According to IMF’s latest analysis, the global economy is likely to experience a 3% contraction in 2020. With regards to Mauritius, economic performance is estimated to be -6.8%. Is that the worst-case scenario or can we expect this crisis to be even more damaging?
At this stage, it is extremely difficult to predict the size of the GDP contraction, be it globally or in Mauritius, as we have several factors in play concurrently. Firstly, we have our internal factors being directly linked to the lockdown, leading to reduced activity across all sectors. Secondly, Mauritius being an extremely open economy, we have external factors which will have a sustained impact our sectors being Tourism & Hospitality, Manufacturing, Construction & Real Estate and Financial Services.
IMF’s forecast uses a baseline assumption that the pandemic fades in the second half of 2020. However, truly speaking, your guess is as good as mine as to when this pandemic will fade, so I will not discount an even bigger contraction, as mentioned by our Minister of Finance and many other economists.
The Bretton Woods Institution has compared the aftermath effects of this Great Lockdown against that of the Great Depression. Is this not too alarmist given that the Great Depression was a phenomenon that has spread over several years whereas the effects of this sanitary lockdown will slowly wear off as normal life resumes?
The comparisons made by Bretton Woods are entirely valid and extremely relevant. There certainly are a lot of parallels between both events: a stock market crash, panic, significant value being wiped out leading to reduced consumer spending, investments and economic output.
The world has changed dramatically in the last three months and this crisis is a three-headed monster: firstly, it is a global health pandemic, secondly, consequent to the health pandemic and the quarantine, there is a global economic collapse and thirdly, this is a global financial market crisis. These three different but related crises are happening concurrently.
The mere fact that we live in a much more complex and interconnected world means that road to recovery could be longer and steeper.
What do you perceive to be the combined effect of a -6.8% contraction and a 4.6% inflation rate on the Mauritian economy?
Again, it is very difficult to predict the size of the impact on our economy. What is certain, however, is that even though it seems that we will have a soft opening in May, our main economic pillars will take time to resume normal activities. Importantly, Mauritians will have to accept that there are tough times ahead.
It is quite clear that the Tourism sector, which directly and indirectly accounts for around 20% of our GDP, will be the most impacted. This is a sector that is mainly geared towards mainland Europe, hence, it will be a prolonged impact. Spillover effects to other sectors and SMEs will certainly happen and retrenchments or restructuring amongst these operators are not to be discounted. The worst-case scenario will probably be a spike in bankruptcies, which will be a global phenomenon.
When one adds the potential impact of inflation, the economic and social outlook seem rather bleak. Given the forecasted lack of foreign exchange receipts from sectors such as Tourism, there will be pressure on the Mauritian rupee and subsequently the cost of our imports. We should nevertheless see some relief from a fall in oil prices and other commodities – the change in consumer behavior post COVID-19 is not to be underestimated as well. Additionally, I do believe that the Central Bank has the ammunition in its locker to control inflationary pressures which in turn could provide some relief to our wallets.
Amidst this period of economic slowdown, the Government should be providing a financial assistance in the form of partial payment of salaries to the private sector. According to some experts, there is a need for an Aid programme which revolves around 10% to 20% of our GDP. Does the country actually have adequate financial resources to match comparable actions of major economies?
Let’s be clear about one thing – all countries, big or small, have a very tight leeway in terms of what is feasible from an economic standpoint.
It is well documented that we have a high Debt to GDP ratio for various reasons – but whether we like it or not, some economic fundamentals will have to be “ignored” for the time being whilst we attempt to revive the economy.
Just a few numbers that we should keep in mind. The country has USD 7.2bn of reserves, which amount to approximately 13 months of imports. The Central Bank has also issued Bank of Mauritius instruments to mop up excess liquidity in the past (about MUR 100bn). How do we make use of this liquidity going forward?
Some atypical measures will need to be adopted, which will probably not suit economic fundamentals but will go towards helping economic operators. Not to mention that all economic players will need to play the game as well, as there will need to be some give and take.
Importantly, we need to have a robust plan in place which will address the immediate needs of our economic operators (the short term), relook at the make-up of our economy, taking into account its main pillars, but SMEs as well (the medium term), and put in place measures to avoid systemic risk (the long term).
As at date, Mauritius has a financial support of Rs. 30 billion for its economic recovery. Given the fact that Moody’s has lowered our credit rating, are we in a position to approach lenders to raise additional funds?
We need to expect that most countries will be given a negative outlook or a rating downgrade by ratings agencies. We are all in the same boat. E.g. the UK itself has been downgraded recently.
Does it impact our ability to raise funds from the likes of the World Bank? I don’t believe so. Mauritius has shown considerable resiliency in the past and we tend to be able to navigate storms better than some of our peers.
