GDP growth: likely 4.0% growth
We expect GDP to hover around 4.0% y/y over the next two years. A meaningful acceleration in growth would probably rely mostly on an improvement in global growth, especially in the Eurozone. By all accounts, the outlook for global growth, and in Europe, is positive. Thus, it seems reasonable that Mauritius’s growth outlook would be biased to the upside, relative to the period since 2011.
Growth in domestic demand will probably be the main driver for overall growth in both 2018 and 2019. Growth in investment spending, which seems to be recovering, will likely remain strong in 2018 and 2019. While growth in the other major sectors of the economy, like retail trade and financial services, has mostly trended sideways, the tourism sector continues to recover steadily.
Balance of payments: still very strong
The rising trend in FX reserves is likely to continue this year. By the end of this year, reserves will likely be around USD6.5bn, covering 10.5-m of imports, from USD5.7bn in November, covering 10-m of imports. FX reserves have been rising at a remarkably consistent pace since they bottomed out at USD3.73bn in January 2015, rising by about USD58m per month. This trend is testament to the strength of capital and financial inflows. Even though tourist arrivals are still growing, the pace has been decelerating since late 2015. Nonetheless, they are likely to continue growing, bolstering services exports.
The C/A deficit is likely to widen to nearly 5.3% of GDP in both 2018 and in 2019. The trade deficit is likely to widen further. Goods exports are still falling, albeit at a moderating pace. Import growth, which has been recovering, is likely to remain strong in the coming two years. Even if exports should return to growth over the next two years, the trade deficit will likely remain elevated.
FX outlook: following the EUR
We expect USD/MUR to get closer to 32.0 by the end of the year, perhaps falling below this level during 2019. Even if one were to discount the country’s BOP developments, the bias of risks lies with USD/MUR falling further over the course of the coming year. Exchange rate policy ties the MUR to the EUR. Given that the latter is likely to appreciate against the USD, the MUR is likely to appreciate as well, also as the MUR tends to follow the broad trends over long periods since the BOM has essentially sought to maintain the trade-weighted MUR stable over time.
Monetary policy: on hold, easing bias
Despite the surprising decision of the MPC to lower the key repo rate by 50 bps at the September policy meeting, we still believe that the balance of risks are for the committee to leave the policy rate unchanged for an extended period. But the bias is towards the committee lowering rather than increasing the policy rate.
We certainly do not believe that the central bank would be inclined to tighten the policy stance. Inflation, and its outlook, points to no need for the central bank to tighten it. Core inflation has hardly budged from 2.0% y/y since Jan 15, testament to a lack of underlying inflation pressures. We don’t expect this to change soon.