Mauritian Economy - AXYS Group ~ Mauritius ~ Capital ... public sector wages. ... companies listed on the Stock Exchange of Mauritius ... A relatively well-diversified Mauritian economy

Mauritian Economy Outlook 2013

Bhavik Desai AXYS Stockbroking Ltd, Bowen Square, Dr Ferrière Street, Port-Louis | BRN C07007947 Apr-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email [email protected] | www.axysstockbroking.com

Executive Summary Equilibrium Hangs on a Thin Line The diversification strategy which had been adopted for Mauritius has shown both its strengths and limits during the recent storm. In 2009, booming construction offset contractions in both Tourism and Exports; by contrast in 2012, Finance and Manufacturing kept the economy growing when construction contracted and tourism stagnated. However, on the flip side, the concentration of exports of both goods and services towards European markets has impaired the economy as a whole. A depressed Europe has led to tepid growth rates; which is why we believe a diversification of export markets towards Africa and Asia is an imperative to renew with robust growth. However, high-level policies to achieve this have yet to be formulated; hence such market diversification has barely begun. Given that our traditional markets remain depressed, we project GDP Growth to reach ~3.3%, i.e. below Statistics Mauritius’ 3.4% and the IMF’s 3.7%.

2013 Perspectives We believe a strong performance by the financial sector coupled with the emergence of Seafood exports as an important pillar of the economy will drive growth in Manufacturing and continue to support economic growth in 2013. Tourism which stagnated last year is likely to stagnate again given that a 5% increase in available hotel-rooms will drive down occupancy rates. The completion of major commercial and high-end residential developments, together with the completion of new roads and the new airport terminal will result in one of the deepest ever contractions (-6.6%) for construction. However, following the flash floods of Mar-2013, we believe Government will speed up its Public Sector Investment Programme and is likely to re-design land drainage across the island; which may in turn re-kindle this troubled sector onwards of 2014. Trade is also likely to benefit slightly from the unexpected expenditure required to repair flood damages, but more so because of increased public sector wages. We expect continued lukewarm growth for Real Estate in 2013 but the sector may start feeling downwards pressures starting 2014. Our greatest concern is the Current Account Deficit which is set to widen to 12% of GDP due to a higher energy bill. However, the Financial Account Surplus has been driven by Foreign Direct Investment (FDI) flows principally directed towards Real Estate; which – as investments in unproductive assets – are unlikely to contribute to future growth. Hence, we feel that, given the quality of FDI flowing into Mauritius, this route does not constitute a lasting solution to our structural Balance of Payments problem.

GDP Growth Rates [%] AXYS SM 2009 2010 2011 2012 2013F 2013E

GDP @ Mkt 3.0 4.1 3.8 3.2 3.3 3.4

Manufacturing 2.4 1.9 0.7 1.5 1.8 2.0 EOE -0.4 6.4 6.1 1.5 2.7 2.6 Textiles 0.0 -0.0 3.0 -0.9 1.5 2.0

Financial 4.6 4.5 5.6 5.7 5.0 5.7 Banking 4.3 4.4 6.3 6.3 5.5 6.2

Hotel & Food Services -6.0 6.0 3.5 0.0 0.5 3.5 Construction 5.9 4.3 -2.0 -3.0 -6.6 -6.9 Real Estate 1.9 2.7 2.9 2.8 2.6 2.8 Trade & Repairs 0.6 4.0 3.7 3.9 4.0 3.9 Info & Comm 11.6 10.9 9.1 9.0 8.0 8.6

Country Information Appellation: Republic of Mauritius

Independence | Rep.: March 12, 1968 | 1992

Government: Westminster Dem.

President: Mr Purryag, Rajkeswur

Prime Minister: Dr Ramgoolam, Navin

Suffrage: Universal, >18yrs

Off. & Biz. Language: English & French

Geography

Area: 2,040 km2

Excl. economic zone: 1.9M km2

Capital: Port-Louis

Location: 20° 10' S; 57° 30' E

Time Zone: GMT +4 hrs

Climate: Sub-tropical

Tel. | Intnet. code: 230 | .mu

Demographics

Population: 1,291,200

Popn growth rate: 0.48%

Median age: 33.1 yrs

Life expectancy: 74.7 yrs

Workforce: 610,800

Unemployment: 8.0%

Literacy: 88.5% (2010)

Poverty: 7.9% (2007)

Currency

Currency: Mauritian Rupee (Rs/MUR)

Exchange rate (Mid): Rs 29.15 per USD

Rs 37.15 per EUR

Economy (2012) GDP growth rate: 3.2%

GDP at mkt price: Rs 344.1bn

GDP per capita: Rs 266,500

GDP ppp: $ 20.3bn (130th)

GDP ppp per capita: $ 15,600 (80th)

Budget deficit: 2.5% of GDP

Public debt: 54.2% of GDP

Current A/C deficit: 10.3% of GDP

Headline Inflation: 3.85%

Reserves: 6.9 Months

Stock Exchange (2012) Lists (Securities): Official (45) | DEM (52)

Primary Indices: Semdex | Demex

Market Cap: Rs 175.2bn | Rs 44.2bn

Mean daily turnover: Rs 38.3m | Rs 5.8m

Market PER: 14.13x | 9.84x

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The Bird’s Eye View The overall structure of the local economy – re-classifications aside – was more or less the same, as result of the absence of any major policy shifts in the most recent budgets. That said, the emergence of Food Manufacturing (excluding sugar) driven by Seafood as an increasingly important slice of the economy could not go unnoticed.

