The Mauritian Economy

Executive Summary
Eye of the storm
The Mauritian economy in 2009 proved relatively resilient to the global
recession by recording a GDP growth rate of 2.2% (at market prices). The
economy derived its strength both from the bold package of policies and
reforms initiated in 2006, and from a timely fiscal stimulus. The worst
affected sectors were textiles and tourism which both recorded contractions
due to a fall in demand; and construction grew at a reduced rate because of
project delays and postponements. Country Information
Appellation: Republic of Mauritius
Lying ahead Independence/Rep.: March 12, 1968/1992
The July CSO forecast revises the GDP growth rate down from 4.3% to 4.0% Government: Westminster Dem.
in 2010. Owing to our less optimistic stance on tourism, we expect the figure President: Sir Jugnauth, A.
to be closer to 3.5%. It is possible for both Textiles and Tourism to record Prime Minister: Dr Ramgoolam, N.
slight growth due to the statistical effect of a low base, in spite of a double Suffrage: Universal, >18yrs
whammy: weakened EUR and GBP, and slower rate of recovery in the Off. & Biz. Language: English, French
Eurozone. The construction sector – boosted by a massive government
infrastructure programme (PSIP) which is facing delays – is set to grow at a Geography
subdued rate for the second straight year. The emerging real estate sector is Area: 2,040 km2
a cause for concern with the drying out of buyers for IRS/RES developments Excl. economic zone: 1.9M km2
coupled with an unsettling rush into commercial real estate. However, we Capital: Port-Louis
expect the financial sector to continue growing at a stable pace driven by Location: 20° 10' S; 57° 30' E
Time Zone: GMT +4 hrs
stable banks and global businesses. The sugar industry is expected to record
Climate: Sub-tropical
no growth with harvest at par with the preceding year.
Tel. country code: 230
Intnet country code: .mu
The current account deficit is set to widen due to decreasing export
revenue, and the re-emergence of inflation. According the last monetary
Demographics
policy committee, inflation has bottomed out and will return to its
Population: 1,275,000
historically high levels. As a result, the Bank of Mauritius kept its Repo Rate
Popn growth rate: 0.5%
unchanged at 5.75%. We believe that unemployment, which stood at 8.3% Median age: 32 yrs
in Q1 2010, will hover around the 8.5% mark. Life expectancy: 74 yrs
Workforce: 594,000
Vicious circle Unemployment: 8.3%
Export dependent sectors are faced with structural issues that can no longer Literacy: 84.4% (2000)
be resolved via depreciation. Depreciation results in increased inflation Poverty: 8% (2006)
which leads to demands for wage increase which ultimately results
increased production costs, thereby not resolving the issue. Mauritius needs Currency
to adapt and re-invent itself – as it has done, more than once, in past – in Currency: Mauritian Rupee
order to return to sustainable growth path. Symbol/code: Rs / MUR
Exchange rate: Rs 33 per USD
Rs 41 per EUR
CSO (Apr) CSO (Jul)
2007 2008 2009 2010F 2010F Economy (2009)
GDP growth rate: 2.2%
GDP Growth @ Mkt 5.5% 5.1% 2.2% 4.3% 4.0% GDP: Rs 274.8bn
Sugar -13.6% 3.7% 15.0% 8.9% 2.3% GDP per capita: Rs 215,500
Manufacturing 2.2% 3.2% 1.1% 2.1% 1.9% GDP ppp: $ 15.9bn (133rd)
GDP ppp per capita: $ 12,400 (91st)
Textiles 8.5% 0.0% -2.9% 1.0% 1.0%
Budget deficit: 4.5% of GDP
Financial Intermediation 7.5% 10.8% 4.9% 5.9% 5.9% Public debt: 58.7% of GDP
Real Estate 7.6% 7.6% 5.9% 5.8% 5.6% Current A/C deficit: 7.5% of GDP
Construction 15.2% 11.1% 6.5% 8.0% 5.0% Headline Inflation: 2.5%
Net intl reserves: 8.3% of GDP
Hotels & Restaurants 14.0% 2.7% -5.3% 5.1% 5.1%

