IMPLICATION OF A NO BREXIT DEAL BETWEEN UK AND THE EU

I. STATE OF PLAY

The UK was due to leave the European Union (EU) on 29 March 2019, but the revised
departure date is now 31 October 2019.

Boris Johnson succeeded Theresa May as Conservative leader and British Prime
Minister on 24 July 2019 after she failed to break the deadlock over Brexit and her
withdrawal agreement with the EU was rejected three times in Parliament.

Following his appointment as Prime Minister of the UK, Boris Johnson made radical
changes at the top of Government. His new Cabinet has a strongly pro-Brexit flavour,
with the major cabinet posts going to those who have backed his plan to take Britain
out of the EU by 31 October with or without a withdrawal deal. Boris Johnson new
cabinet has the following as members:

SR MEMBER OF CABINET PORTFOLIO

NO.
1. Sajid Javid Chancellor
2. Dominic Raab Foreign Secretary and de facto deputy PM
3. Priti Patel Home Secretary
4. Michael Gove Chancellor of the duchy of Lancaster
5. Ben Wallace Defense Secretary
6. Steve Barclay Brexit Secretary
7. Andrea Leadsom Business, Energy and Industrial Strategy Secretary
8. Matt Hancock Health Secretary
9. Gavin Williamson Education Secretary
10. Amber Rudd Work and Pensions Secretary
11. Robert Jenrick Housing, Communities and Local Government Secretary
12. Liz Truss International Trade Secretary
13. Grant Shapps Transport Secretary
14. Theresa Villiers Environment Secretary
15. Robert Buckland Lord Chancellor and Justice Secretary
16. Nicky Morgan Digital, Culture, Media and Sport Secretary
17. Alok Sharma International Development Secretary
18. Julian Smith Northern Ireland Secretary

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 19. Alister Jack Scottish Secretary
20. Alun Cairns Welsh Secretary
21. Natalie Evans Leader of the House of Lords
22. James Cleverly Tory party chairman

Boris Johnson described the withdrawal agreement as a “dead letter” and demanded
that the backstop be removed from the withdrawal agreement. The EU on the other
hand has made it clear that the withdrawal agreement would not be renegotiated and
the backstop would not be removed from the agreement.

Though the preference of the UK is to leave the EU with a deal, preparations for
leaving the EU without a withdrawal deal are being ramped up. On 01 August 2019,
the UK Chancellor Sajid Javid announced that €2.3bn would be allocated to fund
Brexit for this year to prepare for no deal. The money will be used for border and
customs operations, medical supplies, public communications on Brexit, and support
for UK nationals overseas.

II. ECONOMIC IMPLICATIONS

UK was Mauritius 3rd export partner in 2018 with exports amounting to USD 227
million, (constituting 12% of total exports). The three main sectors are: apparel
(38%), fish preparations (26%), and sugar (12%). These three sectors represent
more than 70% of Mauritius’ exports to the UK.

Mauritius signed an Economic Partnership agreement with the UK on

31 January 2019 which will enter into force once the UK moves out of the EU. Whilst
the Agreement guarantees predictability to Mauritian operators exporting to the UK,
independent of any UK-EU BREXIT outcomes, a no deal Brexit will have some
consequences in the short run for Mauritius in view of the uncertainty associated to
UK’s disorderly exit from the EU.

An indicative range of impacts to Mauritius as a result of a disorderly Brexit is

provided below:

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 A. Contraction of the UK economy and possible recession

It is expected that a no deal Brexit with no transitional agreement will result in a

contraction in the UK’s economy by 5% within a year leading to a fall in demand due
to a sustained deterioration in consumer and business confidence. This in turn will
reduce economic activity, leading to a recession.

Over the long term, as per the Britain’s Finance Minister, the economy could be 8%
smaller by 2035 with a no deal Brexit. With the contraction of the UK’s economy and
fall in consumption, a decline in our exports to the UK is expected in the short run.
Current exports trend to the UK in key sectors are as follows:

TABLE 1
EXPORT TREND
Products 2016 2017 2018
(thousand USD) (thousand USD) (thousand USD)
Apparel 141,296 130,266 113,425
Fish preparations(tuna) 68,176 69,528 76,012
Sugar 30,770 25,105 16,604

Source: Trademap

There could also be some opportunities. In case of a no deal Brexit scenario, the UK
Government proposes to impose duty on 13% of its sensitive tariff lines including
sugar, fish and automobiles to the EU. A situation like this could benefit Mauritius,
particularly for sugar, in view of the fact that our exports on the UK market are
expected to remain duty free, whilst the EU and countries that have not signed a Free
Trade Agreement with UK would be subject to a duty of 419 euros per ton.

