Wednesday, August 30, 2017 10:45 AM / BMI Research
BMI View: Mauritius's pursuit of Chinese investment and a place on the 'Maritime Silk Road' will bolster inward investment and may help mitigate some of the effects of significant economic headwinds from traditional trading partners in the coming years. The process will also see a boost in grants from China's strategic rival (and Mauritius's long-time ally) India, which will seek to match Chinese influence with its own financial incentives.
After a series of high-level diplomatic visits to China by senior Mauritian politicians in the past six months, Mauritius seems set to deepen its ties with China, which will offer crucial economic tailwinds in the years ahead. Mauritius's recently inaugurated prime minister, Pravnid Jugnauth, has shown signs of success in his goal of making the country a conduit for Chinese exports and investment into Sub-Saharan Africa.
Further to this, we believe Mauritius will be well positioned to leverage the geopolitical rivalry of India and China in the Indian Ocean to court investment and aid from both. We expect the investment and grants from both countries will offer a vital boost at a time of major headwinds from a slowdown in growth of its traditional trade partners in Europe.
In this regard, we note that Mauritius will be eager to carefully balance its relationship with the two Asian powers, avoiding a substantial deepening of political or security ties with China, as this would likely strain Mauritius's long-standing relations with India.
Courting China to Bolster Economy
Mauritius's government is aggressively moving ahead with its foreign policy strategy of building economic ties with China. The goal is to join China's 'Maritime Silk Road' – part of the Belt and Road geostrategic project – to mitigate the economic headwinds from Europe and the negative impact of an amendment to a double tax arrangement with India (see 'Sluggish Demand In Europe To Weigh On Growth', May 3).
To this end, the Mauritian foreign minister has been meeting his Chinese counterpart and Chinese investors, attending a Belt and Road forum in China in May 2017. The foreign minister stated that Mauritius was well placed to become a conduit for Chinese financial investment and goods exports into Africa, a view reiterated in April 2017 by the prime minister during a visit to the Chinese embassy.
On top of this, the Chinese Vice Minister of Commerce visited Mauritius in May 2017, touting the prospect of a China-Mauritius free trade agreement. Though China is already an investor in Mauritius, having partially funded an extension of Port Louis and the Bagatelle Dam construction, Mauritius's recent efforts will see even greater investment.
Chinese investment under the Belt and Road umbrella will offer long-term tailwinds to growth for Mauritius, allowing it to increasingly position itself as a transhipment hub for Chinese goods flowing into Africa as well as being the hub for Chinese financial activity on the continent. Mauritius's access to the Common Market for Eastern and Southern Africa (19 countries) and the Southern African Development Community (15 countries) will be a crucial draw.
Chinese goods exports could come through the commercial docks at Port Louis before being re-exported, thereby avoiding most external tariffs. Meanwhile, the double tax arrangements with 14 Sub-Saharan Africa (SSA) countries would enable Chinese banks to invest from Mauritius into SSA while being taxed at low Mauritian rates.
These factors have already drawn Chinese interest, with the Bank of China opening a branch in Mauritius in September 2016 which the bank said is strategic platform for its African business. We expect that this is the start of an ongoing trend (see 'Increasingly Looking To Sub- Saharan Africa', May 23).
Indian Grants to Be Boosted
Jugnauth's courting of Chinese investment has seen India simultaneously step up its grants to Mauritius to ensure its own influence is not diminished. The prime minister made his first formal trip abroad to visit Delhi in May 2017 during which India pledged to increase its grants to Mauritius, adding USD500mn to the USD2.2bn already offered in the current financial year.
Both nations have also signed an agreement to deepen maritime security ties including greater co-operation between coast guards and the maintenance of anti-piracy and anti-smuggling operations. This implies that Indian grants are in part tied to the Mauritian close security partnership, something India will wish to reinforce in light of the growing Chinese presence.
While meant to address piracy and drug trafficking, we believe the new security agreement is also an attempt by India to reinforce the close security partnership between the two countries in light of the growing Chinese presence under the Belt and Road programme. This also suggests that as Chinese investment grows, Indian grants will – at least in the short term – grow.
Chinese Political Ties to Be Limited
While courting both powers will yield positive economic results, we expect Mauritius to avoid deeper political or security ties with China. China's naval presence in the Indian Ocean has provoked concern in India, as China has previously funded the development of a port in Sri Lanka that was later used by Chinese military submarines and China opened a naval facility in Djibouti.
India will therefore be keen to avoid anything similar occurring in Mauritius, which explains why India has tightened its security relationship with Mauritius. India trains and equips the Mauritian coast guard and has leased the use of the Mauritian Agalega Islands for an Indian Navy radar station and finances Mauritian defence procurements with loans.
India and Mauritius have deep historical and cultural ties and India is a major source of investment as well as a close security partner; consequently, Mauritius will not want to risk Indian grants, military support and economic ties by increasing security ties with China.
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