MCB Focus

1

62

Occasional paper No: 62

Economic update October 2015

2

62

Disclaimer

This publication has been prepared by MCB Group Limited (“MCB Group”) on behalf of itself, its subsidiaries and affiliated companies solely for the information of clients of MCB Group, its subsidiaries and affiliated companies. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading, MCB Group does not and will not (in any circumstances whatsoever) assume any responsibility in relation to its correctness, completeness or accuracy and accordingly neither MCB Group nor any of its director, officer or employee accepts any liability whatsoever for any direct or consequential loss arising from any reliance on, or use of, this publication or its contents.

3

62

TABLE OF CONTENTS

PAGE

Highlights 5

The global economy 6

The Mauritian economy 9

Figures

Figure 1: IMF World Economic Outlook projections 6

Figure 2: Main economic indicators 9

Figure 3: Evolution of real GDP growth forecast for 2015 10

Boxes

Box I: Recent dynamics in global commodities, money and financial markets 8

Box II: National income indicators in dollar terms 11

Box III: Growth-related indicators 12

Box IV: Analysis of Mauritius’ recent performance on the Global Competitiveness Index (GCI) 15

4

62

Page intentionally left blank

5

62

0

1

2

3

4

5

6

7

2006

2007

2008

2009

2010

2011

2012

2013

2014

(e)

2015

(f)

2016

(f)

%

Sources: IMF, World Economic Outlook, October 2015, Statistics Mauritius, Bank of Mauritius, and MCB staff estimates

(e) estimates (f) forecasts

World inflation

Euro area private consumer expenditure

World real GDP growth

Euro area unemployment

World GDP growth is anticipated at 3.1% in 2015 and should recover modestly to 3.6% in 2016, with inflationary trends likely to remain

subdued. As regards our main market, the euro area is expected to show relatively improving economic conditions, albeit from a low base,

although the environment remains delicate, as gauged by unemployment staying generally high.

Real GDP growth for Mauritius is estimated at 3.4% in 2015 and is expected to stand at 4% in 2016. On another note, unemployment should

remain within relatively elevated territories, while challenges persist with regard to the country’s position on the external front. On the other

hand, it is worth highlighting that, as a source of satisfaction, headline inflation remains quite low.

HIGHLIGHTS

Unemployment

External frontHeadline inflation

THE

INTE

RN

ATI

ON

AL

CO

NTE

XT

THE

MA

UR

ITIA

N E

CO

NO

MY

New methodology takes into account cross border transactions of GBC1s since January 2010

0

1

2

3

4

5

6

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(e

)

20

15

(f)

20

16

(f)

%

Unemployment

6

7

8

9

10

11

12

13

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

2014

(e)

2015

(f)

2016

(f)

% o

f t

otal

labo

ur f

orce

(e) estimates (f) forecasts

Real GDP growth

0

2

4

6

8

10

12

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(e)

20

15

(f)

20

16

(f)

%

2

3

4

5

6

2006

2007

2008

2009

2010

2011

2012

2013

2014

(e)

2015

(f)

2016

f)End

of p

eri

od

co

nsu

me

r pri

ces;

% c

han

ge

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2006

2007

2008

2009

2010

2011

2012

2013

2014

(e)

2015

(f)

2016

(f)

Ann

ual %

cha

nge

5

6

7

8

9

10

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(e)

20

15

(f)

20

16

(f)

%

0

3

6

9

12

15

0

20

40

60

80

100

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

(e)

20

15

(f)

20

16

(f)

% o

f G

DP

Rs

bn

Balance of visible trade deficit

Current account deficit as a % of GDP (right scale)

6

62

THE GLOBAL ECONOMY

The global economic situation remains delicate, with the recovery suffering new setbacks and uncertainty

weighing heavily on the outlook, six years after the world came out of the Great Recession. Largely due to

weaker-than-envisaged global activity in the first semester, IMF sliced its growth projection for the world

economy by 20 basis points to 3.1% for this year. Key undertones of this headline figure relate to increasingly

diverging cross-country and region specific prospects. On the one hand, near-term growth is firming up in

advanced economies, albeit modestly. This primarily reflects a confluence of factors, including retreating crisis

legacies, stimulus from subdued international commodity prices and highly accommodative monetary

