(Published in L'express 07 April 2021)
The lower trade deficit, as a result of lower imports and the higher than expected exports boosted to some extent by the depreciation of the rupee, more than compensated for the substantial shortfall in services, due mainly to the tourism sector plummeting by some 82%. And contained by the net foreign borrowings of government, the 2020 BoP deficit turned out to be only around half of the projected deficit of US$ 1 bn.
The global financial system flush with liquidity, exacerbated by the unconventional monetary policies implemented by the major central banks over the past several years, has contributed to smooth the volatility in capital flows in emerging markets, including ours. As we are still being considered as investment grade by investors, we have been able to limit capital outflows and the GBC sector has been able to weather the storm so far.
A deeper analysis of the BoP shows that there are reasons for concern. The worrying factor is that if we exclude the GBC transactions, the overall BoP balances show a totally different picture with record levels of deficits ranging from -Rs 48 to Rs -90 bn in the year 2018-2020 and as a % of GDP the current account deficit shoots up to an unstainable level of 17% in 2020. Such a heavy dependence on a volatile GBC sector may have a direct impact not only on our BoP and reserves but also on our domestic financial sector.
There are three main factors that may impact on our management of capital flows :
• Moody’s : If we do not carry out the necessary reforms to restore back our fiscal and debt metrics to more reasonable levels , we stand the chance of a further downgrade and we may no longer be considered as investment grade
• EU blacklist and FATF greylist: The FSC and MoFED are still struggling in the overhauling of our law enforcement agencies to ensure effectiveness in the investigations and prosecutions of money laundering and financial crime and thus to restore the jurisdiction as an international financial centre of sound repute. Meanwhile investors are being seriously rattled, and our global business will be saddled with a paralyzing uncertainty about the status of Mauritius until it can get off the blacklist, and
• Rising rates: The massive scale of stimulus in the US and globally had caused considerable nervousness over inflation and has been behind the recent sell-off in government bonds. Thus investors are already taking the possibility of a reversal of the present monetary policy stance into account. The IMF head warned yesterday that the world should be ready for an emerging market debt crisis as the global economy emerges from the coronavirus pandemic and interest rates rise, drawing capital away from vulnerable countries. The tightening of financial conditions would trigger significant capital outflows, especially in countries with elevated debt levels and reliant on hard-hit sectors such as tourism, which will take more time to recover from the pandemic .
As we emerge from the crisis, it will not be plain sailing as our dear Dr Pyadachy was trying to convince us with a kind of V-shaped economic recovery….We will have to put our house in order first, battered that it is by an irresponsible regime bent on populist policies for short-term gains. They were living on borrowed time and borrowed dimes. Now time has come to start paying …..