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 B. Impact on Tourism

As regards the Tourism sector, statistics show that UK tourists accounted for about
10.9% of total tourist arrivals in 2018. In 2017, tourist earnings from UK was
estimated at 11.8% of total tourist revenue. The trend in tourist arrivals and
expenditure are shown below:

TABLE 2
TREND IN TOURISM ARRIVAL AND EXPENDITURE
2016 2017 2018
Tourist Expenditure Tourist Expenditure Tourist Expenditure
Arrivals (MUR Arrivals (MUR Arrivals (MUR
Billion) Billion ) Billion)
(estimates)
United 141,904 6.9 149,807 7.1 151,913 7.61
Kingdom
All 1,275,227 56 1,341,860 60 1,399,408 64
countries
% Increase 5.60% 1.40%
in Arrivals
% of UK 11.10% 11.20% 10.90%
Tourists out
of Total
Number of
Tourists
% 12.30% 11.80% 11.90%
expenditure
1/ Provisional estimates (Subject to revision)

Source: Statistics Mauritius

As indicated in Table 2, while there has been an increase in tourists’ arrival from UK
compared to 2017, the percentage increase was lower at 1.4% compared to the
previous increase of 5.6%. The declining trend is likely to continue.

With a contraction of the UK economy, it is also expected there will also be a change
in the consumption pattern of UK tourists. The World Travel and Tourism Council
(WTTC) anticipates that UK expenditure abroad will decrease significantly (-4.2
percent), as the drop in the value of the Pound will continue to impact UK citizens’
spending power and their propensity to holiday abroad. The compounded effect of

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the drop in arrival and tourist spending may impact the tourism sector by a minimum
of 5% on both counts.

C. Impact of Exchange Rate Fluctuations

The Pound has fallen sharply as a result of Brexit.

Below is a trend in the exchange rate of the Pound, USD and EURO against the
Mauritian rupee between January 2016 and July 2019:

JAN -16 JUL-16 JUL-17 JUL-18 JUL-19

GBP MUR 52.8147 48.0512 45.4506 45.9525 45.4923
USD MUR 36.6521 36.4107 34.9904 34.9418 36.4612
EUR MUR 39.8283 40.3075 40.2592 40.7834 40.9203

Source: Bank of Mauritius (Monthly Average indicative selling rates for T.T. & D.D. of banks.)

From 2016 to July 2019, the Pound has depreciated by 13.9% against the Rupee. With
the knowledge of the Bank of England predicting a slump in the British Pound of the
order of 25% in a no Brexit deal, the British Pound may fall to Rs 34.12 (assuming a
one-to-one relationship against the rupee).

Although our revenue earnings for our key exports (apparels, sugar and tuna) are
mainly in Euro and USD, the decline in Pound is likely to have a ripple effect on other
currencies such as the Euro. With a no deal BREXIT, it is expected that the Euro may
also be affected and consequently affect our export earnings from the EU. As regards
the tourism sector, the continued depreciation in the Pound would automatically
translate in a fall in revenue.

D. Investment

It is expected that heightened economic uncertainty as a result of a no deal Brexit

could reduce business investment in the UK. Analysis by the Bank of England suggests

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that Foreign Direct Investment (FDI) into the UK would fall by around 20% over the
coming years under a no deal scenario thus further impacting the economy.

E. Possible Collapse of UK as a Key Financial Centre

On the financial side, there is an increasing threat that a no deal Brexit may lead to
the collapse of the UK financial market. A huge number of financial market
participants in Europe will be affected by Brexit, which means that financial services
companies may be reviewing the locations of their headquarters and operations, the
more so that there are concerns regarding the free movement of professionals. It is
also likely that UK would implement a new work permit regime between the UK and
the EU 27 which may restrict movement of professionals.

There is an opportunity here which Mauritius could explore as an international

financial centre. Mauritius can attract banks, insurers, asset managers to set up their
offices in Mauritius. Similarly, wealthy UK residents have expressed their concern of
re-domiciling their wealth. Mauritius could be a good alternative to UK based High
Net Worth Individuals to manage their wealth. Mauritius could also explore the
possibility of attracting British pensioners. Spain is currently the host EU country
with the largest number of retired UK citizens. With a no Brexit deal, UK pensioners
will no longer enjoy preferential health care treatment currently enjoyed in Spain.
Appropriate schemes could be explored to attract UK retirees.

II. POSSIBLE SHORT TERM MEASURES IN THE EVENT OF A NO DEAL BREXIT

 The “Support for Trade Promotion & Marketing Scheme” (Ex-Speed to Market
scheme) could be expanded to assist specific companies affected by BREXIT
with an increase in the Air Freight rebates targeted to UK.

 A more aggressive approach to be considered on the UK Market with a view to

maintaining our presence in UK as well as identifying new clients in alternative

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 markets such as Australia, Netherlands, Czech Republic, Spain, Germany,
Hungary, Poland, Denmark and the Netherlands.

 MTPA to conduct high visibility campaigns in the UK as well as consider a

market diversification strategy towards markets with high returns such as
Germany and Asia and emerging/new markets with immediate growth
potential namely Czech Republic, Poland, Austria, Sweden, Denmark, Finland,
Malaysia and Singapore.

 Develop marketing strategies in the financial sector for Mauritius to inter-alia

become an ideal support services centre for UK’s financial services and a good
alternative to UK based High Net Worth Individuals to manage their wealth.

 A technical committee to monitor the impact of GBP depreciation in all sector

of the economy and make subsequent recommendations to the Government
to ensure the competitiveness of our exports in the UK.

 Mauritius can use the UK-ESA agreement to pursue negotiations with the UK
on important issues such as Services and Investment. The Agreement contains
a built in provision to pursue negotiations within 6 months upon entry into
force.

International Trade Division

01 August 2019