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 The Mauritian Economy
Mauritius: A bird’s eye view nevertheless, it will back peddle on a couple of unpopular
Economy fiscal measures taken during its previous mandate.
Mauritius is an upper-middle-income (UMI) small-island-
state. From a monocrop-sugar based economy at Judicial
independence in 1968, Mauritius has steadily diversified The Mauritian legal system was instituted using elements
and opened up its export oriented economy. In 2006, of both British common law and French civil codes. The
bolder ongoing economic reforms were initiated in the highest institution for judicial proceedings is the Supreme
wake of the erosion of trade preferences; namely the Court, however the highest court of appeals has remained
Sugar Protocol and the Multi-Fibre Agreement (MFA). The the Privy Council of England. The chief justice is appointed
fruits of these reforms are evidenced by the successful by the president in consultation with the PM.
economic growth and diversification as well as the
improvement in business climate. In just a few years, the Developments
th
island state sky rocketed to 17 in 2010 on the World In 2009, a specialised Commercial Court was established
Bank’s Doing Business Report; thereby making Mauritius for the purpose of expediting the settlement of
1st in Sub-Saharan Africa (ahead of South Africa), and 1st commercial disputes.
amongst UMI countries (ahead of Malaysia).
The Mauritian Economy:
Sector by Sector
Sugar
The Sugar industry is of
paramount historical
importance to the
development of Mauritius. It
was the only pillar of the
domestic economy pre-
independence. Today it
represents a mere 2% of GDP
and employs almost 10% of
the workforce.

The wake-up call

Sugar estates, protected by
Figure 1. Sectoral breakdown of the Mauritian economy trade preferences (Sugar Protocol, Lomé Convention) and
impeded by imposed structural constraints, did not
Government
improve their business model. Precipitated by World
Mauritius acceded to the status of republic in 1992,
Trade Organisation (WTO) rulings, the European Union
resulting in a president replacing the Queen of England as
(EU), decided to abolish trade preferences and cease the
the head of state. The president is elected quinquennially
purchase of sugar at a hefty premium to market prices.
by the National Assembly (Parliament); however all
executive powers reside in the prime minister (PM), who
Reforms
is elected via universal suffrage for five year terms as per
Upon assessment, Mauritius found itself amongst the
the Westminster model.
least competitive, inefficient, and ineffective sugar
producing countries. Nevertheless the Illovo deal paved
Policy
the way for reforms, and it was found that exporting
Recent administrations – including the newly elected one
refined sugar and special sugars moved Mauritius up the
– have traditionally adopted social agendas, albeit with a
competitive ladder helped by its logistical advantage: an
gradual liberalisation of the economy. The re-elected
efficient seaport, and short land-base journeys.
government has stated its intention to pursue reforms;