Revamped Classifications First, Statistics Mauritius (SM) changed its classification of economic activities from the National Standard of Industrial Classification (NSIC) Revision 1 to NSIC Revision 2. Subsequently, there are now 19 main segments against 15 under NSIC Rev. 1. Further, in-line with our rationalisation of industry classification of companies listed on the Stock Exchange of Mauritius (SEM), we have mapped the NSIC Rev. 2 onto our adapted version of the Global Industry Classification Standard (GICS)1. Our “Where to Partake” section is now more tightly mapped to the local economy.

Figure 1. A breakdown of the Mauritian economy Structure & Resilience A relatively well-diversified Mauritian economy has helped sustain GDP growth – albeit low – during the turbulent past few years. In 2009 when both Tourism and Exports contracted, booming Construction kept the economy growing; by contrast in 2013, when Construction is likely to experience a steep contraction, we expect the Finance and Manufacturing sectors to keep our economy

1 The GICS was developed by MSCI and S&P for use with their many indices.

growing. That said, returning to optimal growth rates 2 would require all sectors of the local economy experiencing robust growth; which could be achieved via a diversification of exports & services away from the traditional European markets and increasingly towards Africa & Asia. We are of the opinion the above cannot happen without the creation of new maritime and aerial links. In spite of the speeches, an overarching strategic master plan to gear the economy towards the region has yet to be drawn out and implemented. A diversification of export markets would surely help redress a widening and hence disconcerting Current Account Deficit (CAD). The CAD – poised to reach 12% of GDP in 2013 – has so far been offset by a large Foreign Direct Investment (FDI) driven Financial Account surplus which has kept the Balance of Payments (BoP) positive. A contributing element to the large CAD is the innate structural currency imbalance of the Mauritian economy: the majority of export revenues are Euro dominated while the bulk of imports are paid in US Dollars. The decline in the EUR’s value exposed the lack of competiveness of local manufacturers and hotels which have seen margins evaporate. We reiterate that export market diversification at an accelerated pace would contribute in restoring higher GDP growth rates which should in turn ease the debt burden of the then more profitable listed companies.

Rankings With regards to international rankings, Mauritius vaulted back into the Doing Business Top 20 to the 19th position, i.e. up 5 ranks and continued to occupy the top spot in Africa. Likewise, Mauritius held on to its No. 1 spot within the Ibrahim Index of African Governance.

Sectorial Perspectives Finance The financial sector remained among the best performing sectors in 2012. This was exemplified by record profits at the top two banks. However, like sugar and textiles in the recent past, the financial sector is approaching that point in time when a re-think is required to keep the sector thriving. The Mauritian Double Taxation Agreement (DTA) with India remains a hot and controversial topic; and according to The Economist “it is not Mauritius which is running its tax-and-investment policy like a funny little island in the middle of nowhere” [ECON 2012]. Again weaning off Mauritian dependence on a single DTA and focusing

2 Estimated at a little under 4.5% at current capacity

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attention on Mainland Africa would lead to a well-needed diversification. In-line with improving earnings of listed financial companies, we expect growth in 2013 to stand at a robust 5%; however, although re-insured, insurers may take a non-negligible hit from the pay-outs to repair damages caused by the tragic flash flooding of the capital, Port-Louis, on Mar 30th.

Figure 2. Financial industry growth rate & share of GDP evolution Where to partake?

Financial LCP @ Δ [%] Key Ratios <Val> Services 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

MCB ▲ 190.75 11.5 10.4 3.1% 1525 Comm. Banking

SBM ▲ 1.04 15.6 9.1 3.4% 610 Comm. Banking

BBCL ▼ 7.30 -8.8 398 0.0% 86 Comm. Banking

MEI ▲ 92.00 17.8 8.3 2.6% 17 Gen. Insurance

MUA ▲ 124.00 0.8 10.7 4.0% 79 Gen. Insurance

SWAN ▲ 335.00 2.1 15.3 2.5% 434 Gen. Insurance

ANGLO ▲ 605.00 0.8 47.0 5.0% 143 Life Insurance

CIM ▲ 5.90 12.4 6.5 4.9% 355 Global Biz. & Credit

FINC ▲ 17.20 6.8 86.5 1.5% 22 Leasing

IBL ▲ 84.50 7.0 12.5 2.5% 73 Global Biz. & Insu.(MEI)

Following the spin-off of CIM from Rogers, CIM has become among the most liquid stocks on the SEM, and is the only stock which offers a direct entry into Non-Banking Retail Finance and Global Business. Non-direct alternatives would include conglomerates (IBL) or multisector holdings (CIEL and UTIN).

