Financial Crisis and Mts Paper

8/2/2019 Financial Crisis and Mts Paper

1/17

International Research Journal of Finance and EconomicsISSN 1450-2887 Issue 66 (2011) EuroJournals Publishing, Inc. 2011http://www.eurojournals.com/finance.htm

Facing the Global Financial Crisis - Policy Lessons and

Recovery from Small Mauritius

Verena Tandrayen-Ragoobur

Department of Economics and Statistics, University of Mauritius, Reduit

Abstract

Most of the attention around the global financial crisis has focused on its causes andeffects in the banking and broader finance sector, particularly among developed andleading emerging economies. However, in a globalised world economy, the crisis hasserious implications for developing countries, which are highly dependent on trade, foreign

investment, and remittances to meet economic growth and social needs. Though withoutdoubt, there are particular countries that were adversely affected, but there were alsocountries where the effects of the crisis have been minimal or successfully mitigated. Thispaper analyses the case of a small island economy of Mauritius which has not been sparedby the crisis. However, the impact has been in general moderate with an appropriate policymix adopted by the government and the private sector. Our study firstly examines thevarious transmission channels via which the crisis has operated on the Mauritian economyby analysing macroeconomic indicators from 2007 to 2010. Second, we undertake a surveyof 150 firms within the private sector to discuss their performance and also the mitigatingactions taken to counter the effects of the crisis. Third, we discuss the appropriate policymix implemented by the government to increase the resilience and optimism of the country.

Keywords: Financial Crisis, International Finance and Developing CountriesJEL Classification Codes: G01, F3, 016, 055

1. IntroductionThe financial crisis originated in the US housing market in late 2008 and spread through the financialsystems of the US and Western Europe. The initial concern for small state economies like Mauritiuswas that the crisis would be transmitted from the advanced countries through their financial sectors.However, the strongest transmission channels of the crisis have been through the real sectors ofdeveloping economies (including Mauritius), owing to their huge dependence on trade, FDI and

remittances. In most small and vulnerable developing countries, the crisis has since the second quarterof 2009, reversed global GDP growth, led to sharp reductions in exports and fall in workersremittances and has triggered declining fiscal revenues. It has also raised demand for social servicesprovision and has substantially increased levels of unemployment.

The Mauritian economy has attempted to dampen the effect of the world economic downturnon its economic performance. Appropriate policies implemented in a timely manner, by thegovernment and the private sector, have sheltered the economy. Moreover, the economys resilience tosuch an unprecedented external shock resides in the effectiveness of the reforms which have beenimplemented during the past three years and the robustness of the financial system as recognised by theIMF. The reforms have given the country the fiscal space required to deal with the crisis. Thegovernment injected Rs6 billion in the economy for education, training, food security and


2/17

International Research Journal of Finance and Economics - Issue 66 (2011) 30

infrastructural development. This massive investment has been possible due to the fruit of past reformsin terms of fiscal benefits. In addition to these policy options, the Mauritian government introduced anAdditional Stimulus Package in December 2008. The private sector, on the other hand, has adoptedmeasures to restructure their processes, activities and functions in an effort to increase efficiency. Theyhave also taken steps to rationalise their expenses and cut back on investment plans to grapple with theuncertain economic environment.

The objective of the paper is to assess the performance and policy options of the small island

economy of Mauritius in the event of the global financial crisis. Mauritius has been resilient to theworld economic downturn and is viewed as an example for other developing and emerging economies.Our paper is structured as follows. In section 2, we analyse the various transmission channels viawhich the crisis operated on the Mauritian economy. Section 3 discusses the methodology used toassess the economic impact of the crisis on the overall economy and on enterprises. We usemacroeconomic indicators to assess the overall macroeconomic performance of Mauritius in the eventof the crisis and also undertake a survey of 150 firms. Section 4 evaluates the changes in themacroeconomic indicators mainly in the period 2007 to 2010. The main findings of the survey arediscussed in Section 5. Section 6 reviews the appropriate policy mix implemented by the governmentand the private sector to increase resilience to the crisis. We finally conclude in section 7.

2. Literature Survey: The Main Transmission ChannelsThe current financial crisis affected developing countries in various ways. We focus on the four majorchannels via which the impact has been more serious.