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 The Mauritian Economy
Figure 1. World sugar prices in MUR/kg
Figure 2. Sugar industry growth rates, and share of GDP
Sugar Industry Performance
According to the Central Statistics Office (CSO), the sugar
industry grew by 15% in 2009 driven by an improved
harvest. As for 2010, the CSO has revised its July growth
forecast down to 2.3% from 8.9% in April; however we at
AXYS foresee no growth in 2010 because
1. The 2010 harvest is expected to be on par with 2009;
2. The Euro is hovering at its lowest level in two-years.
Manufacturing
Textiles
The textile industry, which makes up 28% of
manufacturing, underwent a relatively successful
restructuring in the mid 2000s. These reforms were
triggered by the phasing out of trade preferences such as
AXYS Stockbroking Ltd
the MFA and the Africa Growth and Opportunity Act, as
illustrated in Figure 4 below.
Figure 3. Textile sector growth rates
Shifting Models
The Export Processing Zone (EPZ) model of the 1980s and
1990s was based on trade preferences and an ongoing
depreciation of the MUR. Today, the EPZ model is
obsolete; as local manufacturing companies have to
compete, on a level playing field, with low-cost production
countries such as Bangladesh, India, China, and Vietnam.
Textile Industry Performance
In 2010, contrary to the CSO’s forecasted 1.0% growth, we
foresee stagnation or further contraction; due to
weaknesses in the EUR and GBP which have exacerbated
the trailing lag effects of the global recession.
Domestic Oriented Manufacturing (DOM)
The elimination of duty on all imported goods, as re-
announced by government in the President’s address,
may adversely impact on DOM. Cheaper imports replacing
locally manufactured products, as most recently
exemplified by the closure of a sandal maker after
operating for several decades. However, making of
Mauritius a Duty Free Island (DFI) goes against
convergence criteria of both the SADC and the COMESA;
making of the announced DFI an improbable reality in the
near future.
Manufacturing Industry Performance
The CSO estimates that manufacturing grew by 1.1% in
2009 despite the global recession. It has revised its growth
projections for 2010 down from 2.1% in April to 1.9% in
July. However, we at AXYS expect manufacturing to grow
at around 1.5% because the pace of economic recovery in
July 2010 3
 The Mauritian Economy
Mauritius’ primary export markets has slowed down since
the Greek bail-out.
Figure 4. Manufacturing sector growth and share of GDP
Financial Intermediation
Over the past decade, Mauritius has slowly but surely
developed into a reputable financial centre; albeit, a
conservative one. This traditionalism was demonstrated
by the local banks which did not indulge into asset classes
like the mortgaged-backed securities being at the heart of
Wall Street’s meltdown. A main line of business, other
than banking, is the offshore sector which was recently
renamed the Global Business (GB) sector. Having
graduated to the OECD’s white list, government finds
calling Mauritius a tax haven derogatory.
Global Business
The Mauritian Global Business industry derives its
advantage from the various multilateral, and bilateral
Double Taxation Avoidance (DTA) treaties. Additionally,
fortunate geographical positioning allows Mauritius to
conduct business with Tokyo, Mumbai, London, and New
York, all on the same business day.
DTA with India
Following recent financing scandals in the high-profile
money-minting Indian Premier League (IPL – India’s
cricket top flight), there was public outcry in India to
review its DTA with Mauritius, as it is believed that some
of the tainted money transited in the domestic GB. If this
AXYS Stockbroking Ltd July 2010
DTA were to be amended, it would have a negative impact
on this sector. However, we do not expect any changes in
the DTA with India in the near future because Mauritius
and India share strong diplomatic ties; and also because
Mauritius is a key investment vehicle into India.
Figure 5. Finance growth and share of GDP
Financial Industry Performance
Banking, the financial industry’s primary driver, came out
of the global financial crisis virtually unscathed. The
industry recorded a subdued 4.9% growth rate in 2009,
compared to 10.8% in 2008. With respect to 2010, the
CSO expects a 5.9% growth rate, but we believe the
growth will be similar to 2009 levels due to the reduced
loan book and deposit base growth as recorded by MCB
and SBM.
Real Estate
Real estate has emerged as one of the new pillars of the
economy. The sector took off following the introduction
of Integrated Resort (IRS) and Real Estate Schemes (RES),
where for the first time non citizens were allowed to
purchase property. Additionally, the reduction in sugar
production from over 600kT to about 450kT, has freed up
land for the development of gated communities,
apartments, business parks, and shopping malls. Over the
past three years, the industry has grown at an average of
7.0%.
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 The Mauritian Economy
Figure 6. Real Estate growth rate and share of GDP
IRS/RES
The über-luxurious IRS/RES property developments are
out of reach for over 99% of the Mauritian population.
Several projects have been placed on hold – following the
collapse of this very sector both in Europe and USA –
because buyers have dried out. A key drawback faced in
selling a luxury villa in Mauritius to a European buyer is
distance; not many are willing to take twelve hour flights
to spend a few days at their vacation home. Proximity to
South Africa is a likely explanation for the high proportion
of South Africans buying such properties. IRS/RES is
unlikely to grow much further, unless high net worth
Asians or Middle Easterners can be attracted.