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CIEL ▼ 2.70 -5.3 8.8 0.0% 49 Bank (Bank One) & Offshore (MITCO)

UTIN ▲ 9.86 16.0 — 0.8% 22 Fin Svcs (AXYS Group) & Bank (AfrAsia)

RHT ▲ 32.00 28.6 9.7 0.5% 5 Banking (MCB)

ROGE ▲ 182.75 22.7 31.0 3.6% 240 Insurance (SWAN)

TERRA ▲ 40.50 5.2 18.4 2.0% 308 Insurance (SWAN)

NITL ▲ 23.20 10.5 44.9 2.2% 5 INVH - Insurance (SICOM)

BMHL ▬ 193.00 0.0 5.3 3.6% 19 INVH - IBL & AfrAsia

DRIL ▲ 44.00 8.4 16.2 2.7% 255 INVH - CIEL

ENIT ▲ 43.00 19.4 5.9 3.5% 32 INVH - ROGE & SWAN

ENL(P) ▲ 4,200 44.8 11.1 2.1% 95 INVH - ENIT

Table 1. Listed Financial companies that offer direct/indirect participation Upcoming opportunities

• Increased penetration onto the African Continent Potential threats

• Change of terms of existing DTAs • 45% (Rs95bn) of credit advances (loans and overdrafts)

have been given to the troubled construction & tourism sectors

Travel & Leisure Tourist arrivals stagnated at 965k (±0%) in 2012 while receipts crept up to Rs44.4bn (+4%). Local hotels continued to feel the pinch: the EUR recovered marginally from a 6Yr-Low against the MUR; and although the Volume Market Share of hotels held steady at 60.5%, a 5% increase in the hotel-room park resulted in a drop of occupancy rates. Growth was thus non-existent.

Figure 3. Hotel volume market share

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In 2013, we expect Tourist Arrivals to reach around 974k (+1%) and receipts amount to about Rs46.5bn (+5%). Our forecasts are based on Q1 trends which have shown a further 7.5% drop in arrivals from Europe being offset by a greater number of visitors from Réunion Island, India and China3. In real GDP terms, the industry is poised to experience another year of stagnation with a marginal 0.5% growth. Hotel groups in Mauritius are expected to continue struggling with EBITDA margins and profits gobbled up by loan repayments.

Figure 4. Tourist arrivals and receipts

Figure 5. Hotels growth rate & share of GDP evolution 3 Air Mauritius has introduced direct flights and increased flight frequency to China

Where to partake?

Travel LCP @ Δ [%] Key Ratios <Val> & Leisure 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

NMHL ▲ 72.00 27.4 20.0 0.0% 425 4-5 Star Mtius + Seychelles

SUN ▲ 28.00 1.4 — 2.5% 86 4-5 Star Mtius + Mdives

LUX ▲ 17.50 8.0 32.5 0.0% 68 3-5 Star Mtius+Mdives+Réu

CHSL ▼ 21.00 -8.7 — 0.0% 25 5 Star Mtius+Mdives+Sey.

HTLS ▼ 18.50 -11.9 — 0.0% 7 5 Star Mtius+Mdives+Sey.

ROGE ▲ 182.75 22.7 31.0 3.6% 240 3-5 Star Mtius + NMHL

SCT ▼ 6.86 -2.0 19.1 2.9% 4 Single 4 Star Mtius

MOLI ▲ 40.20 0.5 67.0 2.5% 1 Hilton Mauritius

TPL ▲ 6.00 25.0 41.1 1.0% 22 Biz. hotels

ASL ▲ 92.00 27.8 14.2 6.5% 12 Sports Betting

MK ▲ 13.80 36.6 — 0.0% 54 Airline

While the domestic operating environment is complicated, the more diversified groups, i.e. operating within the Indian Ocean should in principle fare better than those operating solely in Mauritius. The mid-market will continue to receive guests and find it easier to control costs compared to the highly demanding luxury segment. The low/non-existing Div. Yields and high/negative PERs as above tabulated above serve as a reminder of the sector’s woes. Indirect participation avenues can prove to be a complex task given the astounding number of listed participants which are in one way or another active in Tourism and Leisure.

