Treasury Today Country Profiles in association with Citi

Mauritius: aiming high

Mauritus

Since gaining independence in the 1960s, Mauritius has evolved from a basic agricultural economy into a sophisticated financial centre. Up to now, the country’s growth has been steady but not stellar. So how can the country maximise its potential going forward?

Key facts

Population:
1.3 million.1
GDP per capita 2013 (US dollars):
$9,135.64 (IMF estimate).2
GDP % change 2013:
3.4% (IMF estimate).2
Current account balance 2013 (US dollars/billions):
-1.177 (IMF estimate).2
Inflation (average consumer prices) % change:
4.742 (2013) (IMF estimate).2
Ease of doing business (2013) rank:
20 out of 185 globally.1
Corruption perceptions index (2013) rank:
52 out of 175 globally.3

In February 2014, Rundheersing Bheenick, Governor of the Bank of Mauritius (BoM), called for a hike in the Mauritian key repo rate in order to try and prevent capital flight from the Indian Ocean island nation. Governor Bheenick made the comments just days after the BoM’s monetary policy committee had decided to make no change to the rate, keeping it at 4.65%.

He argued that a rise in the repo rate would protect the country from the turbulence that has hit other emerging markets, as well as addressing the low level of savings in the country (between 2007 and 2012 gross national saving as a percentage of GDP fell from 21.5 to 14.9). Bheenick also argued, however, that Mauritius needed more than a higher repo rate as a shot in the arm: it also required structural reform in order to achieve GDP growth of more than 4% a year.

While Mauritius was not hit as hard by the financial crisis as some other emerging countries (it has not, for example, experienced negative GDP growth since the early 1980s) the nation’s growth has tended to lag behind the Sub-Saharan average in recent years.

“In principle, the Mauritian economy has the potential to exceed its current growth rate by a significant margin,” says Nuvin Balloo, a Senior Economist at Mauritius Commercial Bank. “It should aim for long-term growth of 4.5% or 5% – based on our estimations, this is attainable despite the underlying international conditions. The problem is there are some endogenous factors impeding higher growth – notably, deep-rooted structural reforms are required to bolster the country’s productivity and competitiveness levels.”

This modest (by Mauritian expectations) growth is set to be fuelled by continued expansion in Mauritius’ financial services, ICT and seafood sectors. Axys, a Mauritian brokerage firm, forecasted late last year that annual growth in the expanding banking and ICT sectors would reach 5.5% and 8% respectively, outstripping the overall growth rate. This growth in the island’s ‘new economy’ contrasts with its traditional industries, which are stagnant. Textiles recorded negative growth in 2012 and has progressed little since, while tourism grew by less than 1% in 2013.

Managing an economy operating at two very different velocities is one of the key challenges for Mauritius’ government and central bank.

Managing the rupee

Although the Constitution of Mauritius mentions no official language, it is an English- and French-speaking country and maintains trading and diplomatic relations with the UK and France (rulers of the country between 1710-1810 and 1810-1968 respectively). The Mauritian economy is highly susceptible to events in Europe, and recession in the euro area has had an impact on the country’s growth. This is partly because the tourist trade – one of the nation’s key industries – is driven by European (particularly French) visitors.

Despite the country’s sluggish growth, the Mauritian rupee has been stable against the US dollar, fluctuating relatively little over the past two years. The BoM is active in monitoring the value of the rupee and in mid-2012 it moved to check growing appreciation in the currency with Operation Reserves Reconstitution, which saw it build up reserves of the currency, obtaining more than Rs100 billion ($3.3 billion) by May 2013. Prior to this intervention, the central bank had pursued a free-floating foreign exchange regime.

“The combination of Mauritius’ relatively small size, its open economy and its high level of international penetration mean the evolution of the rupee on the FX markets is closely linked to that of the US dollar, though domestic factors also matter,” says Balloo.

