Analysis: Really stretched but still ambitious!

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Never mind the actual size of our national debt for a moment, but amongst the few economic metrics that have looked really solid over our recent past was the profile of our debt, a full 83% of which was actually owed in rupees, the maturity profile of which had been improving, with 95% thereof at fixed rates.

So, quite a few of those who listened to the recent Budget speech were simply flummoxed by the totally unexpected announcement, at the tail end of the Minister of Finance’s speech, that there was to be an early repayment of foreign debt for the equivalent of some Rs 15.7 billion! Beyond the announced raiding of Bank of Mauritius reserves to do so, which will result in the BoM further eroding its image as an independent body and indeed weakening its balance sheet even more, to the point where it will actually now be dependent on government support should it need a war chest to do its job; there was, surprisingly, no attempt at quantifying the exact “savings” that such a move would entail.

The Minister of Finance, during Budget debates, did actually say that the move was logical in that he was making use of forex that generated low revenue to repay relatively expensive loans. However Table F4, page 388 of the Budget estimates, which lists all foreign loans, indicates that of 71 distinct loans, 17 are at floating rates (in a low interest rate environment, let it be said) and that the fixed rate loans pan out as follows : (Table I)

Admitting that we reimburse the full amount drawn down (there is no information on outstanding values) of the 5 more expensive loans whose rates are known, we would save interests of Rs 233.6 millions per year whilst reducing our debt by 5.6 Bn. Early repayments for Rs 15.65 Bn in total suggests a further interest saving of some 250 m is possible. Can a Rs 500 m saving (0.4% of our recurrent expenditure) really be worth the loss of credibility of an entire country and the hullaballoo that has followed? This does not sound a very appealing proposition to me.

*****

When we flashback over the last half decade or so, we can focus on the main highlights as being a satisfactory growth rate averaging 3.7%, though it is growingly dependent on local consumption and very far from the rosy picture painted back in 2015 of growth rates of 5.3% and 5.7% . We can also hold on to a mastered inflation rate, a lowish unemployment rate of 6.9% (though youth unemployment increased to over 25% in 2018 and new job creation rates were despairingly low) and very solid forex reserves representing 10.2 months’ worth of imports as at December 2018. Further, the Gini coefficient improved from 0.414 in 2012 to 0.400 in 2017 and is apparently targeted to reach…. 0.25 in 2030, by which time GNI per capita will have reached 19,000 $, from 10,200 $ now. This is ambitious indeed in view of the very material impediments now facing the country!

«Early repayment for loan Rs 15.65 Bn suggests a Rs 500 m saving (0.4% of recurrent expenditure). Can this really be worth the loss of credibility and the hullaballoo that has followed? This does not sound a very appealing proposition to me.»

Amongst the growing signs of trouble ahead, we may refer to Foreign Direct Investment-FDI (excluding global business) which faltered in 2018 and was, at Rs 17.370 Bn, at its lowest level since 2015. It is also a very lopsided amount, not favouring productive investment and being heavily skewed towards property. We must always be thankful for small mercies, of course, since this helped re-energise the construction sector which had contracted severely between 2011 and 2015 but productive investment would clearly have been more desirable. Besides, the trade balance has now deteriorated from Rs 75 Bn in 2015, i.e. 18.3% of GDP, to an estimated Rs 118 Bn in 2019, an unsustainable 25.0% of GDP. This is especially unacceptable, since the current account balance has deteriorated from a deficit of 3.6% in 2015 to 5.6% in 2018 whilst we have even recently clocked our first two quarters of negative overall balance of payments figures at the end of 2018!

On the fiscal side, the government has been socially very generous over the last few years but quite probably not always wise. The social component of the Budget has now reached 54% of total expenditure and is likely to worsen as more citizens retire and live longer and if government does not “target“ pensions towards the really needy and still does not scale the retirement age upwards. The annual audit reports still make for painful reading but the structures set up to deal with the issues do not seem to have rooted out much waste or streamlined operations so far, if only since nothing much has been reported upon, to that effect. Too many expensive projects have dubious returns to the economy : If a case can perhaps be made for the Rs 18,8 Bn Metro Express on a “cost benefit“ basis, no such thing can be said for the Safe City project which will cost at least Rs 16 Bn, on the basis that it will help fight crime. Indeed, the three-year strategic plan accompanying the Budget estimates this year (page 140) ventures to propose a very modest reduction of the crime rate from 4.3 per thousand population to “less than 4 per thousand by 2030”. Worth it ?