Business Parks
The emergence of business parks has been a welcome
addition to the domestic landscape. However, unless the
big banks, major conglomerates, and government services
start relocating outside of Port-Louis, there will be no
momentum for decentralisation. Another factor resides in
the absence of urban planning. Ebène with its awkwardly
designed narrow roads, and a mere few dozen parking
spaces per 10-15 storey skyscrapers is perhaps a wasted
opportunity.
Residential and Commercial Properties
In Mauritius, Singapore or Hong Kong, land is very limited.
It is thus quite natural for property prices to rise as the
island develops. The construction frenzy and boom in
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sales of property in the recent past – fuelled by
expatriates being allowed to own property after meeting
select criteria – as well as the soaring prices is reason for
anxiety.
Figure 7. Existing malls depicted in red, & planned malls in blue
Malls in Mauritius
There presently is a commercial property craze. For
instance in the short distance between Phoenix and
Trianon, there already exists three shopping centres, each
with a grocery store, food court and boutiques; yet, there
is
1. a new mall (Centre Point) under construction at
Trianon;
2. a shopping centre planned 0.5km down the M1
towards Ebène; and
3. foundation works have begun on the Mall of Mauritius,
4km down the M1 at Bagatelle.
In addition, malls are being planned at
4. Cascavelle in the west;
5. La Croisette (cost of Rs 2bn) in the north at Grand-
Baie; and a
6. Government mandated Waterfront is to be built at Les
Salines (Port-Louis) by an Indian engineering company.
A key question to be asked is whether the Mauritian
consumer has an exponentially expanding purchasing
power; or will these malls further split the existing pie?
Sector Performance
The Real Estate sector grew at a subdued 5.8% in 2009,
with a revised July CSO forecast for 2010 at 5.6%.
However, we anticipate a lower growth of around 5.1% in
2010, on the back of fears that the supply/demand
imbalance will be reached sooner rather than later.
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 The Mauritian Economy
Construction
Construction, so long as government spends as per its
ambitious Public Sector Investment Programme (PSIP),
will grow at an excellent rate, irrespective of the
prevailing economic environment. Thus far, the usual
government-related delays, and complacency have led to
lower than budgeted expenditure. Additionally, the July
CSO national accounts state delays in the PSIP as the
reason for lowering the 2010 growth rate from 8.0% to
5.0%; thereby re-enforcing our views.
Figure 8. Construction growth rate and share of GDP
Road Decongestion Programme
A significant subset of the PSIP involves projects aimed at
road decongestion, most of which were restated during
the President’s Address. These include the extension of
the M2 to Grand Baie, the addition of lanes to the M1
between Phoenix and Caudan, the Ring Road, the harbour
(or dream) bridge, and several by-passes including a
highway to circumnavigate Port-Louis. The program
should in theory alleviate traffic, however several hurdles
remain:
 The issue is not the number of lanes on the M1 or M2,
but the limited number entry/exit points in and out of
Port-Louis;
 There exist squatters connected to the electricity,
water, and sewage grids living on the path of the Ring
Road, ie political will is needed to address the
problem;
 Charging toll to use the highways, imply toll plazas
which lead to increased bottle-necks.
AXYS Stockbroking Ltd July 2010
Sector Performance
The construction sector has grown at double digit rates in
the recent past driven by the real estate boom and doped
by government spending. Having grown at a reduced 6.5%
in 2009, the CSO has revised the growth rate from 8.0% to
5.0% citing government delays. We concur provided
government does not further delay the PSIP.
Tourism
When supply exceeds demand
The tourism industry currently suffers from a
supply/demand imbalance. Comparing 2009 and 2007
statistics, we observe that arrivals dropped by 4% whilst
bed places increased by 7%. Consequently, lowered room
rates are likely to become a new norm for the medium
term. In addition, a pronounced shift in clientèle away
from 5-Star hotels towards cheaper alternatives has been
reported by all major hotel groups. It is time for the
industry to adapt and adjust, since depreciating the Rupee
is a short-sighted and temporary solution.
Figure 9. Hotels & Restaurants growth and share of GDP
Industry Performance
In 2009, the tourism sector experienced recession
shrinking by 5% due to its vulnerability to exogenous
shocks, as well as its over-concentration on the European
market. The CSO have forecast a 5.1% growth rate in
2010; however we believe it is premature to revise our
tourism paper forecasts (arrivals at 907k, receipts at Rs
35bn) upwards until we have seen the results from CY Q2
which englobe the effects of the Icelandic volcanic ash
eruptions, and the low season on the industry.
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 The Mauritian Economy
Mauritian Economy: macroeconomic issues
Tax Policy
In the recent past, Mauritius has moved towards a low
taxation regime. Corporate, Income, and Value Added
(VAT) taxes have all been set at a flat 15%. In spite of
lowered taxes, as a result of improved efficiencies and
reduced tax truancy, fiscal revenue from taxes (both
direct and indirect) have increased.
Foreign Direct Investment (FDI)
FDI levels sky rocketed following reforms leading to the
improvement in business climate, and ease of access to
residency permits. The FDI has been mainly geared
towards Real Estate (IRS/RES), Hotels & Restaurants, and
Financial intermediation.

