Mauritius throws another fillip at struggling economy

As concerns around the pace of its economic recovery continue, Mauritius‘ central bank has reduced its benchmark interest rate by one percentage point to 4.75%.

The central bank stated that, “While domestic economic activity is holding up relatively well in 2010 in spite of a small downward revision in the growth forecast, there are indications that it could slow significantly in 2011,” the bank said in a statement.

The Central Statistics Office on 30 June cut its economic growth forecast for 2010 to 4.2% from a March estimate of 4.6%. Backing up the decision to reduce rates has been the subdued inflation rate, which has seen the rate remaining below 3% all year.

This follows the announcement in August by Mauritian Finance Minister Pravind Jugnauth of an MUR 12bn (USD 401m) programme to help the economy recover from the impact of a weaker euro, targeting Chinese and Indian tourists.

The plan was to include an MUR 1.5bn loan to hotels at the benchmark interest rate to fund renovation, a bid to lure Chinese investment in hotels and almost double the number of visitors from India to an annual 115,000 by 2015. The programme was to be financed by the country’s central bank and private companies.

A debt crisis in Europe has undermined growth in Mauritius’ main markets, and a weaker euro has affected tourism to the country. Up to two-thirds of visitors to the island are from Europe, hence the drive to diversify the tourist arrival base.

Positively, tourist arrivals increased 6.2% to 439,150 in the first half of the year compared to the same period a year ago, and the stimulus is expected to help boost arrivals even further.

Mauritius earns most of its foreign currency from tourism and exports of sugar, clothing and textiles, although it has been pushing hard to diversify its economy by promoting itself in the offshore financial services and IT outsourcing arenas.

The stock market has continued to reflect the slow recovery of the economy, with the benchmark SEMDEX index up just 6.12% year-to-date, with the large cap SEM-7 index down 6.98%, as the more liquid stocks have borne the brunt of any selling pressure.

The increased liquidity in the market that could arise following the rate cut may provide a temporary reprieve for the stock market, but we do not anticipate any major positive movement in the fourth quarter of 2010.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.