Mauritius’ Exports Will Be Hit By Slower UK Growth

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Tuesday, October 25, 2016/ 11.42am /BMI Research

BMI View: The negative impact of the UK's Brexit referendum vote on Mauritian exports will result in the current account deficit widening in 2017, contrary to our previous expectation that it would narrow. Imports will slow in 2017 as new economic realities take hold.

Mauritius is likely to suffer economically through the UK's vote to leave the EU (Brexit) following the referendum held on June 23, and we have revised our current account forecasts for the Indian Ocean island nation as a result.

As a former colonial power, the UK is both a major goods export destination for Mauritius, and a source of a large proportion of tourists for the island economy. Where previously we had projected that Mauritius' current account deficit would be equivalent to 6.4% of GDP in 2016 and 6.1% in 2017, we now project that the shortfall will be 6.5% and 7.4% respectively, before seeing some improvement to 6.4% of GDP in 2018.

We do not believe that this is any immediate cause for concern regarding Mauritian macroeconomic stability; the country's robust financial services sector and long-term attractiveness as an investment destination should prevent any balance of payments crisis.

However, following the renegotiation of the tax agreement with India in 2016, there will be reduced inflows from the subcontinent, and Mauritius will increasingly look to restructure its trade network around other countries to offset this loss (see 'Closer Relations With EAC Will Follow Indian Tax Negotiations', August 8).

Brexit Will Weigh On Exports
The UK is a major export destination for Mauritius' textiles industry, with the sector accounting for around a third of all goods exports. With a weaker pound in the wake of the Brexit vote, and slower economic growth in the UK and EU than projected prior to the surprise referendum result, these exports will suffer (see 'Brexit To Hit Global Growth', July).

The country's textiles export association now expects them to decline by 10% this year following the UK's decision. The EU is the largest export destination for Mauritian goods, and of these exports, the UK accounts for 18%.

Sugar exports to the UK and the rest of the EU will also be hit by the greater economic turmoil, as spending on discretionary consumer goods such as chocolate comes under pressure. Some of this will be offset by higher sugar prices in 2017 – BMI's

Commodities team forecasts that large deficits will see prices rise to an average USc16.40/lb in 2017 compared to a projected USc16.00/lb this year – but nevertheless, we forecast only weak exports growth of 2.0% in 2016 and 2017.

The Brexit vote will not only affect the current account through the goods exports, but through the services account also, as UK and EU visitor numbers to Mauritius will struggle to see positive growth on the back of this uncertainty.

Mauritius is a high-end tourist destination, and while the economic slowdown will hit lower-income families more than the better off, we still expect that the Mauritian tourism sector will be negatively affected, as was the case during the Eurozone crisis in 2013. The services surplus will decline from 6.2% of GDP in 2016 to 6.0% in 2017.


Imports Will Slow
On the other side of the current account equation, we expect that imports will see robust growth of 8.0% of GDP in 2016, compared to a decline of 6.4% in 2015. This is largely on the back of strong government investment into developing new industries necessitating imports of capital goods.

However, we forecast that growth in imports will slow to 3.0% in 2017 as economic realities take hold and imports of consumer goods slow. This will prevent the current account deficit from becoming as wide as the poor outlook for exports might otherwise have suggested.



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