Firstly, the biggest fear was that of financial contagion where financial institutions indeveloping countries would directly or indirectly be negatively affected. Directly, banks would beaffected if they held assets contaminated by subprime mortgages. However, in many developingcountries, banks had limited interrelationships with international banks (Naud, 2009). Foreign ownedbanks are not significant players in most countries in Africa. However, the more serious indirect threatwas through declines in stock market prices and housing prices. These reduced the capital of banks,which in turn, reduced their lending in order to shore up their capital. A fall in bank lending led to

declining investment, lower growth, and an increase in unemployment. Further, lower economicgrowth implies lower government revenue and less means to fight poverty. In a worst-case scenariobanks even faced solvency problems, which required governments to recapitalize them.

Second, in recent years, the economic growth of developing economies has been centred onexports. The crisis has caused a substantial decline in export earnings. The declines come essentiallythrough a combination of a fall in commodity prices and in demand for their goods from advancedeconomies. Over the past seven years, prices of commodities like copper, nickel, platinum andpetroleum, have risen to record highs, and contributed significantly to good growth in Africa.However, since September 2008 commodity prices have been declining. The price of oil fell by morethan 70% in the second half of 2008. Other prices followed suit. However, it is not just commodity-dependent countries that were adversely affected as with the recession developed countries also

reduced their imports. A significant proportion of US and EU imports are from developing countries.Declining global demand has severely curtailed global trade volumes and has brought to a close severalyears of consistent increases in commodity prices. Declining exports and falling export prices haveconstituted a devastating double blow to the small and poor economies. The combined impact has beensevere, with export revenues contracting sharply, employment in export sectors declining substantiallyand governments fiscal revenues reducing significantly. Many of developed countries imports arealso imports of services. Since September 2008, the number of air passengers in the world has droppedsharply. Though a good part of this drop is due to reduced travel for business purposes, it also includedless tourist travel. This occurred mainly as households reduced consumption on luxury goods, andmortgages for overseas holidays were more difficult to obtain. Many small island states dependent ontourism, like Mauritius, registered a decline in hotel bookings.


3/17

31 International Research Journal of Finance and Economics - Issue 66 (2011)

Third, declining global output impacted on the level of workers remittances from abroad, onwhich households in many developing countries are reliant. Remittances in recent years have been oneof the most important financial flows to developing countries, exceeding US$240 billion in 2007, morethan twice the volume of aid flows (Ratha et al. 2007). With the global economic crisis, remittancesdeteriorated sharply in many countries, reducing household income and aggregate foreign exchangeinflows. For unskilled workers, in particular, declining remittances were accompanied by risingunemployment, when workers abroad were retrenched and returned home to seek new employment.

Countries with migrants predominantly in the US or EU (for example Mexico and the Caribbean) andsmall states such as Lesotho, Haiti and Nepal (where remittances contribute in excess of 10% to GNP)were severely impacted.

Fourth, financial inflows from the rest of the world facilitate developing economies toaccelerate trade and economic development. These flows are official development assistance (ODA),investment flows (portfolio and foreign direct investment), trade credits and flows of remittances. Cali,Massa and Te Velde (2008) estimate the decline in financial resources to developing countries to bearound US$300 billion. The reduced access to finance across developing countries resulted mainlyfrom the fact that the major bilateral contributors were themselves profoundly affected by the globalcrisis and faced very substantial domestic fiscal pressure. Further, though, most advanced countrieshave committed themselves to the 2002 Monterrey Consensus on Financing for Development to

provide at least 0.7% of GNP as aid to developing countries, few countries could meet thiscommitment. Moreover, even if countries maintained their share of GNP as aid contributions, with thefalling GNP, the absolute volume of aid would fall (though currency depreciations might counter thiseffect).

Foreign direct investments, in particular, equity capital, and commercial bank lending declinedsignificantly as foreign investors and banks sought to reduce their risk exposures. The collectiveimpact of declining commercial bank lending and uncertain access to concessional financial resourcescreated a substantial sudden-stop in access to external finance to developing countries. With increasingdemands for fiscal spending to address the economic and social consequences of the crisis, a large andpersistent financing gap emerged. The financing gap for developing countries was estimated in therange of US$270 and US$700 billion. This represented the additional amount needed for developing

countries to address the impact of the crisis and to maintain expenditure at pre-crisis levels (WorldBank, 2009).