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ALTEO ▲ 36.50 13.7 14.3 1.9% 156 5 Star (Four Seasons)

CIEL ▼ 2.70 -5.3 8.8 0.0% 49 3-5 Star via SUN & CHSL

MEDL ▼ 61.00 -6.7 — 1.6% 55 3-5 Star Mtius (Palmeraie & Tamarina)

EUDC ▲ 13.00 2.3 14.9 5.0% 29 3-5 Star Mtius (Palmeraie & Tamarina)

UTIN ▲ 9.86 16.0 — 0.8% 22 3 Star Mtius (Attitude Resorts)

LFL ▲ 22.45 14.0 6.6 4.0% 18 Biz. Hotels (TPL)

LMLC ▲ 170.00 17.2 8.9 4.1% 14 Biz. Hotels (TPL)

UNSE ▲ 50.00 15.7 37.5 0.0% 23 4 Star (SCT)

DRIL ▲ 44.00 8.4 16.2 2.7% 255 INVH - CIEL

ENL(P) ▲ 4,200 44.8 11.1 2.1% 95 INVH – via (ROGE, NMHL and TPL)

ENIT ▲ 43.00 19.4 5.9 3.5% 32 INVH – via (ROGE, NMHL and TPL)

ALMA ▲ 95.00 3.5 112 6.6% 12 INVH – via MEDL & EUDC

BRIL ▼ 2,700 -8.6 — 3.2% 170 INVH – via MEDL & EUDC

MSH ▼ 2,525 -10.8 — 2.8% 599 INVH – via MEDL & EUDC

PAD ▲ 73.00 16.8 — 2.1% 43 Biz. Hotels (TPL)

ANGLO ▲ 605.00 0.8 47.0 5.0% 143 Biz. Hotels (TPL)

Table 2. Listed hospitality companies that offer direct/indirect participation Upcoming opportunities

• Increased visitors from emerging markets

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Potential threats • Occupancy rates in the low 60s triggering a new wave of

direct/indirect rate discounting Consumer Staples & Discretionary Consumer companies as we have re-classified using an adaptation of the GICS, operate in two main areas under SM’s NSIC: Trade and Manufacturing. Trade & Repairs At 12% of GDP, retail/wholesale trade is among the largest segments of the local economy. During the last four years, in spite of the prevailing gloom, the sector has growth at a healthy pace (close to 4%). In 2013, we believe the sector will growth at 4% because the increased Public Sector wages will result in increased expendable income which in turn should help sustain local consumption. In addition, the damages caused by the end of March floods will require repairs 4 , which will provide an unexpected boost to domestic consumption.

Figure 6. Trade & Repairs growth rate & share of GDP evolution 4 Home and Office furniture restoration/replacement; and car repairs/ replacements.

Where to partake (Trade)?

Trade LCP @ Δ [%] Key Ratios <Val> & Repairs 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

ENLC ▲ 21.60 3.3 — 7.4% 12 Auto dealer

ABC ▬ 145.00 0.0 27.6 1.2% 10 Auto dealer

ACC ▬ 149.00 0.0 5.8 2.7% 6 Auto spare parts & tyres

MSIL ▲ 29.00 2.1 3.7 3.4% 2 Tyre re-treading

VEM ▲ 172.00 4.2 27.9 4.7% 52 Petrol & Diesel Ret./Dist.

CMPL ▼ 13.50 -4.0 6,750 3.3% 0 Supermarket

IBL ▲ 84.50 7.0 12.5 2.5% 72 Supermarket & Pharmacy

INNO ▲ 47.80 8.6 9.8 3.7% 34 Wholesale & Distribution

TERRA ▲ 40.50 5.2 18.4 2.0% 308 Goods & Spirits

Table 3. Listed trading companies that offer direct/indirect participation

Picking a company involved in trade is a little complex as the pure “traders” are highly illiquid and competition stiff. Fuel distributor, VEM, is subject to cyclical patterns which depend on margins for Marine and Jet A1 fuel supply.

Manufacturing After three straight years of declining growth rates, in 2012, the Manufacturing sector’s growth rate improved to 1.5%. The emergence of fish processing as a new high growth business, propelled food manufacturing which almost singlehandedly boosted manufacturing growth in real terms. Fish & Fish preparations exports jumped 34% and increased its share of food/animal exports to 53%, i.e. well above Sugar’s 34%. We thus place Manufacturing growth at a higher 1.8% in 2013. Not only should seafood continue to prop manufacturing, but a diversification of exports of goods towards the region5 should help improve company pipelines as well as ease the structural currency imbalance.

5 Exports of goods towards South Africa increased by 35% in 2012.

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Figure 7. Manufacturing industry growth rate & share of GDP evolution Where to partake (Staples)?

Consumer LCP @ Δ [%] Key Ratios <Val> Staples 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

ALTEO ▲ 36.60 14.0 14.3 1.9% 157 Sugar farm, milling, refining

TERRA ▲ 40.50 5.2 18.4 2.0% 308 Sugar farming & milling

OMNI ▲ 76.00 2.4 50.9 3.6% 61 Sugar farm, milling, refining

MEDL ▼ 61.00 -6.7 — 1.6% 54 Sugar farming & milling

ENLL ▲ 48.00 23.4 12.8 2.5% 59 Sugar farming

CSE ▲ 104.00 3.0 31.1 4.3% 7 Sugar farming & breeding

UNSE ▲ 50.00 15.7 37.5 0.0% 23 Sugar & crop farming

IBL ▲ 84.50 7.0 12.5 2.5% 72 Fishing & fish processing

INNO ▲ 47.80 8.6 9.8 3.7% 34 Dairy & Poultry

MOR ▲ 28.30 4.0 14.4 5.1% 31 Edible Oils

LMLC ▲ 172.00 18.6 9.0 4.1% 14 Flour

PBL ▲ 205.00 0.5 20.6 3.7% 227 Bevs (Water, Soft & Beer)

