Tuesday, November 14, 2017 8:45 AM / BMI Research
BMI View: Mauritius will experience a sharp widening of its current account deficit in 2017 on the back of weaker demand for its exports in key markets. Even so, the impact on the country's wider economic outlook will be muted, as this trend will reverse in 2018/19 when recovering growth in key export markets will see the deficit begin to narrow gradually.
Mauritius will see further weakness in exports for the remainder of 2017, due to low demand amongst its key trading partners, increasing the country's current account deficit. However, we expect that this expansion will be temporary as growth begins to recover in Mauritius's key export markets from 2018. Imports have been rising partially on the back of ongoing construction projects, but will likely begin to stabilise as poor economic growth will begin to dampen demand for consumer goods imports.
Slowing investment into the ocean economy – following the changes to Mauritius' double tax treaty with India – will see the financial account surplus narrow over our shortterm outlook, although fixed investment will remain stable. Although these dynamics are likely to weigh on the country's stock of foreign reserves, this is unlikely to undermine the stability of country's external position, especially as pressure begins to decline from 2018.
Faltering Exports To Stretch C / A Deficit
A combination of weak demand in key European export markets and a stronger currency bolstering imports will see the current account balance widen in 2017, but we expect that it will begin to narrow thereafter. We expect that exports will continue to decline in 2017, after having already struggled so far this year, with total exports down 5.3% y-o-y in May – the most recent data available.
This has come on the back of weaker demand in Europe, especially in France and the UK – Mauritius' top two export destinations – that collectively accounted for 26.9% of Mauritius's exports in 2016. Q117 trade figures showed a 5.7% y-o-y decline in exports to France and a 22.4% decline in exports to the UK. Indeed, the sectors which have seen the biggest declines are those that export primarily to Europe such as clothing (down 16.7% y-o-y in Q117) and crude materials (down 10.0% in May).
We believe that these trends will continue in 2017, as the UK and France will experience only tepid growth, leading to weaker consumption. This will begin to change from 2018 as France's economy will see accelerating growth (see 'A Turning Point For The French Economy?', June 21), as will the UK's from 2019. This will see demand for Mauritian goods recover and, consequently, we expect this nadir in exports to be transient.
Furthermore, we expect that import growth will slow from 2018 onwards, as weaker real GDP growth across much of the economy will likely feed through to lower demand for consumer goods imports. Imports will continue to increase overall however, albeit more slowly, due to increasing demand for capital goods as a series of construction projects will be ongoing over our forecast period – the most notable example being the Port Louis to Curepipe railway.
Mauritius has courted Chinese investment and sought to join the "maritime silk road", which offers some scope for further construction projects in the coming years. We have not yet factored this into our forecasts as the nature, viability and timing of any projects are not yet clear.
Falling Investment Will Not Threaten Sustainable Position
Revisions to Mauritius' tax treaty with India will likely see a steady decline in the former's financial account surplus over the coming years. Under the treaty, investments made in India from Mauritius would be taxed at a lower rate, not a higher Indian rate of capital gains tax. Revisions to the treaty will gradually eliminate this advantage between April 2017 and April 2019.
This will remove one of the key supports of the financial sector in Mauritius, as it had been the main conduit for foreign investment into India due to its favourable tax status. We have already seen investment decline in Q117 but we expect it to fall off dramatically from Q217 following the implementation of the new agreement.
That said capital investment into
projects such as the Curepipe-Port Louis railway will ensure that the surplus
does not shrink too far and that the pace of decline is gentle. In light of
this we expect that Mauritius' reserves will decline, but at a manageable rate
as they start from a relatively high position of 9.2 months import cover in