Mauritius

major macro economic indicators

(e): Estimate (f): Forecast *Fiscal year 2023 = from July 1st 2022 to June 30th 2023

RISK ASSESSMENT

A necessary diversification in the face of the vicissitudes of tourism

The islanders are exposed to all winds, with the pandemic affecting tourism and the Russian invasion of Ukraine affecting consumer prices. Unemployment has fallen due to the normalisation of entry requirements from Europe, from a peak of 10.5% in early 2021 to 8.1% in mid-2022, thanks to a complete lifting of restrictions at the end of June 2022. Nevertheless, galloping inflation, linked to the fact that almost all energy and consumer goods are imported, will weigh on household purchasing power in 2023. Moreover, the prospect of a recession on the Old Continent augurs a slump in tourism, a sector that accounted for as much as a quarter of the wealth produced and of jobs, as well as half of net exports in 2019. To support households, the government announced a 17.6% increase in social assistance (32.2% of total public spending), as well as continued price controls on necessities such as flour, cooking gas and baby food. These social measures should help avoid a decline in household consumption, expected to reach around 80% of GDP in 2023, despite the uncertainties and normalization of monetary policy conducted by the central bank.

Raised to 3% in September 2022 from 1.85% during the pandemic, the Bank of Mauritius' main interest rate should continue to be used to fight inflation, with the governor considering that "the central bank will be less and less accommodating as the recovery takes hold". This should have a moderate effect on construction, another growth driver and also correlated with tourism.

Although Mauritius is benefiting from a temporary strengthening of global demand for textiles (16% of exports and 5% of GDP), its manufacturing base continues to erode, weighed down by a relatively uncompetitive labour force.  Modernisation and diversification (industrialised refining, biomass plant, bioethanol) is helping to renew the sugar industry (6% of exports). The country hopes to renew itself with the maritime economy, fintechs (50% of the GDP coming from finance) and the diversification of visitors' profile. Renovated infrastructures to increase the capacity of the capital's port were delivered in 2017, the island is promoted as a luxury destination with tax incentives for high-end real estate, and professionals have recently been seeking to attract Asian travellers.

Macroeconomic trends leading to imbalances

The Mauritian government is expected to maintain a fairly comfortable fiscal space in the coming years, with a deficit offset by sustained growth and moderate interest rates. This deficit will finance limited and inefficient investments in an already weak infrastructure, as well as an increase in the minimum retirement pension by 50% in 2023 (0.8% of GDP). Ceteris paribus, the ageing of the population should weigh on public finances, with the dependency ratio (for those aged 65 and over) rising from 0.4 pensioners for one active person to 0.5 in 2034. Social expenditure is a major item: 9% of GDP and a third of public expenditure. With a stock mainly issued in Mauritian rupees, the State will suffer from higher debt servicing with the rise in rates. As Port Louis favours local financing, the domestic holding rules out the prospect of a possible exchange rate crisis, but not that of over-indebtedness.

In 2023, the current account deficit is expected to narrow thanks to the recovery of tourism and textile exports to Europe, while free trade agreements with India and China should support transhipment and financial services. In the long-term, continued strong dependence on external supplies, logistics dependent on insularity, and price fluctuations, are expected to maintain this deficit in negative territory. The removal of the FATF and EU list of tax havens at the end of 2021 will encourage the return of portfolio investments. These inflows, a renewed attractiveness favouring FDI and a decline in levels should facilitate the financing of the current account imbalance. Global business companies are making the archipelago the "Luxembourg of Africa": their profits "repatriated" in dollars are recorded as primary income and deposited in local banks. Although their outward investment flows are not clearly recorded, their net financial flows are considered positive for the balance of payments. However, liquidity risks could arise from their deposit volume (equivalent to 120% of GDP).

Strengthening ties with India and China

Together with its coalition partners, the Mauritian Alliance led by Prime Minister Pravind Jugnauth held on to a comfortable majority in the National Assembly after the 2019 parliamentary elections, the next of which will be in 2024. Calls for criticism of the chief executive have raised concerns about freedom of expression. However, his pro-business policies are not expected to face serious opposition, with left-wing parties remaining divided and public approval being high.

Externally, Mauritius will continue to maintain strong ties with European countries, China and India, its main economic partners. Mauritius has signed a Comprehensive Economic Partnership Agreement (CECPA) with India, which came into force in April 2021, and a free trade treaty with China scheduled for January 2023. Finally, despite the advisory decision of the International Court of Justice requiring the UK to transfer sovereignty over the Chagos Islands in 2019, London has shown no willingness to make concrete progress. As of 2019, India has built a forward air base on the island of Agalega, repositioning the island state as the 'Star and Key of the Indian Ocean'. 

Last updated: November 2022