The Cote d ‘Or sports complex, at Rs 6 billion, will partly miss the boat of the Jeux des Iles, will require a hefty maintenance budget and probably be underutilised. I would be surprised if the Football Academy planned with Liverpool FC did not actually cost more money….

Manufacturing, still the largest contributor to the economy with 17% of employment and 12% of Gross Value Added (GVA), is unfortunately continuing its slow continuous slide downwards as a share of GVA, slipping from 16.7% in 2009 to 12.3% last year, in spite of government’s wishes to the contrary. Tourism, on the other hand, clawed its way up slightly to 8.6% of GVA in 2018, but has wobbled worryingly since early 2019, both tourist number and tourist spend wise. Financial and insurance services, currently at 11.1 % of GVA, have been on a long steady winning wicket since 2011, averaging growth rates of over 5% all throughout that period and remain mostly on solid track. ICT, weighing about 6% of GVA, is another steadily successful sector with an average annual growth rate of 5.5%, but though boasting a 6th rank in the Global Cyber Security Index rank worldwide, it is 72nd in the ICT Development index. Further evidence of “room for improvement“ comes from the May 2019 rankings of Ookla which sets Mobile Global (download) Speeds of Mauritius at 22.26 Mbps, ranking us as 77th in the world, looking at the backsides of such luminaries as Cuba (76th), Myanmar(74th), Fiji (70th), Maldives (65th), Iran (56th) or South Africa (52nd). The situation is even worse on Fixed Broadband where we are apparently ranked 108th in the world, speed wise.

The Ocean economy sector which had (please refer to the 2018 Three-year Strategic Plan, page 41), last year, laid claim to a GVA of Rs 44 Bn by roping in hotels & Restaurants, Port Activities, Seafood, Leisure boat activities, Freeport, bunkering and ship building (!) has seemingly been beaten back to fishing basics this year and its only virility symbol left looks to be the 2,300,000 km² of sea space that we, sitting on an island of just over 2,000 Km², currently boast about, inclusive of the Chagos and Tromelin!

I will not repeat my homilies about sustained poor multifactor productivity gains over the last decades, but will humbly suggest that someone needs to investigate and do something about some of our major health statistics which should have raised alarm bells a long time ago. Indeed, according to official stats, 23% of our population has type 2 diabetes, 28% suffers from hypertension and 54% is either overweight or obese! Free healthcare has certainly contributed to “remarkable progress towards Universal Health Coverage“ and improved life expectancy. However, what is free can often be abused. Would that begin to explain the 14.7 million pathological tests carried out per year, the 3.5 million outpatient consultations in hospitals and the 5.0 million “attendances” in primary health care institutions for our population of 1.3 million? I cannot help but wonder about our comparative track record on sick and local leaves actually made use of every year.

On the other hand, there seems to have been material progress in our port productivity, the number of crane moves per hour having (provisionally) apparently reached 24 in 2018/19, with the KPI for 2021/22 set at 30. The target of achieving 35% of electricity production from renewable sources in 2025 looks like solid pie in the sky for the moment, what with that very percentage diminishing from 16% in 2015 to 12.9% in 2018…. and new electricity generating capacities being planned for using Indian Ocean gas.

*****

The Top 100 rankings for 2019 showed reasonable progression in the circumstance. Turnover duly consolidated over the top 100 companies progressed by 6.7%, that is slightly more than for the previous comparative year. This was led by Building & Civil Engineering Co Ltd (+45% to Rs 1.078 Bn), Transinvest (+31% to Rs 2.052 Bn), Le Warehouse (+26% to Rs 1.010 Bn), Sotravic (+26% to Rs 970 Mn) and Engen (+ 24% to Rs 9.545 Bn), the latter already being in the same top 5 last year. The predominance of construction related companies in this metric is there for all to see.

