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MCB FOCUS: Revised estimate for 201: real GDP growth is predicted to increase to 3.9%

Against the backdrop of afore-described developments characterising the domestic economy and the global environment, our growth estimate for 2017 is maintained at 3.7% when measured at market prices. The latter figure estimate undershoots the official prognosis by 20 basis points after making allowance for (i) a slightly lower real expansion rate for taxes on products net of subsidies; and (ii) a marginally lower estimate for the country’s economic growth at basic prices. In fact, our figure for the latter indicator stands at 3.6%, which is 10 basis points below the official estimate owing to an expected marginally lower expansion in total investment.

Updated forecast for 2018 As per current indications, the country’s economic expansion is likely to improve slightly this year when compared to 2017. Thus, while staying close to the prognosis formulated by Statistics Mauritius, the IMF and World Bank, real GDP growth is, as per our baseline scenario, predicted to increase to 3.9% when measured at both market and basic prices.

Noticeably, in the wake of recent floods that have hit several cultivated areas, the non-sugar agriculture sector is now forecast to post a more inhibited performance than previously expected, while our already modest prediction for sugar has been further scaled down, to some extent reflecting signs that export prices on the European market would be lower than previously anticipated, partly linked to supply-side pressures prevailing in the aftermath of liberalising market access therein. Here, it is worthwhile to note that, along with these segments and despite measures executed to boost activity levels, several strategically-important sectors of the Mauritian economy – notably the export- and domestic-oriented manufacturing industries – are foreseen to post restrained growth in value added this year, mainly owing to uncertain market access and local structural bottlenecks. In another respect, a marginally less upbeat outlook is now being nurtured for the tourism sector, after notably factoring in the increasingly competitive market environment. Yet, in spite of the statistical impact of the high base effect attributable to the good outcomes of the last couple of years, the sector would continue to post an appreciable growth and cast a prominent impact on real GDP growth owing to its competitiveness and market diversification breakthroughs and the partial liberalisation of the country’s air access. Noteworthy performances are also likely to be registered by the ICT and financial and business services industries, although some global business operators are likely to face up to challenges in adapting to the evolving operating environment, in particular in relation to their endeavours to diversify into new markets and broaden the product base. For its part, while the sector is set to stay as a key driver of nationwide growth in output this year when taking into account the lineup of announced large-scale infrastructure projects, we have, at the same time, downgraded our outlook for construction compared to our prior forecast given relatively less optimistic predictions on the investment front.

In fact, we have lowered our forecast for growth in public investment. This is principally due to further delays that have been witnessed as regard the execution of specific projects forming part of the Road Decongestion Programme. Actually, in addition to an extension of time on the bidding, the decision of the Road Development Authority to award a contract for the construction of Grade Separated Junctions at Pont Fer/Jumbo/Dowlut roundabouts and the A1-M1 bridge linking Coromandel to Sorèze was challenged by one of the bidders. The Independent Review Panel ordered an annulment of the decision to award the contract to the selected bidder and further ordered a re-evaluation of the bids, while an application for a judicial review of the said decision was, thereafter, lodged before the Supreme Court. That said, we do expect the decision to award the contract to be taken soon, although this situation implies a delay compared to our prior forecast whereby we had expected the above-mentioned projects to start in January last. Moreover, growth in private capital spending is predicted to be somewhat lower than forecasted in October last, owing mainly to a marginal downgrade for the pipeline of projects in the tourism sector and the execution of ventures linked to the energy sector. Nonetheless, the country’s growth performance is still foreseen to be predominantly driven by a notable expansion in national investment in 2018. Noticeably, in spite of the sizeable import content associated with contemplated ventures, an important growth in public sector investment is being expected, with the indicator’s share of GDP to increase by 90 basis points to stand at 5.2%. Basically, the sheer magnitude of projects announced by the authorities suggests, by itself, that the subsequent impact on real GDP growth should be quite important if at least part of envisioned ventures are instigated within a reasonable timeframe and/or if unfolding projects witness are implemented at an accelerated pace when compared to works undertaken last year. Notably, public investment should benefit from the unfolding of the Metro Express mega-project, with on-site works between Port Louis and Rose Hill having started since January. Besides, works for the construction of the Decaen flyover along Motorway M1 to connect the traffic to the City Centre have been initiated. Furthermore, several investment-upgrading projects have been announced by the authorities for execution across different fields. It is, however, worth observing that, while some of them are likely to unfold during the course of this year, the majority of the key envisioned undertakings are – in line with official pronouncements and after taking on board the time taken for them to go through the relevant procurement and tendering processes – only scheduled to be instigated as from 2019 or onward. Illustratively, as part of the next phase of the Road Decongestion Programme, earmarked ventures encompass the A1-A3 Link Road to connect the Port Louis-St Jean Road to the Black River Road, Phases 2 and 3 of the Ring Road project as well as other projects deemed as a priority by the authorities, mainly a new flyover at Quay D, the Jin Fei Project and the Urban Terminals at Victoria and Immigration Squares. Other important projects that have inter alia been earmarked include the upgrade of water distribution network through the pipe renewal programme, the enhancement of the drainage system, the further extension and modernisation of port infrastructures, capacity upgrade at the airport, and the reinforcement of power generation and distribution set-ups.