Again, it will be important for us as country to have a clear plan of action which will determine our ability to raise funding. The sooner this is done, the better for us. While there is a lot of liquidity in Mauritian Rupees, the lack of foreign currency will probably require us to request for FCY funding from the international agencies.
Amidst this COVID-19 battle that we are presently fighting off, multilateral institutions have a key role to play in providing massive financial support to economies who have been badly hit. Is the monetary system robust enough to withstand the shock of this crisis?
Yes, I believe that the system is sufficiently robust to absorb the shock and I don’t believe that this is up for debate.
But, the key pointer here is to have consensus across the board, at a global level. This, for me is crucial; very few people in our lifetime have faced an economic challenge of this enormity and it is now probably more than ever that we need collaboration amongst all states, big or small. Importantly, global bias, when it comes to economic help, needs to be eliminated.
When it comes to financial assistance, it varies from country to country really.
If we take the example of the United States for example, the US Federal Reserve has a new mantra ‘we will not run out of ammunition’. Well, in a way it is easier for them to state same as they can essentially print more money; however, because of the importance of the US Dollar, this statement in itself has helped to stabilise financial markets.
Smaller states/economies, such as ourselves, will in many ways be at the mercy of these institutions, so to speak. Therefore, it is not a question of whether the system can sustain the shock, but rather if it has the appropriate structure to tackle this problem head on.
The IMF and the World Bank have been founded post World War 2 with the main aim to maintain an equilibrium in the financial and monetary system; that was done with an underlying agenda to be prepared for any potential global upheaval. Should we consider 2020 as the year of the big test?
These institutions have been created by the very countries that won the WWII and there is a lot of debate around whether they suit only the interest of these superpowers. This remains an open debate.
But, I would argue that despite their existence since the 1940s, it is truly the first time that all member states of these institutions have had to come together to find a solution to a problem – and what a problem! COVID-19 may well be the unifying force.
I come back to the point about COVID-19 being a three-headed monster. This is what makes this the biggest challenge of our generation and one might argue that we are witnessing the start of a new world order.
With this test, I have no doubts that some of the existing institutions will be up for “refurbishment”.
Bankers are today at the frontline with a key responsibility to financially accompany companies in these trying times, specially post COVID-19. Does the Mauritian banking sector have enough reserves to fulfil its obligations in this respect?
In such an economic crisis, it is obvious that the banking sector is an important stakeholder that will be asked to play a key role in the revival of the economy.
Our banking sector has been generally robust, so yes, I do believe the resources are available but local banks will have to work closely with the Central Bank in order for the industry to have some form of alignment in terms of the way forward. This is what is happening around the world in any case.
Circumstances are very different from the 2008 Financial Crisis, which affected the banking and financial sectors primarily. This time around, it is the whole world economy that is in lockdown and will struggle to revive because of the multiple impacts that I have mentioned previously.
Liquidity and Capital reserves have been amassed across the banking sector over the last few years with a flourishing world economy, and Central Banks will also help if liquidity is needed, be it in Mauritius or the bigger economies.
During this crisis period, can we say that banks should be less risk averse, even if that means an augmented risk of having an enlarged pool of non-performing loans in the long run?
This is an excellent question but the answer is not straightforward.
While banks may have the liquidity and appetite to help one and all, we need to bear in mind that banking has evolved over the years and especially since the financial crisis of 2008, which brought about a number of new regulations and guidelines, namely the Basel III international regulatory accord.
Whilst the purpose of these regulatory changes was designed to mitigate systemic risks within the financial sector and improve the regulation, supervision, and risk management within the banking sector, no framework could have predicted the worldwide economic and financial meltdown we are now witnessing.
There have been a number of representations and guidance provided by the Central Banks of the larger economies, like the BOE, ECB and MAS recently where they are urging a pragmatic approach to the application of forbearance and new accounting standards by banks; precisely so that banks may accompany economic players during these unprecedented times.
In short, banks will have to find a balance between being good citizens for the real economy of Mauritius and importing risk onto their balance sheet. It can be achieved but will require strong guidance by the relevant authorities and a collective industry approach to the problem.
One also needs to bear in mind that banks are impacted just as much if there are major defaults in the economy, and we also have a fiduciary duty towards our depositors.
Is there a risk that we might face a liquidity crisis?
For no, I do not think rupee liquidity is an issue in this market. Excess liquidity has been a prevalent situation in this market for at least the last 10 years and latest figures show that we have circa MUR 24bn of excess liquidity. Notwithstanding the fact that the Central Bank is also providing liquidity to the market via the relief measures.
We could, however, face pressure on the foreign currency side. Mauritius prides itself for having a lot of foreign currency in our jurisdiction, which of course enhances our status as an IFC. As this crisis prolongs, we might see reduced activity in this realm and could see some repatriation of funds towards their primary jurisdictions. This in turn could then impact on foreign currency liquidity in this market. The good news is that there is no evidence as to this happening for now.