Profitability-wise, our selected sample ranking companies by profit difference indicated difficulty, only 61 companies achieving an improvement, year on year, in their bottom line figures. This group was led by Standard Chartered Bank (+Rs 1.005 Bn), MCB group (+ Rs 734 Mn), SBI (Mtius) (+ Rs 448.6 Mn), HSBC (+ Rs 402 Mn) and Barclays (+Rs 396 Mn), crystallising on one of the main stories of many a year: solid banking results!

Sectoral trends (Table II) were compiled on an expanded sample of 337 companies this year (net of corporate holdings, banks and Air Mauritius, as usual) and indicate yet further growth in turnover of 12.7% and in profit before tax of 16.2%. Consolidated profits as a percentage of turnover thus improved to 6.4 %, continuing a generally positive trend from 3.4% in 2017 and 5.3% last year. This improvement was mainly fed by three sectors, namely hotels (+ Rs 755 Mn or 59% progress), Construction (+Rs 622 Mn or 38% progress) and Telecommunications (+Rs 488 Mn or 26.7% progress). The profitability metrics of Lux Resort (Rs 501Mn for a T/O of Rs 5.9 Bn) are again strikingly good and should act as a beacon of what is actually possible in the sector.

On the other hand, the textiles sector, whilst operating with a fairly stable turnover (actually a 3.9% improvement over 2017), registered a further nose dive of its profits by a disturbing 25% (minus Rs 351 Mn) and must by now, hopefully, register as a very serious concern for the authorities, in the wake of the difficulties of the Palmar group, Future Textiles and the like. Fifty one of the 337 companies sampled showed losses this year (15%), which is a slight improvement on last year (16%) and the year before (18.6%). It is noteworthy that there were 5 fewer hotels losing money this year but 6 more printers than last year. The apparent improvement in the number of loss making companies in textiles also has to do with some of them closing down. The loss makers in the betting industry may be a surprise, but not if one has followed all that has been written on casinos. Including ours and Trump’s.

IBL is still inevitably the largest company in Mauritius and should grow even larger with its recent announcement of an agreement with General Construction (23rd in ranking of PBT as % of T/O and 41st in terms of T/O). The Mauritius Civil Service Mutual Aid Association still leads the pack of profitability returns as a percentage of turnover (50 %!) and is followed by CIM group (28%), Airports of Mauritius (26%), Ajanta Pharma (24%) and J Kalachand (22%). There is little changed on the banking front with most banks pulling ahead of their previous year’s results, the exceptions being SBM which saw its profit halved after some notorious provisioning, Maubank and Banque des Mascareignes.

The most recent Budget may have made many individual voters/beneficiaries relatively happy but what is brewing over the horizon does not look very promising. We may indeed have mastered inflation for a bit, brought down official unemployment figures and reduced the GINI coefficient through much more social spending, but the prospects of any government doing more in the years to come look to be pretty well constrained by now, what with the country’s horribly high trade (-25% of GDP) and current account (-7.3% of GDP*) deficits showing little sign of moving in the right direction and even the overall balance of payments getting negative for the last two quarters of 2018. The weakened state of several of our economic sectors (sugar, textiles, tourism, even global companies in the wake of the revised DTA with India) and the continuing relative weakness of productivity metrics when compared to Unit Labour Costs is surely biting in. The fact that the last Budget indicated a NEED to sell (yet to be identified) government assets of Rs 11 Bn over the next two years AND suck over Rs 18 Bn worth of “reserves“ from BoM in order to achieve the twin targets of a Budget deficit maintained at 3.2% (but a deficit nonetheless) whilst reducing the statutory debt ratio to below 60% of GDP by June 2021, speaks volumes about the future margins of manoeuvre of the country.

Referring back to this Foreword’s more recent titles, we have moved from 2015’s “SMARTLY FOREWARD?”, to 2016’s “A FLACCID YEAR, LOST”, through to 2017’s “LIFT OFF OR ….TROUBLE!” and last year’s “BIS REPETITA!”.

We have not had real lift off and are in trouble.

Who really wants to be the next Minister of Finance in those circumstances?

*MCB Focus No 77, revised forecast for 2019
(Written on 25/06/19)

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