Figure 1

Source: IMF, World Economic Outlook, October 2015

IMF World Economic Outlook projections

Real GDP Growth

World Output 3.4 3.3 3.4 3.1 3.6

Advanced economies 1.2 1.1 1.8 2.0 2.2

United States 2.2 1.5 2.4 2.6 2.8

Euro area -0.8 -0.3 0.9 1.5 1.6

Germany 0.6 0.4 1.6 1.5 1.6

France 0.2 0.7 0.2 1.2 1.5

United Kingdom 0.7 1.7 3.0 2.5 2.2

Emerging market and developing economies 5.2 5.0 4.6 4.0 4.5

Commonwealth of Independent States 3.4 2.2 1.0 -2.7 0.5

Emerging and Developing Asia 6.8 7.0 6.8 6.5 6.4

China 7.7 7.7 7.3 6.8 6.3

India 1 5.1 6.9 7.3 7.3 7.5

Emerging and Developing Europe 1.3 2.9 2.8 3.0 3.0

Latin America and the Caribbean 3.1 2.9 1.3 -0.3 0.8

MENA 2 5.0 2.3 2.7 2.5 3.9

Sub-Saharan Africa 4.3 5.2 5.0 3.8 4.3

Nigeria 4.3 5.4 6.3 4.0 4.3

South Africa 2.2 2.2 1.5 1.4 1.3

World Trade Volume (goods and services) 2.9 3.3 3.3 3.2 4.1

Commodity prices (US dollars)

Oil 3 1.0 -0.9 -7.5 -46.4 -2.4

Nonfuel (average based on world commodity export weights) -10.0 -1.2 -4.0 -16.9 -5.1

Consumer prices

Advanced economies 2.0 1.4 1.4 0.3 1.2

Emerging market and developing economies 6.0 5.8 5.1 5.6 5.1

London Interbank Offered Rate (percent)

On US Dollar Deposits (6 month) 0.7 0.4 0.3 0.4 1.2

On Euro Deposits (3 month) 0.6 0.2 0.2 0.0 0.0

(e) estimates (f) forecasts

2 Including Afghanistan and Pakistan

Percent change unless noted otherwise 2012 2013 2014(e) 2015(f) 2016(f)

Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during July 27–August 24, 2015. Economies are listed

on the basis of economic size. The aggregated quarterly data are seasonally adjusted. Data for Lithuania are included in the euro area aggregates

but were excluded in the April 2015 World Economic Outlook (WEO).

1For India, data and forecasts are presented on a fiscal year basis and GDP from 2011 onward is based on GDP at market prices with FY 2011/12

as a base year.

3 Simple average of prices of UK Brent, Dubai Fateh and West Texas Intermediate crude oil. The average price of oil in US dollars a barrel was

USD 96.25 in 2014; the assumed price based on futures markets is USD 51.62 in 2015 and USD 50.36 in 2016.

7

62

conditions, as well as improving confidence and labour market conditions, even if deflationary pressures and

weak underlying productivity growth continue to exert strains on activity levels. On the other hand, emerging

market and developing economies, as a whole, should experience a growth slowdown for the fifth year in a

row, which is all the more worrying when taking note of the fact that they account for a bulging share of global

output and are the biggest contributor to world growth. In an environment already marked by weakening

world commodity prices, this group of countries is also bearing the brunt of structural bottlenecks, stiffer

external financial conditions, pressures on their currencies, a rebalancing in China and economic woes linked

to geopolitical factors. For 2016, whilst its forecast has been trimmed by 0.2 percentage point relative to its

July 2015 World Economic Outlook Update in light of lingering vulnerabilities and uncertainties, the IMF still

projects that global activity will strengthen moderately to snatch a 3.6% growth rate. This would likely hinge

on (i) a sturdier recovery of advanced economies as output gaps steadily narrow; and (ii) emerging market and

developing economies recovering on the back of spillovers from stronger activity in advanced economies, a

progressive return to trend growth rates in countries in economic distress in 2015 (including Brazil, Russia and

some countries in Latin America and the Middle East), which would outweigh the gradual Chinese growth

realignment. All in all, however, the distribution of risks to the medium-term outlook for the global economy

keeps on being largely tilted to the downside, with threats comprising protracted commodity market

rebalancing, low productivity levels, broad-based weaknesses in investment, lasting legacies of insufficient

demand, geopolitical tensions, as well as heightened financial market volatility and disruptive asset price

shifts.