The implications were very significant and adverse for small and vulnerable countries, and forwhom recovery would take far longer in comparison with larger, more resourced economies. For mostcountries, the crisis was a profound economic and social crisis; and far less a crisis impacting on thefinancial sectors.

3. Data and MethodologyTo assess the impact of the crisis on the Mauritian economy, first, we analyse the change in the mainmacroeconomic indicators like GDP growth, employment external trade, FDI inflows, tourism arrivals

and receipts, investment and savings as well as stock market indices, from 2007 to 2010. We build onthe macroeconomic indicators to evaluate the performance of the main pillars of the Mauritianeconomy in the event of the crisis. Data is used from the Central Statistical Office, Bank of Mauritiusand the Stock Exchange of Mauritius. Second, we undertake a survey of 150 enterprises of differentsizes, from all the main sectors of the economy. The survey examines how private firms have beenaffected by the economic crisis and the mitigating actions taken to contain its impact.


4/17


4. Mauritius in the Global Financial Crisis: Evidence from Macroeconomic

IndicatorsThere are four ways in which the global economic downturn and the recession affected a small openeconomy like Mauritius. Mauritius is highly dependent on international trade and foreign directinvestment. The share of our exposure to the global economy is very high. The first impact was felt onthe textile, clothing, seafood and tourism sectors, via the trade channel. Second, we rely significantlyon foreign direct investment and foreign investors chose to reduce their risk exposure. Third, thecapital market and the stock exchange were affected as many rich corporations moved out of emergingmarkets and went into the safety of the US dollar. Many of the rich industrialised countries have bailedout the banking system because of the toxic assets. Commercial banks in Mauritius that used to get lineof credit from correspondent banks abroad could no longer do so. The fourth way in which Mauritiuswas affected was via trade finance and export credit. We analyse below the different macroeconomicindicators in terms of GDP growth rate, sectoral performance, tourism arrivals and receipts,unemployment rate, FDI inflows, trade, investment and savings rate and stock market performance ofthe Mauritian economy in the event of the crisis.

4.1. Economic Growth and Sectoral Performance

Mauritius has long been dependent on three traditional pillars namely sugar, textiles and tourism. The

structure of the economy, however, evolved over time. From Figure 1 below, GDP growth has beenstable from 2006 to 2008 but with a sudden drop of 2 percent, from 5.1 percent in 2008 to 3.1 percentin 2009. This is largely attributed to the impact of the global financial crisis on the different sectors ofthe economy. The economy grew by 4.2 percent in 2010 higher than the 3.1 percent recorded in 2009,gradually recovering from the effects of the global crisis.

Figure 1: Real GDP Growth Rate 1991-2010

Source: Central Statistical Office, Mauritius, 2010

In 2009, 68.8 percent of GDP was generated by the tertiary sector comprising the servicesindustries compared to 27.2 percent by the secondary sector. The remainder (4.0 percent) wasattributable to the primary sector which consists mainly of agricultural activities. Figure 2 shows theperformance of the main sectors of the economy from 2008 to 2010.


5/17


Figure 2: Sectoral Growth Rate 2008-2010

-15.0 -10.0 -5.0 +0.0 +5.0 +10.0 +15.0 +20.0 +25.0

Agriculture, forestry and fishing

Mining and quarrying

Manufacturing

Electricity, gas and water supply

Construction

Wholesale & retail trade

Hotels and restaurants

Transport, storage and communications

Financial intermediation

Real estate, renting and business activities

2010 2009 2008 Source: Central Statistical Office, Mauritius, 2010

Our main outward oriented sectors namely Textile and Tourism were the most affected. A fallin orders and revenues for textile exports as well as lower tourism arrivals and receipts meant that bothsectors experienced a contraction. Growth in the tourism sector declined from 12.0 percent in 2007 to1.3 percent in 2008 and -5.9 percent in 2009. This was notably as a consequence of the depressingeconomic and labour market conditions in our markets abroad, particularly the UK, EU and US. Themanufacturing sector grew by 2.2 percent in 2009 and 2010 compared to 3.1 percent in 2008. Theclothing industry, which thrived under EPZ incentives and preferential market access, suffered a major

setback with the end of apparel quotas under the MFA and the new era of global competition inclothing exports with giants like China, India and others. The textile sector registered a negativegrowth of 0.7 percent in 2009 compared to 0.1 percent growth in 2008. In addition, in 2009, activitiesof export oriented enterprises grew by only 0.5 percent compared to 3.6 percent in 2008.