PHIN ▼ 124.00 -0.8 14.6 5.1% 93 Bevs (Water, Soft & Beer)

VITAL ▼ 50.00 -16.7 — 8.0% 11 Water

QBL ▲ 9.40 5.6 — 5.3% 1 Soft Drinks

MIL ▬ 870.00 0.0 9.4 6.9% — Margarine

SODIA ▼ 0.50 -23.1 — 10.0% 2 Livestock, Poultry & Monkeys

LFL ▲ 22.45 14.0 6.6 4.0% 18 Livestock feeds

There are many listed companies which produce non-discretionary goods with the majority being sugar related for historical reasons. Among these are found the safe heavens such as MOR and PBL and the emergent INNO which is expanding its poultry business in Mozambique, as well as the large cap. cane industrials which are

also in the midst of expanding their business on Mainland Africa. Should wish to go for more tortuous access routes to the now tiny sugar industry, below are several options.

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ROGE ▲ 182.00 22.1 30.9 3.6% 239 Sugar farming

ENIT ▲ 43.00 19.4 5.9 3.5% 32 INVH - ROGE & FAIL Group

ENL(P) ▲ 4,200 44.8 11.1 2.1% 94 INVH - ENIT & ENLL

DRIL ▲ 44.00 8.4 16.2 2.7% 255 INVH - ALTEO

ALMA ▲ 95.00 3.5 112 6.6% 13 INVH - MEDL & SODIA

BRIL ▼ 2,700 -8.6 — 3.2% 170 INVH - MEDL & SODIA

MSH ▼ 2,525 -10.8 — 2.8% 599 INVH - MEDL & SODIA

PAD ▲ 74.00 18.4 — 2.0% 43 INVH - MEDL & SODIA

Table 4. Listed Con. Staples companies that offer direct/indirect participation Where to partake (Discretionary)?

Consumer LCP @ Δ [%] Key Ratios <Val> Discretionary 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

CTL ▲ 24.00 2.6 5.4 5.0% 57 Textiles

ENLC ▲ 21.60 3.3 — 7.4% 12 Sunglasses, Plastics, Linen

MCFI ▼ 26.30 -6.1 75.1 3.8% 9 Chemicals

BYCH ▼ 12.65 -9.6 40.8 4.0% 1 Chemicals

CHEM ▼ 21.00 -15.0 11.7 4.8% 3 Chemicals

EUDC ▲ 13.00 2.3 14.9 5.0% 29 Distillery

GOLI ▬ 0.04 0.0 160.5 0.0% 23 Food sup. (South Africa)

MSM ▼ 8.00 -0.0 — 0.0% 183 Printing

PIM ▼ 80.00 -2.4 9.4 5.0% 26 Plastics

SAIL ▲ 27.20 2.6 — 3.7% 2 Soap & Detergents

MCOS ▲ 49.00 5.4 36.7 1.5% 8 Cosmetics

PCCL ▲ 43.30 1.4 — 1.7% 3 Tissue & Toilet Paper

GAZ ▲ 138.00 12.2 10.1 2.2% 30 Gases (Med. & Industry)

Among the listed companies producing discretionary goods the majority have experienced tightening margins and CTL had a record FY12 which may prove difficult to out-do this year. That said it remains a relatively liquid stock and the only one providing an exposure to the Textiles sector.

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TERRA ▲ 40.50 5.2 18.4 2.0% 308 Distillery & Chemicals

HML ▲ 120.00 6.2 — 3.3% 124 Chem. (MCFI, CHEM, BYCH)

UTIN ▲ 9.86 16.0 — 0.8% 22 Chemicals (Island Fertilizers)

Table 5. Listed Con. Discretionary companies that offer direct/indirect participation Upcoming opportunities

• Greater diversification towards regional markets (SADC/ COMESA) by making use of reduced or zero tariffs

Potential threats

• Decline in both local and overseas demand for goods in the wake of prolonged difficult times

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Construction During the first few years of the crisis, on-going IRS, hotel re-development, and commercial projects kept the industry growing. In addition, Government shored up the sector through large scale infrastructure development called the Public Sector Investment Programme (PSIP) which includes the Road Decongestion Programme (RDP) and the airport terminal & runway upgrades. However, most private sector driven projects are presently either completed or nearing completion; and the PSIP remains plagued with administrative red-tapes and bottlenecks. SM has thus forecasted an unprecedented 7% contraction for construction in 2013.

