BoP Position Stable Despite C/A Imbalances

BMI View: The latest balance of payments data are broadly supportive of our view that Mauritius will see its sizeable current account deficit remain close to present levels over the coming quarters, with BMI projecting a shortfall equal to 10.5% and 10.0% of GDP in 2013 and 2014 respectively. While a deep structural trade deficit will see this shortfall persist over the medium-term, robust inflows of foreign capital should continue to provide adequate cover.

While the country saw its trade account deficit - the major determinant of the current account shortfall - narrow by 11.5% year-on-year (y-o-y) in Q113 we believe this improvement exaggerates the overall health of the country's trade dynamics given that much of this owed to the continued slowdown in capital goods imports (resulting from an ongoing slump in fixed investment). Indeed, with the recovery in exports continuing to be constrained by weak demand from Europe, our prediction of a slight narrowing of the trade account deficit in 2013 is based more on import weakness than export strength.

Looking ahead, our outlook for Mauritius's overall balance of payments dynamics remains unchanged. We expect the country to sustain a sizeable, but narrowing, current account shortfall over the medium-to-long term driven by a structural trade deficit. Even so, we believe this deficit will continue be adequately covered by capital inflows - notably foreign direct investment - underpinned by Mauritius' attractive investment climate. Moreover, the government appears mindful of the economy's exposure to external shocks, as illustrated by ongoing efforts to boost foreign reserve cover as well as its commitment to reducing its debt pile.

Import Dependence Keeps C/A Deep In The Red
Mauritius - A Very Structural Deficit

BoP Position Stable Despite C/A Imbalances

BMI View: The latest balance of payments data are broadly supportive of our view that Mauritius will see its sizeable current account deficit remain close to present levels over the coming quarters, with BMI projecting a shortfall equal to 10.5% and 10.0% of GDP in 2013 and 2014 respectively. While a deep structural trade deficit will see this shortfall persist over the medium-term, robust inflows of foreign capital should continue to provide adequate cover.

While the country saw its trade account deficit - the major determinant of the current account shortfall - narrow by 11.5% year-on-year (y-o-y) in Q113 we believe this improvement exaggerates the overall health of the country's trade dynamics given that much of this owed to the continued slowdown in capital goods imports (resulting from an ongoing slump in fixed investment). Indeed, with the recovery in exports continuing to be constrained by weak demand from Europe, our prediction of a slight narrowing of the trade account deficit in 2013 is based more on import weakness than export strength.

Looking ahead, our outlook for Mauritius's overall balance of payments dynamics remains unchanged. We expect the country to sustain a sizeable, but narrowing, current account shortfall over the medium-to-long term driven by a structural trade deficit. Even so, we believe this deficit will continue be adequately covered by capital inflows - notably foreign direct investment - underpinned by Mauritius' attractive investment climate. Moreover, the government appears mindful of the economy's exposure to external shocks, as illustrated by ongoing efforts to boost foreign reserve cover as well as its commitment to reducing its debt pile.

Import Dependence Keeps C/A Deep In The Red
Mauritius - A Very Structural Deficit

Following a challenging 2012 that saw growth in exports slow to 4.2% y-o-y (from 13.6% in 2011), we forecast revenues to rise by 6.0% in 2013 driven by an overall improvement in external conditions. Indeed, exports rose by 10.5% y-o-y in Q113 (following on from an 11.0% y-o-y increase in Q412), with much of this down to strong growth ships stores & bunkers (up 42.7% y-o-y) and to a lesser extent cane sugar and fish exports (up 17.5% y-o-y). Nevertheless, apparel and clothing exports - - which account for one third of total revenues - remain subdued (down 5.5% in Q113), reflecting the difficult conditions still facing the sector. Demand within Mauritius's two biggest export markets, the UK and France, remains sluggish (see chart), while South Africa and Madagascar - the island's two major African export markets - are mired in economic and political uncertainty.

Although this exposure will see export growth remain relatively constrained over the next several years; looking ahead we are more optimistic. In a bid to reduce its heavy exposure to developed markets, the government has been active in its efforts to deepen trade and investment ties with faster growing economies in Asia and Africa, as well as developing higher value added exports, and we expect these measures to bear fruit over the medium-to-long term.

Weak External Conditions And Import Reliance Weigh On Trade Balance
Mauritius - Imports And Exports (Goods And Services)

Turning to imports, the latest data provide further evidence of the ongoing slowdown in fixed investment. This has seen the demand for imported machinery and transport - which accounted for around 16% of the import basket in Q113 - fall sharply in recent quarters and, with a decline of 30.3% y-o-y, was the main reason behind the pronounced slowdown in total imports. Over the coming months we expect this trend to continue due to the completion of a number of major public works projects and ongoing capital budget execution difficulties. In spite of these issues, however, we expect Mauritius's hefty import bill to keep the trade account deficit in the double digits as a percentage of GDP over the duration of our 2013-2017 forecast period.