On the back of our IFC status, we should additionally note that local banks are also funding companies in other countries and therefore, the Mauritian banking sector plays an important role in some of the major economies of Africa for instance.
The tricky part is that while we might get over the health crisis soon, our economy is so dependent on the rest of the world so for good measure, we should err on the side of caution.
In the present situation, should Government significantly secure lending, as being currently advocated by some?
In the current context the government is the only ‘institution’ that has the financial clout to be able to sustain the economy – there are no two ways about it. Many established economies have announced such measures and we will probably see it happening here as well. Guarantee by the state would definitely impact on the already high public debt level, but it would also depend of how it is structured.
I personally do not think that we should expect the state to guarantee all private sector debt, at least before we draft a proper economic recovery plan. At the end of the day, we need to realise that government is using tax payers’ money to help the private sector.
In my humble opinion, I think that government will need to prioritise sectors that would need to be helped. The tourism and export sectors are the ones that probably will need a long-term financial aid and extension of debt, which might need some sort of government guarantees. However, there are no free lunches in this world and those who require government guarantees will have to accept that that the government will probably have to play an active role in the running of their operations – for transparence, good governance and to ensure bang for their buck.
On the other hand, the SME sector is the engine of consumption and might need straight cash from government to help it get back on its feet, because you need an economy to keep running.
However, I want to re-iterate the fact that there is no ‘one size fits all’ solution. As mentioned before, our room for manoeuvre is quite tight so one cannot expect the government to be Father Christmas here – all stakeholders will have to play their part! And above all, I think if government is to help in terms of guarantees, then, it needs to impose strong conditions to ensure that tax payers’ money is safeguarded. It is in everyone’s interest that the money is put to good use and the sectors be flourishing again.
How is AfrAsia Bank providing support to its clients and ensure that they have enough liquidity for the continuity of their operations in these trying times?
AfrAsia Bank, of course, wants to help the affected sectors to get back on their feet and we are already working on several debt restructuring requests just like all the other major banks in the country.
Obviously, helping our clients is at the core of our priorities right now, as without them, we do not exist! Internally, we have already come up with our modus operandi as to how to go about providing relief to our clients and the affected sectors and assisting them on the road to recovery. We are fully committed to play our part in helping the economy to be up and running as quickly as possible.
Given the high volatility of financial markets, can you tell us about the investors’ sentiments? Are they considering to put on hold their future projects?
World financial markets seem to have regained some sanity since the last 2 weeks with volatility indices lower than they were since the Western world went into economic crisis in mid-March. For example, in the US, we have some earnings’ reports from the large banking institutions for the last quarter and the main thing to highlight is the higher levels of provisioning for expected bad debts and anticipated repayment difficulties.
However, on Monday, we saw oil plunging to its lowest level since 1986. Traders fled the WTI Futures contracts for both May and June as industrial and economic activity is grinding to a halt with governments around the globe extend shutdowns due to the swift spread of the coronavirus and such demand for the commodity is negligible while storage is limited.
To be honest, we are yet to see the worst, as the real impact of this crisis will only be visible on financial statements of corporates across the world in the forthcoming quarters.
I think everyone is starting to tighten their purses and this is a phenomenon that will last for at least 24 months according to me. If on a personal level, we feel that it is time to save money and sacrifice unnecessary expenses, you can expect the investor community at large to do the same.
As per IMF’s latest forecasts, Sub-Saharan Africa and emerging economies will be the least impacted by this crisis. Post COVID-19, should we reinforce our strategic position as an International Financial and Commercial Hub bridging Africa and Asia?
As I mentioned at the start, it is extremely difficult to judge the extent of the global slowdown.
Sub-Saharan Africa has its own sets of specificities. For example, if we look at Nigeria, the current low oil prices which are set to prevail for a while will wipe out a significant percentage of their GDP. On the other hand, when we look at Kenya, while it will benefit from low oil prices, its tourism sector will be hugely impacted. South Africa, which is the economic power house of Sub-Saharan Africa has now been downgraded to junk status by international rating agencies. We have seen last week that South African Airways is going to be filing for bankruptcy soon.
African and emerging market economies are heavily reliant on FDI from the Western world and we should note a lot of it transits through the Mauritian IFC – it is in our interest to keep a keen eye on the global impacts as well.
I will not tire of saying it: it’s time we start moving away from only playing a postman role to more active investments both by government and the private sector in economic areas on the continent that will benefit both those countries and Mauritius.
In the post COVID-19 era, all the economic stakeholders will need to come together and plan how we re-invent ourselves, strategise and draw out an economic plan to be able to play an opportunistic role in this problem, with specific timelines and focus on short, medium and long-term targets.
It’s now or never…