Coming to Mauritius’ main markets of interest, a relatively more favourable environment in the euro area can

be noted. Indeed, recovery therein has slowly begun to gather pace, with the IMF forecasting growth to

increase from 0.9% in 2014 to 1.5% this year, and move up slightly to 1.6% in 2016. Despite disparate country

prospects across the single currency area, this pickup should be underpinned by lingeringly low oil prices,

monetary easing and the euro depreciation. The outlook is nonetheless marked by a series of downside risks,

including potentially renewed deflationary pressures, weak potential growth and a slowdown in total factor

productivity, the still-unfolding Greek debt woes, the refugee and migrant crisis, as well as unfavourable

demographic dynamics. For its part, despite its generally appreciable fundamentals and ongoing policy

reforms, sub-Saharan Africa, which features as a prime target by Mauritius Inc. to widen and diversify its

economic space, is anticipated to post slower growth this year at 3.8%, although it is worth noting that this

growth rate is significantly higher upon excluding South Africa. The end of the commodity boom, waning

demand from slowing China – the region’s biggest single trading partner – as well as tightening financial

conditions for the continent’s frontier markets underscore this growth deceleration. Thereafter, the region’s

outlook is forecast to mend in 2016, with growth standing at 4.3%, buttressed inter alia by a moderate rise in

external demand linked to an anticipated strengthening of the global recovery, an expected progressive pickup

in oil prices benefiting net exporting economies and better prospects for Ebola-afflicted countries across

Africa.

8

62

Box I: Recent dynamics in global commodities, money and financial markets

Sources: IMF World Economic Outlook October 2015, IMF Global Financial Stability Report October 2015, World Bank Commodities Market Outlook July 2015,Morgan Stanley Research

Prices of several commodities dropped sharply in 2015, owing to ample supplies and

weak global economic activity. According to World Bank estimates, non-energy

commodities fell by 20% since June 2014, with prices of agriculture and precious

metals dropping by 18% and 5% respectively over this period. For its part, the price

of crude brent oil, which registered an above 55% drop between June 2014 and

January 2015, modestly rebounded before again falling in recent months to stand at

around USD 48 currently, on account of demand shocks and an oil production glut.

Over the medium term, oil prices are projected to increase gradually but remain

generally subdued, whilst non-fuel commodity prices should stabilise at lower levels.

Declining commodity prices acted as a shot in the arm for importing countries, and

particularly affected exporting emerging market and developing economies.

Notably, in sub-Saharan Africa, where the combined share of energy and minerals

and metals accounting for about two-thirds of the region’s exports, several oil-

exporting countries experienced major setbacks to growth.

Implications of lower international commodity pricesCommodity price indices, monthly

Note: Energy constitutes crude oil (85%), natural gas (11%) and coal (4%); Non-energy is mainly comprised of agriculture (65%)

Escalating risks to global financial market conditions

In a context characterised by lingering uncertainties about the global recovery,

volatility risks are being observed as international financial markets are bracing up to

the forthcoming interest rate lift-offs from the zero lower bound in the UK and the

US. Of note, the IMF advised the Federal Reserve to hold off its first increase in policy

rate since June 2006 at least till the first half of 2016, until signs of wage or price

inflation are firmer than being currently perceptible. On the other hand, other

countries are boosting monetary stimulus, hence heightening risks of asynchronous

monetary policy environments. Particularly, in the euro area, the Governing Council

of the European Central Bank, which is holding its regular monetary policy meeting

this week, is expected to contemplate an expansion of the Quantitative Easing (QE)

programme. At another level, the surprise Chinese Yuan devaluations last August

sent fresh shockwaves through global markets, with stock and resource prices

tumbling as investors viewed these moves as vivid signals of slowing Chinese growth.

