Mauritian Economy - AXYS Group

1 Mauritian Economy Outlook 2013 Bhavik Desai AXYS Stockbroking Ltd, Bowen Square, Dr Ferri re Street, Port-Louis | BRN C07007947 Apr-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email | Executive Summary Equilibrium Hangs on a Thin Line The diversification strategy which had been adopted for Mauritius has shown both its strengths and limits during the recent storm. In 2009, booming construction offset contractions in both Tourism and Exports; by contrast in 2012, Finance and Manufacturing kept the Economy growing when construction contracted and tourism stagnated. However, on the flip side, the concentration of exports of both goods and services towards European markets has impaired the Economy as a whole.

2 A depressed Europe has led to tepid growth rates; which is why we believe a diversification of export markets towards Africa and Asia is an imperative to renew with robust growth. However, high-level policies to achieve this have yet to be formulated; hence such market diversification has barely begun. Given that our traditional markets remain depressed, we project GDP Growth to reach ~ , below Statistics Mauritius and the IMF s 2013 Perspectives We believe a strong performance by the financial sector coupled with the emergence of Seafood exports as an important pillar of the Economy will drive growth in Manufacturing and continue to support economic growth in 2013. Tourism which stagnated last year is likely to stagnate again given that a 5% increase in available hotel-rooms will drive down occupancy rates.

3 The completion of major commercial and high-end residential developments, together with the completion of new roads and the new airport terminal will result in one of the deepest ever contractions ( ) for construction. However, following the flash floods of Mar-2013, we believe Government will speed up its Public Sector Investment Programme and is likely to re -design land drainage across the island; which may in turn re-kindle this troubled sector onwards of 2014. Trade is also likely to benefit slightly from the unexpected expenditure required to repair flood damages, but more so because of increased public sector wages. We expect continued lukewarm growth for Real Estate in 2013 but the sector may start feeling downwards pressures starting 2014.

4 Our greatest concern is the Current Account Deficit which is set to widen to 12% of GDP due to a higher energy bill. However, the Financial Account Surplus has been driven by Foreign Direct Investment (FDI) flows principally directed towards Real Estate; which as investments in unproductive assets are unlikely to contribute to future growth. Hence, we feel that, given the quality of FDI flowing into Mauritius, this route does not constitute a lasting solution to our structural Balance of Payments problem. GDP Growth Rates [%] AXYS SM 2009 2010 2011 2012 2013F 2013E GDP @ Mkt Manufacturing EOE Textiles Financial Banking Hotel & Food Services Construction Real Estate Trade & Repairs Info & Comm Country Information Appellation: Republic of Mauritius Independence | Rep.

5 : March 12, 1968 | 1992 Government: Westminster Dem. President: Mr Purryag, Rajkeswur Prime Minister: Dr Ramgoolam, Navin Suffrage: Universal, >18yrs Off. & Biz. Language: English & French Geography Area: 2,040 km2 Excl. economic zone: km2 Capital: Port-Louis Location: 20 10' S; 57 30' E Time Zone: GMT +4 hrs Climate: Sub-tropical Tel. | Intnet. code: 230 | .mu Demographics Population: 1,291,200 Popn growth rate: Median age: yrs Life expectancy: yrs Workforce: 610,800 Unemployment: Literacy: (2010) Poverty: (2007) Currency Currency: Mauritian Rupee (Rs/MUR) Exchange rate (Mid): Rs per USD Rs per EUR Economy (2012) GDP growth rate: GDP at mkt price: Rs GDP per capita: Rs 266,500 GDP ppp: $ (130th) GDP ppp per capita: $ 15,600 (80th) Budget deficit: of GDP Public debt: of GDP Current A/C deficit: of GDP Headline Inflation: Reserves: Months Stock Exchange (2012) Lists (Securities): Official (45) | DEM (52) Primary Indices: Semdex | Demex Market Cap: Rs | Rs Mean daily turnover: Rs | Rs Market PER.

6 | 1 Mauritian Economy Outlook 2013 Bhavik Desai AXYS Stockbroking Ltd, Bowen Square, Dr Ferri re Street, Port-Louis | BRN C07007947 Apr-13 Tel (230) 213 3475 | Fax (230) 213 3478 | Email | The Bird s Eye View The overall structure of the local Economy re -classifications aside was more or less the same, as result of the absence of any major policy shifts in the most recent budgets. That said, the emergence of Food Manufacturing (excluding sugar) driven by Seafood as an increasingly important slice of the Economy could not go unnoticed. Revamped Classifications First, Statistics Mauritius (SM) changed its classification of economic activities from the National Standard of Industrial Classification (NSIC) Revision 1 to NSIC Revision 2.

7 Subsequently, there are now 19 main segments against 15 under NSIC Rev. 1. Further, in-line with our rationalisation of industry classification of companies listed on the Stock Exchange of Mauritius (SEM), we have mapped the NSIC Rev. 2 onto our adapted version of the Global Industry Classification Standard (GICS)1. Our Where to Partake section is now more tightly mapped to the local Economy . Figure 1. A breakdown of the Mauritian Economy Structure & Resilience A relatively well-diversified Mauritian Economy has helped sustain GDP growth albeit low during the turbulent past few years. In 2009 when both Tourism and Exports contracted, booming Construction kept the Economy growing; by contrast in 2013, when Construction is likely to experience a steep contraction, we expect the Finance and Manufacturing sectors to keep our Economy 1 The GICS was developed by MSCI and S&P for use with their many indices.

8 Growing. That said, returning to optimal growth rates2 would require all sectors of the local Economy experiencing robust growth; which could be achieved via a diversification of exports & services away from the traditional European markets and increasingly towards Africa & Asia. We are of the opinion the above cannot happen without the creation of new maritime and aerial links. In spite of the speeches, an overarching strategic master plan to gear the Economy towards the region has yet to be drawn out and implemented. A diversification of export markets would surely help redress a widening and hence disconcerting Current Account Deficit (CAD). The CAD poised to reach 12% of GDP in 2013 has so far been offset by a large Foreign Direct Investment (FDI) driven Financial Account surplus which has kept the Balance of Payments (BoP) positive.

9 A contributing element to the large CAD is the innate structural currency imbalance of the Mauritian Economy : the majority of export revenues are Euro dominated while the bulk of imports are paid in US Dollars. The decline in the EUR s value exposed the lack of competiveness of local manufacturers and hotels which have seen margins evaporate. We reiterate that export market diversification at an accelerated pace would contribute in restoring higher GDP growth rates which should in turn ease the debt burden of the then more profitable listed companies. Rankings With regards to international rankings, Mauritius vaulted back into the Doing Business Top 20 to the 19th position, up 5 ranks and continued to occupy the top spot in Africa.

10 Likewise, Mauritius held on to its No. 1 spot within the Ibrahim Index of African Governance. Sectorial Perspectives Finance The financial sector remained among the best performing sectors in 2012. This was exemplified by record profits at the top two banks. However, like sugar and textiles in the recent past , the financial sector is approaching that point in time when a re-think is required to keep the sector thriving. The Mauritian Double Taxation Agreement (DTA) with India remains a hot and controversial topic; and according to The Economist it is not Mauritius which is running its tax-and-investment policy like a funny little island in the middle of nowhere [ECON 2012].