The Mauritian Miracle

 

Glenn Silverman, Consultant and former Chief Investment Officer (CIO) at Investment Solutions 

Most South Africans visit Mauritius to enjoy its beaches and hospitality. While these are certainly good enough reasons to visit, the country offers much more, having diversified its economy from its earlier dependence on sugarcane and tourism. Mauritius’ economic transition did not occur by chance, nor was it easy for an island once written off as a country ‘doomed for failure’ by Economics Nobel Laureate, Professor J. E Meade. This sentiment was not far-fetched, given Mauritius’ small size, limited natural resources, volatile weather, ethnic tensions and a colonial past.

However Mauritius has exceeded expectations over the last few decades – lifting hundreds of thousands of people out poverty, establishing itself as the continent’s financial hub and its economy has expanded at an average of 5.1% since 1986.

But how has the island-country achieved this so-called ‘miracle’? Is Mauritius’ growth sustainable in the long-run? What are the possible lessons for South Africa? My recent research trip to the island provided some insights into these questions.

Mauritius has a population of just 1.3 million, far smaller than South Africa’s 55 million.  Its land mass is only 2,000 square kilometres, less than 0.1% that of South Africa’s and its GDP, at $11.5 billion, is a fraction of South Africa’s $312.8 billion. When it comes to capital markets, South Africa has no peers in Africa. The market cap of the South African stock exchange, the JSE, is $921.2 billion as of August 2016, significantly higher than island’s, which stands at $5.5 billion.

Evidently, Mauritius’ economy is much smaller than South Africa’s. Why then is the small island often referred to as the ‘gateway to Africa’ or the continent’s financial services centre?

Soon after independence in 1968 Mauritius’ Prime Minister at the time, Sir Seewoosagur Ramgoolam, set out an ambitious vision for the country. Acknowledging the island’s weaknesses and challenges, he was determined to drive his country’s economic progress through economic diversification, stable leadership and by capitalising on the country’s French and British colonial past.

Over the years, Mauritius has turned its small size into a strength. With a ‘can-do attitude’, Mauritius is now the most open economy in Africa, ranking 1st among African countries on the 2015 Ease of Doing Business Index.

The Island has also relied on its French and English colonial past – especially the rule of law emanating from both, along with consistency of policy, to further enhance its economic performance. As a result, Mauritius is able to easily work with regions such as Francophone Africa where countries such as South Africa struggle.

Moreover, with an income tax rate of 15% (this is even lower for corporates) and no capital gains tax or exchange controls, Mauritius has far lower ‘financial repression’ barriers than most of its peers. Attractive tax rates alongside welcoming and consistent policies make the island very attractive for doing business.

Mauritius’ GDP per capita also surpassed South Africa’s as early as 1996, with the island now boasting a per capita income of $9,218 compared to South Africa’s $4,768. In addition, Mauritius’ unemployment rate is an impressive 6% against the official number of 26.5% in South Africa, which is a clear national emergency for Africa’s largest economy. Mauritius has also impressively diversified its economy into tourism, textiles, banking and financial services, not to mention that most trade finance in Africa is now conducted in the island-nation.

In our book HalfWay There, we introduced the concept of the National Scar – a national nightmare if you will – in an attempt to better understand complex countries. Some have expressed the view that unlike countries such as SouthAfrica, whose past ‘scars’ such as aparthied continue to haunt it, Mauritius does not wrestle with any issues of that magnitude; this has perhaps also helped the island make faster economic strides compared to many other countries.

While Mauritius has made significant economic progress in the last few decades, there are worrying storm clouds forming on the horizon. Off a high-base, not unlike China, future growth rates are likely to fall. The country’s big capital projects, although helpful in driving economic growth, have contributed to unsustainable government debt. Over the years Mauritius has pursued large infrastructure projects, including a new airport, an improved national highway running from North to South of the island and ‘Cybercity’, a large office complex area. Government debt has rapidly increased to almost 56%, raising alarm and forcing the current government to set a reduction target of 50% by 2018.

Moreover, the the country’s financial services sector, not alone in this respect, is struggling under the weight of the new global rules on trusts, an antipathy towards tax havens. And considering the small size of the local economy and population, larger Mauritian companies are also finding local growth opportunities far harder to find, and the prospect of expanding offshore brings with it obvious challenges.

Mauritius’ present challenges, which threaten to undercut its progress, mean that the country must work harder to remain competitive. With slowing GDP growth, its economy is already showing weaknesses. Would Professor J E Meade still bet against the island?