In addition, China’s competitors, especially in Emerging Markets (EM), feared a loss

of competitiveness and an inflow of cheaper Chinese exports, which drove down

their import prices and in effect ignited disinflationary pressures. As a result, several

central banks followed suit and triggered a fresh round of competitive devaluations.

All in all, looking ahead, the IMF expressed concerns about financial risks increasingly

rotating to emerging markets, which would dampen the latter’s capacity to

withstand shocks associated with the potential threats of a further strengthening US

dollar and interest rate normalisation, more volatile capital flows and China’s

slowdown. Should all three unwinds occur simultaneously, Brazil, South Africa and

Indonesia will most severely be hit, as depicted in the adjacent diagram.

Triad of financial turbulences

(EM credit, China leverage and US QE)

55

75

95

115

135

155

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15

Ind

ex

(Jan

20

10

=1

00

)

Energy Non-energy Precious Metals

In the illustration below, the EM marked with an

arrow are the most structurally exposed to a ‘triple

unwind’, and could potentially inflect into a weaker

channel of growth.

Taiwan

Chile

ColombiaPeru

Malaysia China

Indonesia

South Africa

Brazil

Mexico Thailand

Russia

Poland India

Unwinding EM domestic credit(Hurting EM growth directly)

Unwinding US QE via higher real rates, dollar strength(Hurting EM capital accounts)

Unwinding China leverage(Hurting EM current accounts)

9

62

THE MAURITIAN ECONOMY

Updated forecasts for 2015

Economic growth

It is comforting to note that macroeconomic priorities have been taking a more central place in the domestic

public discourse recently. Whilst not dismissive of headway being made to lay framework conditions with a

view to achieving and harnessing a nascent economic momentum, the Mauritian economy would remain in a

challenging zone in 2015. In fact, our latest outlook features a downgrade of our earlier growth prognosis,

partly linked to the notable worsening of our investment projections. Thus, economic growth – based on GDP

at market prices, in line with international national accounting conventions – is anticipated to stand at 3.4%

this year. This marginally undershoots the most recent forecast of Statistics Mauritius, which has been revised

downward to 3.5%, whilst being above the IMF forecast of 3.2%. In particular, growth would be marred by

another noticeable downturn in private sector investment and unfavourable outcomes posted by specific

sectors, which can principally be explained by the persistence of supply-side constraints as well as the

country’s vulnerability to the worsening global growth outturn and related economic uncertainty levels.

Additionally, activity levels would be affected by the restrained, albeit positive, growth foreseen at the level of

Figure 2

Sources: Statistics Mauritius, Ministry of Finance & Economic Development, Bank of Mauritius & MCB staff estimates

Main economic indicators

Unit 2011 2012 2013 2014(1)

2015(2)

GDPmp Rs bn 323 344 366 387 408

Per capita GDP USD 8,975 9,134 9,483 10,013 9,200

GDP growth (at market prices) % 3.9 3.2 3.2 3.6 3.4

GDP growth (at basic prices) % 3.6 3.4 3.2 3.5 3.4

GDS % GDP 13.1 12.7 11.8 11.6 12.0

GDFCF % GDP 24.0 23.0 21.2 19.1 18.1

Headline inflation Dec, % 6.5 3.9 3.5 3.2 1.7

Budget deficit % GDP 3.2 1.8 3.5 3.2 3.8*

Public sector debt (for the purpose of debt ceiling) % GDP 53.1 52.1 53.9 54.2 55.5

Balance of visible trade deficit Rs bn 74.2 81.3 77.5 76.8 79.3

Current account deficit % GDP 13.8 7.3 6.3 5.5 5.4

Overall balance of payments Rs bn +5.2 +6.0 +16.6 +23.0 +14.3

Unemployment rate average, % 7.8 8.0 8.0 7.8 8.0

(1) Revised estimates (2) MCB revised forecasts

* In light of the shift from a calendar year to a fiscal year basis for budgetary reporting purposes, the figure relates to the January to June 2015 period, with the

forecast for FY 2015/16 being 3.5%.

