We expect GDP growth of 6.3% y/y in 2022 and 4.6% y/y in 2023. We expect that the C/A surplus to reach 14.2% of GDP in 2022 and narrow to 10.4% of GDP in 2023. We see the pair USD/MUR around 42.96 at year-end.
GDP growth – Ukraine war is a risk to the recovery
We estimate real GDP growth of 6.3% y/y in 2022, 0.3 ppts below our previous forecasts, with base effects still playing a big role. GDP growth may reach 4.6% y/y in 2023, and thereafter hover around 4.0% y/y. In 2021, activity in most sectors was well below the pre-pandemic levels (except in agriculture, mining, water, ICT, finance, and health). Thus, base effects could still unwind gradually, especially in tourism, through to 2023 and 2024. The main downside risks stem from the heavy dependency on the global economy, especially Europe, which is now facing significant risks from the Ukraine war.
Balance of payments – C/A deficit already hefty, and deepening further
The C/A deficit is expected to widen to 14.2% of GDP in 2022 due to higher oil, food and transportation costs resulting from the Ukraine war, China’s renewed lockdowns, and the pandemic. By 2023, we expect the C/A deficit to, however, narrow to 9.7% of GDP. Services exports, especially tourism, should grow due to favourable base effects. The services account has already shifted to a surplus of USD81m as of Q4:21. Although this may continue into 2022, it is unlikely to offset rising imports.
Monetary policy – hawkish bias
We expect inflation to average 11.9% y/y in 2022 and 8.4% y/y in 2023, from 4.0% y/y in 2021. Therefore, monetary policy may be biased towards tightening. The repo rate has moved broadly in line with core inflation, and along with the US FED monetary policy stance which have both moved meaningfully. With core inflation now up to 7.0% y/y from a historical average below of 3.0% y/y, the current repo rate of 2.0% might have to be adjusted. Based on this, the BOM’s MPC is likely raise rates to alleviate secondround effects. Due to the pass-through of the exchange rate depreciation and global supply constraints, inflation may peak in 2022, then, supported by tighter monetary, gradually decline to the long-term of 3.0% average by 2024.
FX outlook – range-bound
The USD/MUR will likely be range-bound in the near term, perhaps ending the year 42.96. Should capital inflows subside, as projected, nominal exchange rate depreciation might be unavoidable. The BOM has intervened occasionally to smooth excess volatility in the FX market, but if the FX reserves decline sharply, interventions could be limited.
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