C for Comms, Confusion, Coherence, Coming out, Coronavirus?

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The Minister of Finance who might have been seemed to be Missing in Action (MIA) since the new government has been re-elected in November 2019, has finally come out last week (Yes he is alive and he has a name). And this time at least twice. Firstly at the National Assembly on Monday 24th of February supporting the discours programme made by the President 1 month ago. And secondly, three days later in what could be seen as a last minute press conference, flanked by the Financial Secretary at his Ministry’s office.

Having eagerly listened to his speech and brief questions and answers at the press conference, I couldn’t help comparing notes with French Finance Minister Bruno Le Maire who was interviewed by CNBC couple of days prior to our Minister of Finance’s coming out. I took France as an example, as it is a country which our Minister of Finance is very familiar with, as besides his love (and who doesn’t) and mastery for the language of Molière, he studied in Paris and has a recurrent habit of quoting a number of French economists and philosophers in the likes of Piketty et al.

Firstly, Bruno Le Maire was alone with the interviewer and wasn’t flanked by his Financial Secretary or his advisors. At least they were not seen during the interview. At no moment in time during the interview, did the French finance minister look at his financial secretary/or advisors nor did any of the latter intervene. His eye contact was with the interviewer. Neither left nor right, but straight. This clearly gave the perception that Bruno Le Maire is the (sole) Minister of Finance of France and no one else, that he knows his stuff and is fully in charge and in control. This is extremely important as it is the most crucial Ministry besides the ultimate Prime Minister’s office.

Secondly, the French Finance Minister is not an economist (and never claimed he was either) as he did French Literature, but attended the same renowned and prestigious University as our Minister of Finance, being Paris-Sorbonne. At no moment did Bruno Le Maire quote anyone, neither Voltaire, Camus nor Piketty, Attali. He could have easily done so, given his background of literature. It would have been so natural for him. But that wasn’t the moment. Instead he was very candid, factual, and he seemed very well on top of what he said to CNBC. In my view, very clinical and exerted the assurance his citizens needed. He didn’t dramatise, nor understate the impact of the Coronavirus and the global economy slowing down and repercussions on the French economy. He said “we are concerned about the consequences of the virus on the level of growth in France.”

Thirdly, Bruno Le Maire came up with real proposed solutions and not wishy washy of may be this or that. He went straight to the point. In his own words he said “I am going to be blunt” and talked about the limited manoeuvre that they have in terms of monetary policies and stated clearly that the next “arm” will be fiscal stimulus and that they have already prepared themselves in that perspective. In addition, he said that they are on alert mode to take actions and come up with new actions if needed at any moment in time. This is a Minister of Finance who is ready.

So what I got out of this 11 minute interview of Bruno Le Maire, is somebody in control, like the captain of the plane that has just got itself into clear air turbulence and knows what he or she is doing. Passengers would feel well reassured with such a captain. Because at the end of the day as a passenger we would wish for the best captain and not any type of captain especially when it gets rough out there. I, even though I don’t live in France nor a French citizen, felt reassured listening to the French Finance Minister.

Back to Mauritius, and what was said at the National Assembly and the press conference of last week.  I picked out 2 things that our Minister of Finance mentioned namely his target for Mauritius to reach Rs1Trillion by 2040 and in the short term our GDP growth will be impacted negatively due to Coronavirus by 0.1% to 0.3% this year.

1/ The target: GDP of Rs1Trillion by 2040

Now it’s official, the aim for Mauritius is to double its current GDP of Rs500Billion to Rs1Trillion. We have 20 years to achieve this. So this sounds plausible, right? Though Keynes might say in the long-run we are all dead which unfortunately could even be more valid today given the rapidly environmental deterioration (let alone Coronavirus) that the World including Mauritius is facing. Anyway, let’s try to unpack this Rs1Trillion.

If we look back at the official statistics over the last 15 years, we would notice that it took us far less than 20 years to double our GDP from Rs250Billion to Rs500Billion. So why now 20 years to double to Rs1Trillion? This means that in respect to the Minister’s forecast, Mauritius GDP growth rate will be slower than what we have witnessed the last 15 years. On the back of an envelope calculation, Mauritius would need a growth rate of 3.5% annually and consistently to get to Rs1Trillion. So not sure how the BOM 4% gdp growth forecast plays in that. Confusion at best? 