10

62

public sector investment. Overall, in keeping with recent trends, the growth forecast for 2015 translates into

yet another sub-par performance for the country, which needs to be promptly reversed in order to lay solid

foundations for full gear wealth and job creation in view of our objective of achieving durable and inclusive

growth. Against the backdrop of the country’s growth performance, GDP at market prices is forecast to grow

from Rs 387 billion in 2014 to Rs 408 billion in 2015. Subsequently, per capita GDP in rupee terms should chalk

a 5.3% nominal increase to attain some Rs 323,000. However, per capita GDP denominated in US dollars

should drift downwards, when assessed relative to the preceding year, to revolve at USD 9,200, after making

allowance for the marked strengthening of the greenback on international markets.

As mentioned, our growth outlook reflects a still bridled national investment climate. Firstly, public sector

investment is expected to register a lower-than-previously-anticipated growth due to project implementation

lead times affecting large-scale ventures. Secondly, private sector investment should contract, for the fourth

consecutive year, against the backdrop of economic difficulties and uncertainties, mainly attributable to a

notable dip in non-residential fixed capital formation, which has an important bearing on the country’s

productive capacity and job creation. All in all, the combination of these trends should cause the GDFCF to

GDP ratio to yet again decline this year to reach 18.1% for the first time in more than three decades.

Nonetheless, in view of the still-low domestic savings rate, the resource gap remains a cause for concern in

light of the country’s investment aspirations, thus implying continued reliance on foreign saving. At another

level, it is worth pointing out that the anaemic investment pattern should contribute to the worsening of

nationwide unemployment by 20 basis points to reach 8.0% in 2015. Beyond this number, an assessment of

the core dynamics at play shines light on persistent related trends which offer disquieting insights. Indeed,

labour statistics for the second quarter of 2015 indicate that: (i) 43% of the unemployed were aged below 25

years; (ii) 32% of the unemployed have been looking for work for a year or more; (iii) the overall joblessness

rate for women attained 11.9%, with the indicator reaching 30.4% for the 16-24 age group; and (iv) the

national participation rate lingered at 60.8%, with the female activity rate being even more worrying at 47.3%.

Figure 3

Sources: Statistics Mauritius, Bank of Mauritius (Minutes of Monetary Policy Committee meetings), IMF & MCB staff estimates

Evolution of real GDP growth forecast for 2015

(Figures are at market prices unless otherwise stated)

Forecast as atStatistics Mauritius

(Official figures)Bank of Mauritius* IMF MCB

Oct 14 - - 3.9 -

Nov 14 - - - 3.8

Dec 14 - - - -

Jan 15 - - - 3.8

Feb 15 - - - -

Mar 15 3.9 - - -

Apr 15 - 4.3 3.5 3.8

May 15 - - - -

Jun 15 3.6 - - -

Jul 15 - 3.7 - 3.6

Aug 15 - - - -

Sep 15 3.5 - - -

Oct 15 - - 3.2 3.4

* Figures are at basic prices

Sources: Statistics Mauritius, Bank of Mauritius (Minutes of Monetary Policy Committee meetings), IMF & MCB staff estimates

11

62

Box II: National income indicators in dollar terms

Sources: IMF, Statistics Mauritius & MCB Staff estimates

National income identity

GDP at market prices = Final Consumption Expenditure + Gross Domestic Fixed Capital Formation +

Government Expenditure + Net exports of goods & services

+ Net primary income from rest of the world + Net transfers from rest of the world

= Gross Domestic National Disposable Income

Using latest available figures from IMF, it can be observed that GDP at market prices, measured in current international dollars

and in PPP terms, has risen over the past few years. However, GDP per capita contracted by around 8% to reach USD 9,200 in

2015, after catering for the estimated sizeable firming up of the greenback against the rupee.

GDP in PPP terms Per capita GDP

Net flows from rest of the world Net exports of goods & services

The impact of trends characterising the USD can be fittingly evaluated by scrutinising indicators capturing the country’s

transactions on the international scene. Notably, whilst the movement of such metrics should be carefully appraised on account

of their volatile nature – partly linked to the evolution of flows associated with Global Business Companies – the net primary

income and net transfer from rest of the world fell in 2015 when computed in USD and making allowance for the latter’s

strengthening. Besides, this situation contributed to the negative USD figure for net exports becoming less prominent in 2015.