Figure 8. Construction growth rate & share of GDP evolution Our estimates place the contraction at a slightly smaller 6.6% because we believe that the tragic flooding of Port-Louis’ lower basin will act as post-mortem trigger to accelerate6 PSIP spending on drainage systems and related public infrastructure. Our concern here remains that the sector will remain heavily dependent on government to provide growth in the medium to long term as

6 Within a fortnight some 300t of debris have been cleared from drains in Port-Louis, roads are being re-done, and waterways cleared.

private sector residential 7 and commercial development are slowing. Where to partake?

LCP @ Δ [%] Key Ratios <Val> Construction 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

UBP ▲ 97.00 4.3 22.4 2.8% 77 Bldg Materials

GAMMA ▼ 28.90 -3.7 — 3.1% 77 Bldg Materials & Civil Eng

ENLC ▲ 21.60 3.3 — 7.4% 12 Bldg Materials & Civil Eng

IBL ▲ 84.50 7.0 12.5 2.5% 72 Bldg & Civil Eng

FORT ▬ 170.00 0.0 — 4.4% 10 Engineering

Given the expected contraction a suitable pick for construction would have to be a conglomerate which has other lines of business to offset the reduced revenue, alternatively opt for an indirect means of participation.

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TERRA ▲ 40.50 5.2 18.4 2.0% 308 Bldg & Civ Eng (R. Grinaker)

HML ▲ 120.00 6.2 — 3.3% 124 Bldg & Civ Eng (R. Grinaker)

Table 6. Listed Construction companies that offer direct/indirect participation Upcoming opportunities

• Accelerated implementation of PSIP by Government Potential threats

• Sluggish demand for new residential and commercial buildings

Property The property sector has gradually but steadily increased its share of GDP. The increase in supply of office spaces outside Port-Louis and opening of new shopping complexes throughout the island have both led to a decentralisation and may result in downward pressures on rentals. The mushrooming of town houses and high-rise flats will also affect residential rentals rates. Subsequently, we expect the sector to grow at a slightly subdued rate of 2.6% in 2013.

7 Mauritians typically prefer to construct their own homes and buy land either to speculate or for long term investment.

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Figure 9. Real Estate growth rate & share of GDP evolution Where to partake?

Real LCP @ Δ [%] Key Ratios <Val> Estate 8-Apr YTD PER DY [Rs k] Activity

Dire

ct

ENLL ▲ 48.00 23.4 12.8 2.5% 59 Res./Comm. Dev. & Rental

MERIT ▼ 10.50 -4.5 — 0.0% 188 High Rise Res. Dev.

CAUD ▲ 1.15 4.5 21.4 3.5% 8 Comm. Dev. & Rental

ROCK ▲ 1.30 29.2 0.2 3.5% 955 REIT (not in Mauritius)

UTDL ▲ 67.00 3.1 — 0.0% 58 Comm. Dev. & Rental

ASCE ▬ 1,300 0.0 16.9 5.8% 59 Comm. Dev. & Rental

CIMO ▬ 442.00 0.0 17.4 3.6% 6 Comm. Dev. & Rental

COVI ▲ 8.46 12.8 5.1 0.0% 3 Hotel Dev. & Rental

UFL ▲ 7.40 48.0 3.9 6.4% 32 Gated Res. Dev.

ALTEO ▲ 36.60 14.0 14.3 1.9% 157 Gated Res. Dev.

MEDL ▼ 61.00 -6.7 — 1.6% 54 Res./Comm. Dev. & Rental

TERRA ▲ 40.50 5.2 18.4 2.0% 308 Morcellement Sales

OMNI ▲ 76.00 2.4 50.9 3.6% 61 Morcellement Sales

ROGE ▲ 182.00 22.1 30.9 3.6% 239 Res./Comm. Dev. & Rental

Cane industrials all tend to have some form of a property development arm and to some extent offer a diversified proposition; however, although suffering from poor liquidity, ASCE – ROGE’s property arm – has experienced steady rental growth as well as paid appreciable dividends.

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NMHL ▲ 71.75 27.0 19.9 0.0% 425 Gated Res. Dev.

CIEL ▼ 2.70 -5.3 8.8 0.0% 49 Res./Comm. Dev. & Rental

PAD ▲ 74.00 18.4 — 2.0% 43 INVH - MEDL

ALMA ▲ 95.00 3.5 111.6 6.6% 13 INVH - MEDL

BRIL ▼ 2,700 -8.6 — 3.2% 170 INVH - MEDL

MSH ▼ 2,525 -10.8 — 2.8% 599 INVH - MEDL

DRIL ▲ 44.00 8.4 16.2 2.7% 255 INVH - CIEL

ENL(P) ▲ 4,200 44.8 11.1 2.1% 94 INVH - ENLL & ROGE

ENIT ▲ 43.00 19.4 5.9 3.5% 32 INVH - ROGE

Table 7. Listed property companies that offer direct/indirect participation Upcoming opportunities

• Foreigners being allowed to purchase apartments in high-rise8 developments that are not IRS/RES designated

Potential threats

• Drop in rental rates due to increasing supply of available for rent office/commercial space

Macro Perspectives From a macro stand point equilibrium hangs on a fine line. Should Foreign Direct Investment (FDI) flows – which have been mainly geared towards property and kept the Balance of Payments (BoP) positive – slowdown, the worrisome Current Account Deficit (CAD) at 12% of GDP could lead to a rapid deterioration of economic fundamentals. The MUR could nose-dive and propel inflation well above the 5%-mark, thereby aggravating the situation across the board.