Another important sector that felt the brunt of the crisis was Construction. Constructionactivities which had registered buoyant growth rates of 16 percent and 11.8 percent during 2007 and2008 grew by merely 6.2 percent in 2009 and 4.3 percent in 2010. Given the uncertain economicenvironment, several private building and construction projects were postponed causing a significantslowdown. Nonetheless, an increase in public sector construction works, linked to the implementationof road, school and hospital infrastructure projects, helped to maintain positive growth in the sector.

There were relatively better performances in the Sugar sector and Financial and Business

Services, especially ICT. In spite of the end of the Sugar Protocol and the 36 percent drop in pricetaking effect from October 2009, the sugar industry, which has undergone major restructuring in recentyears, recorded an impressive expansion of 12.5 percent in 2009 thanks to a superior sugar production,mostly in the form of higher value added special and refined sugar. Growth rate in 2010 however stoodat only 0.6%. In addition, sound regulations and supervision of Financial Services sector and agenerally sensible approach to risk taking by the operators ensured that the sector had little directexposure to the turmoil caused by the crisis. The sectoral growth was positive at 3.8 percent, albeitlower than the 10.2 percent growth achieved in 2008. The lower growth rate was primarily explainedby a drop in banking activities on the back of the slowdown in real economic activity and particularlyin the offshore segment as a result of the reduction in international capital flows.


6/17


4.2. The Tourism Sector

Tourism was the most affected sector with monthly tourist arrivals falling in 2009 compared to thesame period in 2008. There were 871,356 tourists in 2009 compared to 930,456 in 2008. Touristearnings were estimated at R 35,700 million in 2009 compared to R 41,213 million in 2008. After thenegative growth of 5.9 percent recorded in 2009, tourist arrivals are expected to grow by five to sixpercent. In terms of arrivals, for the period January to August, the 2010 level recorded is similar to thatof 2007 while compared to 2009, an increase of 5.9 percent is observed. In parallel, the supply of

rooms (hotel and non-hotel) has also increased (by 7.0% between 2008 and 2010). Compared to 2009,the occupancy rate has improved by five percent points. This rate is however still far below thoseregistered in 2007 and 2008 as shown in Table 1 below. Tourist receipts show an increase of 4.8 %compared to the same period in 2009.

Table 1: Tourism Indicators

Indicators 2007 2008 2009 2010

Tourist arrivals, Jan- Aug 579,279 608,532 548,741 581,252Tourist receipts, Jan-July (Rs M) 22,732 25,229 18,195 22,452Room occupancy rate (Semester 1, %) 75 71 59 64GDFCF in hotels and restaurants (at current prices) 10,127 11,919 12,721 10,607

Tourism value added (Rs M) 24,071 24,387 21,435 22,665Growth of the tourism sector 12.0 1.3 (5.9) 3.8


4.3. The Financial Sector and the Stock Market Performance

The financial services sector has been growing continuously over the last decade. Domestic banks havelong dominated financial intermediation in Mauritius although efforts have focused on promotingoffshore banking activities by emphasizing the countrys reputation as a safe financial haven. Thefinancial system was not involved in sub-prime lending or any activity deriving directly or indirectlyfrom that asset class. It is well regulated, solid and highly profitable. It has ample liquidity to meet thefinancing needs of the economy. Thus, there was no need for government intervention, as in manyother countries, to bail out the banks. In fact, for the first 10 months of 2009, commercial bank credit to

the private sector grew by 24%. Total assets of banks maintained a high expansion pace and thefundamentals of the banking institutions improved significantly. The rest of the financial sector alsoperformed well except the stock market.