Evolution of key indicators in dollar terms

(e) estimates (f) forecasts

6,000

7,000

8,000

9,000

10,000

11,000

12,000

2011 2012 2013 2014(e) 2015(f)

USD

10

15

20

25

2011 2012 2013 2014(e) 2015(f)

Cu

rre

nt

Inte

rna

tio

na

l D

oll

ar

bn

-100

0

100

200

300

2011 2012 2013 2014(e) 2015(f)

USD

m

Exports of goods & services Imports of goods & services

Net exports of goods & services

-400

-200

0

200

400

600

800

1000

2011 2012 2013 2014(e) 2015(f)

USD

m

Net primary income from rest of the world (incl. GBC)

Net transfers from rest of the world (incl. GBC)

12

62

Box III: Growth-related indicators

Source: Statistics Mauritius

Contribution of expenditure to economic growth

(e) estimates (f) forecasts

In 2015, private investment is, for the fourth

consecutive year, anticipated to cast a

negative impact on the economy’s expansion.

Indeed, it is expected to rub off some 70 basis

points out of real GDP growth.

Reflecting the soft economic climate, the share

of total investment to GDP pursued a marked

downtrend over the years. In spite of this

evolution, the country’s resource gap has

remained relatively wide over time.

On the other hand, the ratio of final

consumption expenditure to national output

has stayed generally elevated …

… while net exports of goods and services

have exerted lower strains on GDP over time.

Investment & Savings

Consumption expenditure

Net exports of goods & services

0

20

40

60

80

100

2011 2012 2013 2014(e) 2015(f)

% o

f GD

P

General Government Households

-14

-13

-12

-11

-10

2011 2012 2013 2014(e) 2015(f)

% o

f GD

P

-6

-4

-2

0

2

4

6

8

2011 2012 2013 2014(e) 2015(f)

% p

oin

ts

Public investment Private investment

Net exports of goods & services Inventories (incl. statistical discrepancies)

Consumption

5

10

15

20

25

2011 2012 2013 2014(e) 2015(f)

% o

f GD

P

GDS GDFCF

13

62

From a sectorial standpoint, mixed outcomes are being contemplated in respect of value added generated.

Specifically, tourism is anticipated to record a circumstantially appreciable growth performance in 2015, on

account of ongoing trends which point towards sustained increases in tourist arrivals building up on the

corresponding year-on-year increase of 10.8% recorded for the period January – September 2015. The sector

will, in all likelihood, leverage on the payoffs of sustainable efforts towards ensuring the continuous

diversification of markets and refinement of value propositions, even though it should be highlighted that the

trajectory of gross receipts would likely be contained, partly due to dampened income evolution in key source

markets. Moreover, the business and financial services as well as the ICT industries should uphold their

noteworthy expansionary tempo yet again this year, propped up by sound fundamentals and sustained sector

deepening. For its part, growth should remain quite strong in the seafood industry this year, supported by

market access inroads and capacity-building investments, despite some ascending stresses originating from

newly implemented increases in European tariff quotas for the latter’s imports of selected fishery products

which would tend to benefit competitor countries, such as Philippines and Thailand. From a less favourable

perspective, the performances of other sectors are expected to stay in relatively challenging waters. In

particular, despite a much-weakened base effect, construction is forecast to contract in 2015 for the fifth

consecutive year, largely due to declining private sector investment and the tempered growth in public sector

spending. Elsewhere, the sugar sector should post an adverse performance this year, on the back of (i) a

slower sugar extraction rate notably linked to unfavourable climatic conditions, with sugar production

expected to fall marginally from 401,000 in 2014 to 390,000 tonnes as per latest estimates from the Crop

Estimate Coordinating Committee; and (ii) the reorientation of its productive activities. As for the textile

industry, expansion in value added is forecast to be modest this year owing to the still-delicate economic

climate prevailing in our key export markets, even if operators would reap the positive offshoots from

enhanced market access beyond established spheres, as well as productive efficiency gains. Furthermore,

despite new initiatives launched by the authorities to foster the development of Small and Medium

Enterprises, the performance of the domestic oriented industry is likely to remain subdued this year due to the

soft economic landscape, which should also contribute to a somewhat restrained growth outcome for the

trade sector.

