"The next crisis is unfortunately already here”

Interview: Sameer Sharma, Investment Analyst & Financial Risk Manager

‘The ongoing global negative supply shock creates challenges when it comes to stimulating the local economy with fiscal stimulus’

* ‘The quality of our institutions has been declining for close to a decade with a noted acceleration since 2019.
At the core, Mauritius maintains a system of political patronage’

*’Inefficiently run companies and near-zombie companies will remain a drag on overall growth’

MT readers would have read previous pieces from Sameer Sharma, a Chartered Alternative Investment Analyst & Certified Financial Risk Manager with previous experience in the Reserves Management Divisionof the Bank of Mauritius. In this interview he shares his technical and financial perspective on the current state of our economy, the monetary inflation and depreciation policies pursued, the reliance on property sales and tourist receipts, the IMF and Moody’s ratings and the MIC-BoM imbroglio amongst other issues.

* The situation on the economic front worldwide is still gloomy and getting more uncertain, according to the IMF. Several shocks have hit the world economy already weakened by the pandemic: higher-than-expected inflation worldwide, a worse-than-anticipated slowdown in China, and further negative spill-overs from the war in Ukraine. It seems economic recovery will take a much longer time than thought earlier, but is going back to normal even possible?

The still fragile and unspectacular Mauritian economic recovery, which is largely being driven by continued growth in financial services and the re-opening of borders, will begin to lose momentum as we enter the next two quarters.

Unlike in the Great Financial Crisis of 2008 and during the more recent Covid-19 driven crisis, central banks are belatedly tightening monetary policy at the same time as the global economy continues to slow down. We are entering yet another major slowdown with advanced economies having more than 400% of GDP of combined private and public sector debt made worse by rising costs of funds given the selloff in global bond markets.

Global growth momentum as measured by various high frequency indicators are gaining downward momentum and in many places much faster than anticipated; central bank induced asset bubbles are beginning to come under strain. US consumer balance sheets remain healthy but when one strips out the top 1% of income earners, the picture does not appear to be as rosy. The US however is in a much better shape than Europe, our main market.

In a nutshell, Central banks were overly accommodative with ultra loose monetary policies and are now acting at the tail end of a short and historically unusual business cycle in order to avoid any de-anchoring of inflationary expectations by taming demand. While many market watchers have been talking about a plain vanilla or garden variety, short-lived or relatively shallow recession, all ingredients are currently in place to cause a much worse economic crisis with stagflation likely a base case for Europe. There is now a 60% chance of recession split evenly between a bad one and a shallower one.

Chinese economic indicators along with the potential burst of the less-talked-about Chinese property market is mere icing on the cake. Moody’s wrote about Mauritius lacking both fiscal and monetary buffers to face the next crisis as it did in the past. The next crisis is unfortunately already here. Beyond high levels of public debt and no central bank backstops behind them, the still ongoing global negative supply shock creates challenges when it comes to stimulating the global and local economy with fiscal stimulus.

* It’s said that supply chain disruptions and the dynamics of the global economy will continue to adversely impact the performance of the local economy for many years. In that scenario, what will the economic situation look like for countries like Mauritius in the years ahead, say by 2024/2025?

By 2025, most of the gains to GDP growth driven by the recovery in tourist arrivals, which currently are expected to hover at 2014-2015 levels, will be behind us. On a positive note, I have to say that while the likes of Maldives and Seychelles are ahead of Mauritius given the earlier opening of their borders and aggressive marketing strategy, the current Tourism minister is sending the right signals which is a good sign despite the slowdown in arrivals growth momentum given what is happening globally.

The Mauritian economy over the longer term based on fundamentals can only sustain a real growth rate of between 3% and 3.3% per annum post base effects. This potential growth rate is driven by the low multiplier of the kind of investment we attract, low levels of total factor productivity growth, labour force quality constraints and unfavourable demographics.The state will likely continue to rely heavily on inflation in order to deflate both private and public debt and bloat tax revenues. The distorted tax regime locally will not be fixed and reviewed and inflation which is another way governments can stealthily tax citizens will remain the favoured tool especially when one considers the cost of funding the Basic Retirement Pension scheme. Read More… Become a Subscriber

Mauritius Times ePaper Friday 2 September 2022