The central bank also has a comparatively strong hold on inflation (between 2009 and 2013 its inflation averaged 3.9% percent). Unemployment in the country is also relatively low, not breaking the 10% barrier since the early 1980s.

Offshore hub

In recent years, Mauritius has firmly positioned itself as an offshore financial hub and has backed this up by actively providing the foundations for its free-market economy to flourish. “Mauritius’ role as an offshore financial hub has been buoyed by taxation agreements with a number of countries, mainly with India, but also with some African nations. Thanks, in large part, to these agreements a huge amount of captive flows transits through Mauritius to be invested elsewhere,” says Balloo.

Mauritius is a key fund channel for India, and the two countries maintain close ties. Indeed, when Mauritius officially opened the Ebene office park – the centre of its offshore financial industry – in 2005, it was Indian Prime Minister Manmohan Singh who was invited to cut the ribbon.

It is estimated that more than 40% of foreign direct investment (FDI) into India over the past ten years, or $76 billion, has been channelled through Mauritius. One agreement that helps facilitate these captive flows is the double-tax avoidance agreement between Mauritius and India, which is a key driver of the flow of funds along the so-called ‘Mauritius route’. This agreement allows companies to pay taxes in the legal country of residence, usually the jurisdiction with lower taxes.

India is also Mauritius’ top import trading partner, followed by China and France. Its main export trading partners are the UK, France and the US.

Free-market

In his first budget speech in November 2012, incoming Minister of Finance and Economic Development Xavier-Luc Duval made clear his commitment to pursuing a market-based, pro-business approach. But even before then, Mauritius had chosen its free-market course. “Mauritius has built its success on a free market economy,” said accounting group KPMG in a 2012 report.

Chart 1: real GDP (annual % change)
Chart 1: real GDP (annual % change)

Source: World Bank

In the 2014 Index of Economic Freedom, published by US conservative think tank the Heritage Foundation, Mauritius was ranked eighth, four places above the United States (ranked 12th).

The country has an open and efficient regulatory framework that is designed to encourage investment, both domestic and foreign, in the country. Mauritius is ranked a very respectable 20th in the World Bank’s Ease of Doing Business Index, ahead of countries such as Germany (21st), Japan (27th), the Netherlands (28th), Switzerland (29th) and France (38th).

“Mauritius is very business-friendly. The country is sending out the message that it is absolutely open for business – it has a good regulatory environment, an open economy and an attractive corporate tax regime,” says Cas Coovadia, Managing Director of the Southern African Development Community Banking Association, of which Mauritius is a member state. Mauritius has a flat corporate tax rate of 15%. There is also an alternative tax rate of 7.5% of accounting profits (or 10% of dividends declared), which is applied if this yields more tax payable than the flat rate.

The island’s political stability – “It is one of the most stable countries politically on the continent,” says Coovadia – also contributes to this business-friendly environment. The country has a well-established democracy and holds free general elections every five years – the last was held in 2010 and resulted in a coalition of the Mauritius Labour Party, the Militant Socialist Movement and the Mauritian Social Democrat Party winning a majority.

In addition, Mauritius was the top-ranked country in the 2013 Ibrahim Index of African Governance, which measures the delivery of public goods and services, and policy outcomes, and which classifies results by safety and rule of law, participation and human rights, sustainable economic opportunity and human development. It also has one of the lowest levels of corruption of African nations. “Mauritius is an appropriately governed, transparent society,” adds Coovadia. “Corruption is very low, which is probably helped by the fact that they have a very small population, so it is easier to stamp out corruption before it really starts.”

Electronic payments on the up

The Mauritius Automated Clearing and Settlement System (MACSS) is the country’s national real-time gross settlement system and is operated by the BoM. More than Rs1 trillion ($33 billion) of transactions were made on the system during the first half of 2013 – an increase of 15% on the equivalent period in 2012. According to the BoM, all transactions during this period were settled on the system without delay or loss. MACSS is largely reliable, although it did suffer two outages during the first half of 2013.