Monetary Policy Inflation In the past few years, a relatively stable USD/MUR coupled with stable commodity prices and subpar growth rates have helped contain inflation. In 2009 and 2010, headline inflation fell below 3% for the first time. Since, inflation has made a comeback with its headline figure poised to reach – if not exceed – 4.7% by December given the recent 6% jump in petrol prices. Year-on-Year inflation which has been on the decline (coming off 2006’s peak) is also set for a substantial rise.

8 Ground + 3 floors or more

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Figure 10. Headline & YoY Inflation evolution Repo Rate Given the Central Bank’s delicate mandate to “maintain price stability and to promote orderly and balanced economic development”, i.e. to balance sustainable growth and fend off inflation we strongly believe that the Key Repo Rate – lest for another cataclysmic shock within the Eurozone – has bottomed out. After all, at present sub-optimal GDP growth rates, Mauritius has no position to trade-off inflation for high growth as it was the case between 2006 and 20089.

Figure 11. Key Repo Rate evolution Sovereign Yields The yield curve in 2012 flattened driven by a monotonic decline in T-Bill and Govt. of Mauritius Bond yields. Yields fell simply because of a system flush with liquidity in the absence of low-risk fixed-income and/or high-yield instruments. Sovereign instruments have been in high demand and hence the Mauritian government is borrowing at record low rates10. We expect yields to continue dropping given the available liquidity and increased appetite for low-risk assets.

9 Between 2006 and 2008, GDP grew at 5.5% or above and inflation hovered between 9-10%. 10 At the latest 5-Year auction, yields fell to a record low 4.3%

Figure 12. Mauritian sovereign yields evolution Balance of Payments Current Account In 2012, the CAD shrank from 13% of GDP to 10% of GDP thanks to an improved services account surplus (higher net travel receipts) and recovery from deficit to surplus within the income account (inclusive of GBC1s). However, according to the Ministry of Finance, the CAD will widen to 11.6% this year. This would make 2013 the 10th consecutive year with a negative Current Account. Two contributing factors include: first, imports (6%) which have – on average – grown at twice the rate of exports (3%) over the last five years; and second, household consumption which has grown, on average, by 8% per year at the expense of savings. Low deposit yields and low interest rates have encouraged consumer spending 11 and thus steadily eroded away the Gross National Savings (GNS).

Figure 13. BoP, CAD and Budget Deficit evolution

11 For instance, 2012 was a record year for motor vehicle sales

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The CAD which was been partly triggered by a drop in GNS and increased consumption has also exposed local manufacturing and services industries for their lack of competitiveness. In addition, it also shows a lack of will and proactivity to adapt to the post-crisis business climate/conditions and diversify export markets. A Positive Balance of Payments Although the Current Account remains negative, Mauritius has enjoyed a BoP surplus for six straight years. This has been made possible by real-estate driven record FDI levels onwards of 2007. While Australia has managed just fine with a CAD for decades, Mauritius remains more vulnerable to sudden foreign pull-outs. Foreign inflows are a potential fickle and/or volatile source of income, and thus should not be viewed as a solution for our CAD. Foreign Direct Investment FDI surged to record levels following aggressive reforms to improve the local business environment. These reforms have since consistently placed Mauritius in the Top 25 of the World Bank’s Doing Business rankings. Inflows have been principally geared towards two industries: finance and property. The property influx was driven by the construction of IRS/RES developments open to foreign nationals, i.e. FDI has flowed into non-productive assets. FDI quality has in a sense been poor as it will not fuel future growth.

Figure 14. FDI inflow evolution Exchange Rate Following a steep rise (almost 10%) in the USD’s value against the MUR in May-10, the central bank began intervening on the domestic foreign exchange market to tame volatility. Since Jul-10, the USD/MUR’s average mid-point has been Rs29.60±3% in

contrast to Rs30.26±7% in the corresponding period prior to the interventions.

Figure 15. Long term exchange rate evolution While excessive volatility has been tamed, the MUR appreciated with respected to a basket of currencies due to the inherent weakness of the other currencies vis-à-vis the USD. We notice that the USD/MUR mid-point cross rate has 68% of the time between Rs27.75 and Rs30.75; in comparison Mar-13 rates fall on the high side. Should the USD continue to firm, it could result in a higher than forecasted inflation rate.