With Mauritius's wide trade account deficit likely to endure, albeit narrowing gradually, over the medium-to-long-term, the services account will continue to provide a key source of support to the island's current account balance. Central to these prospects is the tourism sector, which comprises a significant proportion of the country's services account surplus. While the 1.0% y-o-y increase in H113 visitor numbers is evidence that a tentative recovery is underway, we expect conditions to remain challenging over the near term. Indeed, a sharp contraction of 20.9% in net travel receipts in the first quarter has prompted us to lower our forecast for the services account surplus in 2013.

Foreign Capital Inflows Ensure BoP Surplus
Mauritius - Current Account Balance And Capital & Financial Account Balance, US$mn

Investment Covers Structural Flaws

Mauritius' stable investment climate and mature banking sector mean that it continues to attract substantial financial inflows, namely foreign direct investment. These capital inflows continue to provide adequate cover for the shortfall in the current account, with the latest official data (indicating that Mauritius continues to run a balance of payments surplus (data for Q113 revealed a surplus of US$44mn). Over the medium term we expect robust levels of FDI to continue to be channelled into the country's burgeoning services sectors such as real estate, education and IT as foreign investors look to take advantage of the wide range of tax incentives, such as double taxation avoidance agreements (DTAA), and financial services on offer. Indeed, despite flows coming largely from Europe, FDI levels held up well in 2012, increasing by around 34% to US$12.7bn.

MAURITIUS - CURRENT ACCOUNT
2009 2010 2011e 2012e 2013f 2014f 2015f 2016f 2017f
Notes: e BMI estimates. f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 Bank Of Mauritius/BMI.
Goods imports, US$bn 2 3.5 4.4 4.9 5.1 5.2 5.4 5.7 5.9 6.3
Goods imports, % of GDP 2 39.9 45.1 43.7 44.7 44.2 43.5 42.9 42.0 40.7
Goods exports, US$bn 2 2.0 2.3 2.6 2.7 2.8 3.0 3.2 3.4 3.7
Goods exports, % of GDP 2 22.1 23.3 22.8 23.4 24.1 24.2 24.3 24.1 23.7
Goods exports, % of imports 2 55.4 51.6 52.2 52.4 54.4 55.6 56.6 57.4 58.3
Balance of trade in goods, US$bn 2 -1.6 -2.1 -2.4 -2.4 -2.4 -2.4 -2.5 -2.5 -2.6
Balance of trade in goods, % of GDP 2 -17.8 -21.9 -20.9 -21.3 -20.2 -19.3 -18.6 -17.9 -17.0
Services imports, US$bn 2 1.6 2.0 2.5 2.4 2.7 3.0 3.4 3.8 4.2
Services imports, % of GDP 2 18.3 20.4 22.0 21.3 22.9 24.1 25.4 26.5 27.3
Services exports, US$bn 2 2.3 2.7 3.3 3.4 3.9 4.2 4.7 5.2 5.7
Services exports, % of GDP 2 25.5 27.7 29.0 29.8 32.7 34.0 36.0 36.8 37.2
Goods and services exports, US$bn 2 4.2 4.9 5.8 6.1 6.7 7.2 7.9 8.6 9.4
Goods and services exports, % of GDP 2 47.7 51.0 51.8 53.2 56.8 58.1 60.3 61.0 60.9
Balance of trade in goods and services, US$bn 2 -0.9 -1.4 -1.6 -1.5 -1.2 -1.2 -1.1 -1.1 -1.1
Balance of trade in goods and services, % of GDP 2 -10.6 -14.6 -13.9 -12.8 -10.3 -9.5 -8.1 -7.6 -7.1
Income account balance, US$bn 2 0.0 0.2 -0.1 0.1 -0.2 -0.2 -0.2 -0.3 -0.4
Income account balance, % of GDP 2 0.3 2.1 -0.6 1.3 -1.4 -1.6 -1.6 -2.1 -2.3
Net transfers, US$bn 2 0.2 0.2 0.1 0.1 0.2 0.1 0.1 0.1 0.1
Net transfers, % of GDP 2 2.6 1.9 1.2 1.2 1.3 1.1 1.1 1.0 0.9
Current account balance, US$bn 2 -0.7 -0.8 -1.5 -1.2 -1.2 -1.2 -1.1 -1.2 -1.3
Current account balance, % of GDP 2 -7.7 -8.2 -13.3 -10.3 -10.5 -10.0 -8.6 -8.6 -8.4
Openness to international trade, % 1,2 62.1 68.4 66.6 68.0 68.3 67.6 67.2 66.1 64.4
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