Revisions
The re-elected government has stated its intent to abolish
two highly unpopular taxes: the first on property and the
second on interest. Contrary to popular belief, the
removal of taxes on interest will not increase savings, as
the deposit base had continued to increase. The heart of
the ‘low-savings’ issue lies with the fact that the CSO
amalgamates SMEs and Households into a single entity.
Nonetheless, as a means to make up for lost revenue, the
re-introduction of progressive tax rates is a possibility.
Figure 11. Evolution of FDI distribution
Current Account
Figure 12 above suggests that the construction, banking
Mauritius being a small country, both by surface area, and
and tourism sectors have all been doped by FDI during the
domestic market size, it is almost inevitable – because
last few years, which led to the duly noted high growth
several specialised industries focused solely on the
rates. The Rs 8.8bn reached in 2009, compared to the
domestic market would not be sustainable – that the
record Rs 11bn levels reached in 2007 and 2008, is
country operates under a current account deficit.
commendable given the fact that FDI fallout globally was
much more pronounced.

Figure 10. Key balances as % of GDP

Expectedly, Mauritian imports exceed exports leading to a

substantial current account deficit. The present current
account deficit is likely to become larger due to the global
recessionary environment affecting key Mauritian export
markets for both exports and tourism. Additionally,
Mauritius as witnessed a steady decline in the level of
exports of goods and services from about 60% of GDP in
the 1990s to under 50% in 2009. Further, imports are due
to become more expensive because of the re-emergence
of inflation.
Figure 12. FDI evolution in Mauritius
Monetary Policy
The central bank’s objectives include the promotion of
orderly, balanced development, and monetary policy.
Inflation
The largest driver of domestic inflation is the price of oil;
implying that a shift away from fossil fuels would be a
fundamental way to reduce inflation. The current inflation
rate of 1.8% is at an all time low because the global
recession led to a dramatic fall in commodity prices.
According to the last Monetary Policy Committee (MPC),

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 The Mauritian Economy
nd
held on June 22 , inflation has bottomed out and will
soon return to historical average.

Figure 15. Average YoY depreciation

The MUR depreciates by an average of 3.5% Year-on-Year,

which more or less correlates with the government
Figure 13. Headline Inflation
mandated compensation increase for lowest-income
Interest Rate earners. A practice which has allowed export oriented
The Key Repository Rate (Repo Rate) – as a replacement enterprises to partially pay for increasing wages via
to the bank rate – was introduced in December 2006 as exchange rate gains.
the new central bank benchmark interest rate. A quarterly
Monetary Policy Committee (MPC) reviews the rate, and
intervenes in cases of emergency, as was the case after
the financial meltdown in September 2008. The Rate was
first reviewed down by 50 basis points to 7.75%, then by
another 100 basis points in December 2008 to 6.75%, with
the present rate standing at 5.75%.