Anyway, the reality is that the Mauritian economy has been on a slowing (before Coronavirus) path (as shown in the table below) for a number of years,
                         2005-2009    2010-2014    2015-2019    2020-2024*
                               4.4%               3.8%               3.7%             <3.5%

* my estimate based on current status of economy

because of structural issues which includes a number of things and not limited to below: 

  • Various pillars of the economy stuck at cross roads and taking way too long to reinvent and we can even wonder if it might not be too-late for some of the pillars.
  • Disconnect between public and private sector, lack of real team work. Adhoc meetings with Business Mauritius is not the solution. We need to go beyond that as Business Mauritius alone is not the saviour.
  • We brag Mauritius as an opened economy and yet it’s not easy to do business in Mauritius. Sometimes even seen as a paradox given that the ease of doing business ranking at Number 13, but yet in practice it is not easy for private sector (local and foreign) still to-date.
  • The inability to capture meaningful value added foreign direct investment (FDI), besides one-off investments in the real estate sector. FDI has stagnated in terms of US$ amount for years.
  • Lack of new talents both in public and private sectors but more so in public sector institutions which is a real stumbling block as to why Mauritius struggles to make any meaningful progress. We need to break our insularity totally by opening up to new people and new and even radical ideas. 
  • Rising national debt, trade deficit, budget deficit. The tableau de bord is on the red!  Which means the room to manoeuvre is getting difficult year by year and we cannot afford to come up any more with wrong strategies or actions. The window of opportunity was there in the last decade and now it’s gone. Every single action is crucial going forward.

One last thing about the Rs1Trillion GDP which we need to factor in, is given that we rely heavily more so every year on imports which are predominantly in US$, our accelerated depreciation of the rupee vis a vis the US$ which is almost at 38 will not be helpful if we convert our GDP in US$. Zimbabwe could boast about it’s GDP growth in local currency but then we know that the local currency is worth nothing in US$. That’s not the case for Mauritius, but we have to factor that in, that is in a global world an opened economy like Mauritius doesn’t need a printing machine that prints local money, but rather needs the ability to build reserves of hard core currencies. The latter is the saviour and not the former.

2/ The GDP growth of 2020 estimated by the Bank of Mauritius (BOM) will be impacted negatively by 0.1% to 0.3%. 

The assumption to be made here is that the Minister of Finance who was no later than 4 months ago the first deputy governor of the BOM was more at ease to rely on the BOM’s forecast given his short tenure to-date at the head of the Ministry of Finance. Even though he mentioned that he is an economist he still took reliance on BOM’s forecast.

As far as I recall, the last forecast made by the BOM and issued to the public was the one undertaken at the 53rd Monetary Policy Committee (MPC) Meeting held on the 27th November 2019 where the BOM announced that they maintained a forecast at 4% for 2020 which is much higher than the 3.6% actually achieved for the year 2019. Based on the 0.1% to 0.3% downgrade that the Minister of Finance referred to, the revised forecast for 2020 is therefore estimated to be 3.7% to 3.9%. 

We eagerly await for BOM’s next MPC Meeting which was initially scheduled for the 26th of February 2020 and has been postponed to a future date yet to be communicated. More so given the fact that there is a new team at the helm of the BOM.

My view, as I have already stated in my previous article published last week, is without Coronavirus, there is no way our economy can generate 4% growth and that at best we can achieve what we did in 2019 that is 3.6%. Bearing in mind that our BOM has lately repeatedly misforecast or rather overestimated our GDP growth. With the spread of Coronavirus which has gone to the 4 corners of the globe, I stand with my forecast of 3.0% to 3.2% in a base case scenario. If there is no slowing of the virus by end of March, the forecast could be well south of 3% and we better start preparing ourselves for that scenario.

The Profound Changes on the way- New Norm 

Two weeks ago IMF chief economist Gita Gopinath announced the global economy will face a V shape downturn with a swift recovery. In the previous article, I wrote that the V shape is unlikely to happen and it will be either an L or probably a U shape cycle and even the U, we don’t know whether we have reached the bottom yet and thereafter how long it will take. Couple of days ago, a number of global market analysts in the United States have downgraded from V to L shape which is more alarming.

We can see the global world slowing down, almost a precursor to what happened in 2007/08 but with a different twist as the world is going through a structural change setting a new chart for this decade. Oil prices, gas prices, a number of commodity prices are significantly down since last week. The bond markets globally are signalling a global slowdown, with now the U.S Treasury markets pricing in a U.S. slowdown. The US yield curve has inverted again, with the 1-month Treasury yielding more than a 10-year Treasury, and signalling global economic slowdowns within this year. All the symptoms of a global downturn are there. As Morgan Stanley have already forecasted since 2019, this decade ahead of us will generate much lower returns which could be 1/3 of the last 2 decades. 

This is the new norm and in this extremely challenging period ahead of us in this decade, now more than ever is time to get together and bring all brains together to chart this new way forward for Mauritius. Put political and whatever differences on the side as it will be rough. The past is by no way a guarantee for the future and more so today. And a vulnerable country like Mauritius has to prepare and act in a very nimble way to manoeuvre through this paradigm shift happening in front of us.

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