We expect the economy to contract by 8.9% y/y in 2020 and then grow by 4.4% y/y in 2021. We expect C/A deficit to widen to 8.3% of GDP in 2020 and narrow to 7.8% of GDP in 2021. We expect USD/MUR at 39.68 by year end 2020.
Medium-term outlook- how long for tourism to recover?
The pandemic’s economic impact will afflict most sectors, with tourism suffering the most. We now expect the economy to contract by 8.9% y/y in 2020 and then grow by 4.4% y/y in 2021, from our previous 3.6% y/y forecast for 2020. The nationwide lockdown is expected to be lifted by Jun but global travel restrictions will linger, keeping the tourism sector depressed. This sector contributes roughly 6% to GDP but the impact on tourism tends to spill over to other sectors. Weaker EU economic growth, the main trading partner, will worsen the contraction. The EU accounts for above 60% of tourism arrivals. In the medium- to long term, a meaningful acceleration in growth would probably rely mostly on an improvement in global growth, especially in the euro zone.
Balance of payments – widening C/A deficit
The C/A deficit is likely to widen both in nominal terms and as a percentage of GDP in 2020. We expect it to widen to 8.3% of GDP in 2020 and narrow to 7.8% of GDP in 2021. We expect subdued global demand to suppress exports of goods and services. Tourist arrivals are likely to continue to decline, weakening services exports. FX reserves are unlikely to continue rising, as has been the case. Much of that rising trend was due to healthy financial inflows, as the C/A balance was in deficit. We doubt that capital inflows will continue to be robust enough to keep FX reserves on an upward trajectory.
Monetary policy- easing bias
We expect headline inflation to average 3.3% y/y in 2020 instead of the 1.6% y/y in our Jan AMR. In 2021, headline inflation is expected at 2.2% y/y. whilst there is impetus to a certain degree for the MPC to deliver another rate cut, the effectiveness of such a move is doubtful.
FX outlook – trade-weighted MUR depreciating
We expect to see USD/MUR rising before falling to 39.68 by year-end. Both measures of the trade-weighted MUR that the BOM calculates depreciated at a faster pace, more so the index based on merchandise trade. The index based on merchandise trade depreciated by 7.9% in 6-m to Apr, and the one based on both merchandise trade and tourism earnings depreciated by 4.7% in 6-m to Apr. Irrespectively, in the medium term, we do not anticipate the BOM abandoning the practice of managing the MUR through two measures of the trade-weights. This leaves the direction of USD/MUR heavily reliant on the path of EUR/USD.