Figure 16. MUR evolution

Figure 14. Evolution of the Repo Rate since introduction
The last MPC stated apprehensions of the resurgent
spectre of inflation and excess liquidity, as key arguments
for keeping the repo rate unchanged.
Labour
The Mauritian labour force represents less than 50% of
the island’s population, with the unemployment rate for
men hovering just under the 5% mark, and the rate for
women at a high 15%, are cause for concern. In recent
times, the growth rate of employment has outpaced that
of the labour force, with select sectors such as Business
Process Outsourcing (BPO) facing a scarcity of qualified
labour. The unemployment rate for Q1 2010 reached
8.3%, which we expect will reach 8.5% for the CY 2010.

Exchange Rate
Exchange rate controls were removed in 1994, resulting in
the adoption of the managed float principle. The MUR is
now managed to a lesser extent, with the USD used as
benchmark currency.

Figure 17. Labour indicators evolution

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 The Mauritian Economy
Drawing Conclusions
The Mauritian economy is dependent on the heath of its
primary export markets for both goods and services,
which are the Eurozone and the UK. Given that their rate
of economic recovery has slowed down following the
sovereign debt problem, coupled with a weakened EUR
and GBP, the local economy is being hit by a double
whammy.
Figure 18. Mauritian GDP growth
The Mauritian economy proved relatively resilient to the
global recession due to the combined effects of the
economic reforms since 2006, and timely policies which
included a stimulus package worth about 4.5% of GDP
that led to a V-shape recovery as evidenced by the SEM-7.
Figure 19. A V-Shaped recovery can be seen on local bourse
Consequently, the economy grew at a reduced 2.2% in
2009, and is expected to grow at 4.0% according to CSO’s
latest forecast. Though, this is a downward revision from
4.3% in April’s projections, we believe this growth rate to
be optimistic because the sugar industry’s woes are not
over, the manufacturing industry’s production costs are
higher than in Asia, and the tourism industry is faced with
a lasting supply/demand imbalance.
AXYS Stockbroking Ltd
The above sectors need to make structural changes, as
depreciating the MUR only postpones the problem. In
fact, a weaker MUR would lead to more expensive
imports which in turn lead to high inflation. High inflation
triggers union demands for wage increases which in turn
drive up production costs. Thereby leading to a vicious
circle of depreciation-inflation-compensation without
resolving the initial problem.
Ironically, in the Mauritian context, the financial sector is
presently the healthiest, whilst the emerging Business
Process Outsourcing sector is facing a shortage of skilled
labour, and the commercial real estate sector is in a
frenzy.
The second half of 2010 is expected to remain difficult.
The absence of a clear and coherent economic policy from
the re-elected government may become a hindrance as
simultaneously cutting taxes, increasing spending and
reducing deficit/debt are incompatible. Therefore we
believe that the real GDP growth rate for 2010 will be
closer to 3.5%.
July 2010 9
 The Mauritian Economy
References
International Monetary Fund, World Economic Outlook,
April 2010.
World Bank, Mauritius at a Glance, Dec 2009.
African Development Bank, Country Strategy Paper:
Mauritius, May 2009.
Central Intelligence Agency, The World factbook:
Mauritius, June 2010.
US Department of State, 2010 Investment Climate –
Mauritius, March 2010.
Office of the President of the Republic of Mauritius,
Government Programme 2010-2015, June 2010.
Ministry of Finance, Programme Based Budget 2010,
November 2009.
Sithanen, R., Budget Speech 2010, November 2009.
Bank of Mauritius, Monthly Statistical Bulletin, June 2010.
Central Statistical Office, Quarterly National Accounts,
June 2010.
Central Statistical Office, Quarterly National Accounts,
March 2010.
Central Statistical Office, Labour force, Unemployment &
Employment, June 2010.
Central Statistical Office, International Travel & Tourism,
May 2010.
Central Statistical Office, External Trade Statistics, June
2010.

Bhavik Desai bd@axys-group.com

Vikash Tulsidas vt@axys-group.com

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