Figure 16. MUR/USD 10Yr rate distribution

The Workforce While official unemployment figures are set to continue hover at about 8%, we maintain that this “high” figure does not reflect the reality of the labour market and is not a primary concern. Many factories import cheap labour from Asia and more recently, the

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construction sector has begun to import labour as well. This suggests that the Mauritians seek the higher value added jobs rather than reverting to menial work which may explain the higher youth and women unemployment rates. Our primary concern remains the skill-set mismatch that prevails, i.e. there exists a gap between what the employer seeks and training/experience within the pool of employable persons. It is perhaps addressing this gap, either via internships or specialised training that would help close the gap. Unfortunately, both are highly disruptive to the operations of a company. Inevitably, local Top Talent move overseas which forces Mauritian companies to in-turn import the appropriate personnel.

Figure 17. Employment trends

Concluding Remarks In this post crisis era, Mauritius will once more have to adapt and change its growth strategy. A further diversification of the economy is required to hoist productive capacity which would in turn raise optimal growth rates back up to ~5%. Also, a diversification of exports markets for both goods and services away from Europe is required. Unfortunately, Mauritius has been slow to react believing the storm would pass and traditional markets return. Having based its past success on preferential access, the island may find it less easy to penetrate new markets. Even its DTA with India has come under much scrutiny and will inevitably have its terms altered at a future point in time. Before then, weaning off the financial services sector’s dependence on the Indian market and exploiting new avenues in Africa would be essential. Unfortunately, a bold new policy and strategy to foster closer ties to the region have yet to be formulated. We also believe that major infrastructure changes need to be made to the ports12 to

12 Both Air and Sea

truly transform Mauritius into a regional hub and the gateway to Africa. Heightened diversification could then help turn the current account deficit into a surplus, and pave the way for a new and robust growth path.

Figure 18. GDP growth and Market evolution trends Like 2012, we choose to adopt a conservative stance. Our forecasts place GDP growth for Mauritius in 2013 at 3.3%. We expect the financial sector and a pick-up in manufacturing to offset the plunge in construction and stagnation within tourism. However, it is said that market indices trends mimic the state/health of an economy. The similarities between domestic GDP growth trends and the Semdex’s movements are striking. It is thus possible that the bullish trends observed since the start of the year signal an improving economy; alternatively, it may only mean that the SEM has recoupled with overseas trends.

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APPENDIX I. AXYS Sectorial Classification and Mapping

II. AXYS Listed Company Classification

Sector Gov. Classification

Financial (FIN) Financial services

Travel & Leisure (TL) Hotels & Restaurants Arts

Con. Staples (CONS) Agriculture Manufacturing

Con. Disc. (COND) Trade Manufacturing

Materials (MAT) Mining

Industrial (IND) Construction Transport & Storage

Health (HLTH) Health & Social

Communicatn. (COMM) IT & Comm. Property (PROP) Real Estate

Utilities (UT) Elec. & Gas Water

Government (GOV) Public admin. Other (OTH) Prof. svcs Admin. svcs Education Other

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REFERENCES The Economist 2012, ‘India’s balace of payments; The tail that wags the elephant’, The Economist. Available from <http://www.economist.com>. [12 May 2012]. Statistics Mauritius 2012, ‘National Accounts Estimates (2009-2012)’, Available from <http://statsmauritius.gov.mu>. [December 2012]. Statistics Mauritius 2013, ‘National Accounts Estimates (2010-2013)’, Available from <http://statsmauritius.gov.mu>. [March 2013]. Statistics Mauritius 2013, ‘International Travel and Tourism year 2012’, Available from <http://statsmauritius.gov.mu>. [27 February 2013]. Statistics Mauritius 2013, ‘Tourist Arrivals by Country of Residence, January – March 2012/2013’, Available from <http:// statsmauritius.gov.mu>. [April 2013]. Statistics Mauritius 2013, ‘Labour Force, Employment, and Unemployment – Fourth Quarter 2012’, Available from <http:// statsmauritius.gov.mu>. [March 2013]. Statistics Mauritius 2013, ‘External Trade – 4th Quarter 2012’, Available from <http://statsmauritius.gov.mu>. [28 February 2013]. Ministry of Finance 2012, ‘Programme-Based Budget Estimates 2013 and Indicative Estimates 2014 & 2015, Medium Term Macroeconomic Projections’, Available from <http://mof.gov.mu>. [November 2012]. Bheenick, R 2013. ‘Letter to Stakeholders, Steaming on… in Uncharted Waters in Storm-Tossed Seas’, Bank of Mauritius. Available from <http://www.bom.mu>. [05 February 2013]. Bank of Mauritius 2013, ‘Monthly Statistical Bulletin February 2013’, Available from <http://mof.gov.mu>. [30 March 2013]. U.S. Department of State 2013, ‘2013 Investment Climate Statement - Mauritius’, Available from <http://www.state.gov>. [March 2013]. Central Intelligence Agency 2013, ‘The World Factbook’, Available from <http://www.cia.gov>. [April 2013].

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Mauritian Economy - AXYS Group ~ Mauritius ~ Capital ... public sector wages. ... companies listed on the Stock Exchange of Mauritius ... A relatively well-diversified Mauritian economy

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