
with the private
sector for
Investment/Debt
service. Crowding
out Effect*.
Twin Deficits
(Budget and Balance
of Payments).
Loss of
Competitiveness,
misallocation of
resources and over
dependence on
preferential
agreements.
Exogenous and/or
Political/Lobby
pressures to
influence
Monetary Policy.
c
Social
Unrest.
This article attempted to analyse if Mauritius would qualify as a macro investment opportunity.
Based on the findings, it would be fair to say that Mauritius has a lot of prospects ahead only if it
succeeds to identify its weak points and correct them. A Neutral recommendation would be given
to an investment manager as Mauritius can have a bright future for its economy and for its people in
general but right now there is a sentiment of slow and gradual decline.
Note :
Long - To Buy.
Short - To Sell.
Keynesian Economics Favouring fiscal policies over monetary policies.
Crowding out Effect Increased public spending driving down private initiatives.
Collateral A transferable/ guaranteed asset.