Other indicators

One bright spot for the Mauritian economy comes from moderating inflationary pressures. In fact, after

standing at 3.9% a year earlier, headline inflation pursued a downward trend to attain 1.2% in September

2015. This largely reflects (i) weakened oil and commodity prices on the global front, albeit not fully passed

through; and (ii) subdued domestic demand and the relative declines in transport and telecommunication

prices locally. In the months ahead, inflation would resume a gradual uptrend, partly linked to the increasingly

prominent statistical impact of recent past increases in the consumer price index, but is still expected to stay

14

62

relatively low at 1.7% as at December 2015 on the back of the soft commodity prices and economic conditions.

Against this backdrop of relatively subdued inflationary pressures and bearing in mind the delicate economic

context, it can be noted that the successive meetings of the Monetary Policy Committee of the Bank of

Mauritius have left the benchmark Key Repo Rate unaltered. Regarding public finances, in spite of lower-than-

expected Government capital expenditure, the country’s fiscal position should continue to warrant close

monitoring, with the budget deficit remaining relatively elevated in 2015, thus exerting pressures on the public

debt. Already, the public debt has risen from 60.7% in 2014 to 63.4% in June 2015 based on the international

definition, while increasing from 54.2% in 2014 to 56% of GDP in June 2015, when computed for the purpose

of the statutory ceiling. There is thus a vital need, in the short- to medium-term, to be particularly careful

regarding the structure of financing of public sector projects. On the external front, notwithstanding notable

headway harnessed regarding diversification of export markets, the still testing economic context

characterising our key trading partners, the relative weakness of the euro on international markets and

inherent structural weaknesses on the local front should continue to contribute in keeping external

imbalances at generally elevated levels. The balance of trade is forecast to stay high and attain around Rs 79

billion this year, despite benefiting from the relief instilled to the import bill for petroleum and food products

in the wake of declining international commodity prices. All in all, such dynamics should lead to a relatively

wide current account deficit of around 5.4% of GDP in 2015. This imbalance is likely to be more than

compensated for by capital inflows – even if the latter’s exact magnitude is difficult to figure out given the

inherent volatility of cross border transactions of global business companies (GBCs) and the impact of ‘net

errors and omissions’ – leading to another surplus position on the country’s balance of payments.

Nevertheless, this positive outcome should not mask the precariousness of our external balances in light of the

country’s vulnerability to external shocks in the event of unforeseen outflows brought about by sudden shifts

in investor sentiment.

15

62

Box IV: Analysis of Mauritius’ recent performance on the Global Competitiveness Index (GCI)

Sources: World Economic Forum Global Competitiveness Indices and IMF World Economic Outlook October 2015 database

Even if the country retains its leading position as the most competitive economy in Africa in the GCI 2015-2016 rankings, the

report highlights that “the decade-long improvement of Mauritius comes to a halt this year with a fall of seven places to 46th.

Small improvements in the basic factors for competitiveness— institutions (34th, up one), infrastructure (37th, up five), and higher

education (52, up two) are offset by declines in the efficiency of labor (down by five places to 57th) and the financial market (down

by eight places to 34th) … However, as the country transitions moves up the development ladder, more needs to be done to unlock

the areas of competitiveness conducive to a knowledge-driven economy: higher education, especially its quality; the use of ICTs

and ability to absorb new technologies (65th), where it has steadily declined over the past decade; the capacity to innovate, about

which business leaders are particularly concerned; and an inadequately educated workforce.” Of note, over and above the afore-

mentioned changes in the country’s rankings, it is important to probe further into the granular evolution of our scores along the

pillars of competitiveness, relative to the best and worst performers worldwide for informed analysis and policy-making towards

effectively addressing such deficiencies.

1

2

3

4

5

6

7

2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014

Sco

re (1

-7)

Best performer

Mauritius

Worst performer

Pil

lar

The urgency to promptly tackle the above-mentioned competitiveness hindrances is all the more amplified in order to timely

meet Mauritius’ aspirations for an elevated growth path, given the strong positive link existing between a country’s GDP per

capita and its competitiveness score. The latter acts as a good proxy for productivity and as such, fundamentally shaping the

medium to long-run growth rate of an economy and its level of prosperity, as depicted in the below diagram.