For its part, private sector investment is anticipated to grow further this year, with its share of GDP increasing by 20 basis points to stand at 13.2%, supported by the realisation of specific ventures, especially those related to Smart Cities, tourism and energy, alongside being, in the latter case, aided by the recourse to PPP-type financing structures for specific projects. Overall, the national investment ratio is expected to improve by a relatively appreciable margin to attain 18.4% of GDP in 2018. This outcome, however, still largely undershoots the level advocated to gratifyingly enhance the country’s growth pattern and achieve social aspirations. In another respect, the quality of investment warrants due scrutiny, especially when considering the following aspects: (i) the multiplier impact of higher capital expenditure on activity levels and job creation; and (ii) the productive efficiency and commercial viability of specific undertakings. On another note and as a major source of apprehension, net exports of goods and services would again post a subdued evolution this year and continue to exert a drag on the country’s expansion rate. While its share of national output is foreseen to further deteriorate, net exports of goods and services are, as per our estimations, anticipated to rub off around one percentage point from the real GDP growth being envisioned for 2018

Unemployment After further declining in 2017 as per our estimations, the nationwide unemployment rate is, as per our baseline scenario, anticipated to edge down further to 6.9% this year, notably driven by expanding economic activities across sectors. Yet, while being positively viewed per se, such a trajectory calls for due scrutiny for several reasons. In the first place, while methodological limitations subsisting at some levels highlight the need for a careful reading of prevailing tendencies, the intrinsic job creation capability of the country across economic sectors is still viewed as being impeded by the prevalence of labour market rigidities and the economy’s restrained growth pattern. Against this backdrop, the unemployment path is still regarded as sub-optimal, the more so when considering our social development ambitions and our relative lack of natural resources for underpinning growth ambitions. In addition, a key trend observed over time and requiring the necessary limelight relates to the general drop in the country’s activity rate – i.e. the ratio of the labour force to population aged 16 years or more – to abnormally low levels when compared to several of our peer economies. Latest official data demonstrate that the country’s overall activity rate or labour participation rate stood at 59.2% in the third quarter of 2017, with the female participation rate depicting a more worrisome rate of 45.2%. On the other side, the economically inactive section of the population stood at 402,200 during this period, representing a rise of some 6,800 when compared to the third quarter of 2016 and of 10,900 relative to the second quarter of 2017. Overall, such labour market trends are viewed as quite worrisome insofar as they threaten to impede our future economic development on the basis of the country being subject to proportionately lower factor inputs than it could have possibly afforded and, thus, missing out on a potential source of economic growth.

Nonetheless, headline inflation is expected to recede during the second semester of the current year as the repercussions of earlier price movements become increasingly diluted in the computation, though the slide is likely to be restrained by projected pressures on the price index. On balance therefore and while discounting exceptional events, headline inflation is projected to stand at around 3.7% as at December 2018. Basically, the latter outlook overshoots our earlier forecast by 50 basis points, after mainly making allowance for (i) higher-than-expected increases in the prices of vegetables amidst adverse climatic conditions, which notably impacted the consumer price index by a significant margin this January; and (ii) higher-than-foreseen increases in international oil prices, especially in line with recent trends observed. In other respects, probable rises in administered prices cannot be discounted, although these developments are not likely to be of an overly high magnitude, while exchange rate developments should deserve close attention. Indeed, whereas inflationary pressures have been tempered by rupee strength lately, we cannot discard the risk of a further strengthening of the greenback on international markets amidst US corporate tax reforms, as the latter could, as mentioned before, trigger major repatriation of funds by US corporates. Overall, with a view to guarding against adverse nationwide economic effects, signs of building inflationary pressures deserve careful monitoring from a policy perspective, while concomitantly making allowance for other elements for informed decision-taking, especially the country’s still fragile growth trajectory and other considerations such as the persistent upward pressures on the rupee. Of note, the IMF has highlighted the need to bring the headline figure down to historical norms of about 3%. In this spirit, it shed light on the requirement to establish a formal medium-term inflation objective to foster the successful implementation of a new monetary policy framework as well as better anchor policy actions and tackle inevitable trade-offs that can rise when implementing related initiatives. Public finance Bearing in mind our relatively elevated public sector debt levels, the country’s budgetary position continues to call for close inspection, the more so when considering our economic development aspirations for the short and longer runs. With respect to FY 2017/18, the authorities expect the budget deficit to decline to 3.2% of GDP.

MAIN CHALLENGES As it delves further into 2018, the Mauritian economy remains exposed to an inquisitive sentiment on the heels of the persisting pressures on its real, fiscal and external sectors. In particular, the sub-optimal real GDP growth trajectory expresses the necessary grounds that the country has to cover in order to turn the corner. Against this backdrop and amidst the rapidly changing and exigent global landscape, the key salute for the country is to resolutely widen and deepen its economic transformation programmes, which should enable it to achieve desired socio-economic gains, alongside accelerating its graduation to the high-income nation league. In this respect, while the envisioned nationwide infrastructure push-up is foreseen to provide due stimulus by upgrading capacity and boosting activity levels, the direct ramifications of many of those projects on nationwide growth are likely to be mainly of a short to medium term nature

 

ENDING NOTE French poet, Charles Baudelaire, once asserted that “Tout ce qui est beau et noble est le résultat de la raison et du calcul [Everything that is beautiful and noble is the product of reason and calculation].” Indeed, amidst the current challenging, albeit improving operating context, the Mauritian economy is left with no choice than to be shrewd and sensible enough to identifying its weak spots and embrace lasting solutions that will re-ignite the engines of growth. Ultimately, identifying the appropriate challenges, adopting the right approaches and taking decisive decisions should help to transform Mauritius into a resilient, creative, flexible and knowledge-based economy that is capable of swiftly fending off exogenous shocks and harnessing expansion opportunities. Simultaneously, the economy should be better positioned to further diversify and broaden its economic space and foster increased international openness. While embarking on this route should prove beneficial to Mauritius Inc., promoting multi-stakeholder collaboration, participation and engagement should be pivotal in achieving the Pareto efficient allocation of resources and optimise the welfare of our socio-economic fabric.

The complete report can be read on the site:

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