Settlement is made in Mauritian rupees as well as a limited number of foreign currencies, including pound sterling, US dollar, euro, Swiss franc and South African rand, and payment instructions are sent using SWIFT.

Electronic transactions are on the up in Mauritius – in the first half of 2013 there were 1.4 million electronic clearing transactions on MACSS with a combined value of more than Rs28 billion ($915m) – a rise of 11.2% on the equivalent period in 2012. Mid-way through 2013, 14 of the 20 banks that operate in Mauritius provided electronic banking services.

Chart 2: Transactions on MACCS
Chart 2: Transactions on MACCS

Source: Bank of Mauritius

The five largest banks (in terms of total assets) are Mauritius Commercial Bank, HSBC Bank (Mauritius), Standard Chartered (Mauritius), State Bank of Mauritius and Barclays Mauritius. All banks in the country are permitted to carry out both domestic and offshore activities, which is crucial given the way Mauritius has sought to position itself as an offshore financial hub.

Cheques remain a common payment instrument in Mauritius. During the 2012-2013 financial year a daily average of 20,568 cheques with a value of Rs1.1 billion ($36m) was cleared, slightly down from average of 21,287 cheques cleared, with the same value, during the previous financial year.

Since the implementation of the BoM’s Cheque Truncation System (CTS), which was completed in February 2013, cheques are no longer physically exchanged on the Bank’s premises.

Regional payments are handled using the Regional Payment and Settlement System (REPSS), which allows the 19 member countries of the Common Market for Eastern and Southern Africa (COMESA) to transfer funds between one another. The system is built on open standards and is accessible to non-member states. REPSS is operated by the COMESA Clearing House and the BoM. It was set up with the aim of stimulating economic growth in the region through intra-regional trade.

Cash management

Notional cash pooling and cash concentration are not available in Mauritius, although cross-border cash management is allowed. Cross-border activity goes through SWIFT and is settled with correspondent bank accounts held abroad.

Mauritius issues treasury bills, typically with maturities of 91, 182 and 364 days. All securities are settled on a T+3 settlement cycle, except Treasury bills, which are settled on a T+1 cycle.

Settlement and custody is carried out on the Stock Exchange of Mauritius (official market) and the Development and Enterprise Market (formerly the OTC market). The central securities depository for immobilised equities, corporate debt and listed Treasury bills in Mauritius is the Central Depository and Settlement Co. Ltd. Settlement and depository services for immobilised government debt issues traded on the secondary market are offered by the BoM.

There are three custody service providers in Mauritius: HSBC, Mauritius Commercial Bank and Standard Chartered.

The BoM allows for two basic models for mobile payments in the country, one bank-led and the other driven by mobile network operators. Mobile (consumer) banking is offered by five banks in Mauritius.

The Dubai of West Africa?

At the beginning of 2013, Mauritius was hit by a spate of Ponzi schemes, with fraudsters exploiting loopholes in the country’s regulatory framework to defraud more than 2,000 individuals of around Rs1 billion ($32.7m). The BoM described the uncovering of the schemes as ‘a wake-up call for regulatory and other authorities to review their operations as they relate to detecting and combating financial crime.’

Some observers feel that if this island nation can iron out some of the weaknesses in its financial environment – such as this capacity for its regulators to be caught napping by fraudsters – then it could progress into a much more imposing proposition as a financial hub.

And it seems the government is taking this ironing out process seriously. As part of last November’s budget, finance minister Duval announced the government’s intention to grant greater power to Mauritius’ financial market regulator and to establish a serious fraud office.

“Mauritius has a fantastic opportunity to really establish itself as a vital financial hub for Francophone Africa, as other countries in the region have nowhere near the level of infrastructure and financial sophistication it does. If it can continue to attract global corporate activity as it has done so far, it could become the Dubai of West Africa,” says Coovadia.

  1. World Bank

  2. IMF World Economic Outlook October 2013

  3. Transparency International