*GCI score: 1=worst; 7=best

*

GCI 2015-16 score (1-7)*

0

20

40

60

80

100

120

140

1 2 3 4 5 6 7

GD

P p

er c

ap

ita

, PP

P (2

01

5),

USD

'00

0

Mauritius

16

62

The way forward

In view of pressures exerted on its real, fiscal and external sectors, it is essential for Mauritius Inc. to address

its supply-side bottlenecks to create and nurture a strong and dependable foothold that will pave the way for

high, sustainable and inclusive growth. In this respect, while it is comforting to take note of large-scale projects

announced by the authorities, the rejuvenation of national investment levels, coupled with the timely and

consistent execution of other structural reforms, is a sine qua non condition for uplifting the economy’s long-

term potential growth rate to beyond the 5% mark, thence helping the country to preserve and enhance its

social gains. As for 2016, notwithstanding the cumulative statistical effect of several years of sub-par growth,

our preliminary view is that real GDP growth would, as per our baseline scenario, attain 4%, which is slightly

above the latest forecast of 3.8% by the IMF. While factoring in the gradual healing of the global economy,

particularly in some of our key export markets, and the upturn in national investment levels, our outlook

reflects expected lead times for investment projects to be put into place and associated leakages, bearing in

mind that the import content is usually quite prominent at the inception phase of such ventures. That said,

economic growth will be underpinned by the projected double-digit expansion in public investment amidst

announcements made by the Government to extensively and opportunely bolster the infrastructure set-up,

with focus laid on the new road decongestion programme, the restructuring and extension of the port, as well

as the upgrading of water and electricity distribution and the telecommunications network. Besides, domestic

activity levels would benefit from a moderate recovery in private investment, aided by the kick-starting of

some sizeable projects and policy measures earmarked by the authorities to expedite the execution of

ventures and generate a more business-friendly trade and investment framework. In another respect, it can be

highlighted that, relative to our baseline growth forecast, downside risks remain on the cards, with Mauritius

being faced with the possibility, albeit with a low probability, of weaker-than-projected growth being realised

next year in the event of global shocks and material delays in the execution of contemplated investment

projects. However, the distribution of risks to our baseline growth prognosis is slightly tilted to the upside.

Noticeably, there is a moderate probability of real GDP growth moving up to a higher level if (i) a more

significant recovery is posted by our key export markets; (ii) earmarked infrastructure-enhancing undertakings

are executed at an accelerated pace; and (iii) the prompt implementation of structural reforms plays a more

catalytic role in unlocking and re-energising private sector investment.

J. Gilbert Gnany Chief Strategy Officer October 22, 2015

17

62

Sources

Bank of Mauritius, Minutes of Monetary Policy Committee Meetings, Financial Stability Report, August

2015, Inflation Expectations Survey, August 2015 & Various Publications

European Commission, Various Publications

Eurostat, Quarterly National Accounts

IMF, Article IV Consultation Reports for Mauritius

IMF Blog, Various articles

IMF, Global Financial Stability Report, October 2015

IMF, Global Policy Agenda, October 2015

IMF, World Economic Outlook Online database

Morgan Stanley Research, July 2015

MCB Focus, Previous issues

Ministry of Finance & Economic Development, National Budget Speech 2015, Public Sector Investment

Programme Jan-June 2015/16 - 2019/20, Various Other Publications and Pronouncements

Selected Internet and Newspaper Articles

Statistics Mauritius, National Accounts Estimates, Population and Vital Statistics, Labour Force,

Employment and Unemployment, International Travel and Tourism, Exports and Imports Price Indices &

Various Publications

World Bank, Africa Pulse, October 2015

World Bank, Commodities Price Data (The Pink Sheet), October 2015

World Economic Forum, The Global Competitiveness Index 2014-2015 and 2015-2016

MCB Strategy, Research & Development, Staff Estimates

Page intentionally left blank

Page intentionally left blank