Frontier markets like the Stock Exchange of Mauritius (SEM) provided international fundmanagers a good diversification opportunity. With the on-start of the crisis, there was a fundamentalshift in the international stock market environment. The correlation between frontier markets anddeveloped markets increased substantially as investors worldwide suddenly realised that the macro-economic links between developed countries and emerging/frontier economies were much strongerthan anticipated. Table 2 below shows the stock market evolution since September 2008.

Table 2: Impact of the Crisis on Stock Market Performance

Market Evolution Sept. 2008 Dec. 2009

Indices 15-Sep-08 03-Mar-09 Net Change (%) 03-Mar-09 09-Dec-09 Net Change (%)

SEMDEX 1659.06 919.83 -44.56 919.83 1677.19 82.34SEM-7 402.13 196.24 -51.2 196.24 369.50 88.29SEMTRI (Rs) 4436.73 2521.57 -43.17 2521.57 4758.04 88.69S&P 1192.70 696.33 -41.62 696.33 1095.95 57.39FTSE-100 5204.20 3512.10 -32.51 3512.10 5203.90 48.17DOW JONES 10917.51 6726.02 -38.14 6726.02 10337.05 53.69DAX 6064.16 3690.72 -39.14 3690.72 5647.84 53.03CAC 40 4168.97 2554.55 -38.72 2554.55 3757.39 47.09

Source: Stock Exchange of Mauritius, Handbook, 2009


7/17


The SEM experienced a severe dip over the period March 2008 to February 2009, reflecting ahigh risk aversion by investors due to the global financial crisis. The downward trend in the stockmarket was however reversed from March 2009. The main reason for the upturn was the return ofinvestor confidence especially in light of the resilience of the economy to the crisis. The SEMDEXrebounded by more than 82 percent between March and December 2009, compared to a fall of 44.56percent of its value from September 2008 to March 2009. In fact, the SEM showed a larger recoverythan global stock markets.

We analyse the stock market development of Mauritius in the event of the crisis, by using twomain indicators to measure the size of the market and the liquidity of the market. The size of themarket is more appropriately measured by market capitalization as a percentage of GDP. Twomeasures of liquidity are computed namely total value traded to GDP and the turnover ratio. The lattergives the total value of shares traded in relation to the size of the market. Table 3 below shows thecomputed indices from 2005 to 2009.

Table 3: Size and Liquidity of the SEM

Indices 2005 2006 2007 2008 2009

Market Capitalization Rs billion 80.04 116.98 173.09 109.30 151.64Market Capitalization / GDP % 43.18 56.96 74.93 41.42 54.74

Turnover Rs billion 4.55 5.99 11.83 11.40 9.9Turnover ratio (Total Value Traded / Market Capitalization) % 5.68 5.12 6.83 10.43 6.53Total Value Traded / GDP % 2.45 2.92 5.12 4.32 3.57

Source: Stock Exchange of Mauritius, Handbook, 2009

Like other exchanges worldwide, the SEM experienced market volatility since the start of thefinancial crisis in September 2008. We note that the turnover ratio fell from 10.43 percent in 2008 to6.53 percent in 2009 showing a decline in liquidity whilst market capitalization as a share of GDPwhich reflects the size of the market illustrates a rise during the same period.

4.4. Unemployment

Unemployment rate was 7.3 percent in 2009 relative to 7.2 percent in 2008 and has increased to 7.5

percent in 2010 (see Figure 3 below). Unemployment did not peak in the event of the crisis as thepriority of the government was to save jobs. In effect, Rs4 billion was earmarked to save employment.Much effort was made to sustain, modernise and ease the access to finance of local enterprises to helpthem improve their productivity and competitiveness.

Male unemployment is on the rise but remains frictional. It is estimated at 4.8 percent in 2010compared to 4.4 percent in 2009 and 4.1 percent in 2008. On the other hand, female unemploymentrate is almost three times higher than that of males. Female unemployment is estimated at 12.1 percentin 2010, down from 12.3 percent and 12.7 percent in 2009 and 2008 respectively. The problem ofunemployment in Mauritius remains of a structural nature, affecting mostly women, youths and theunskilled.

Figure 3: Unemployment Rate 2000-2010


8/17


4.5. Investment and Savings

The investment rate increased from 24.6 percent in 2008 to 25.4 percent in 2009. The higherinvestment rate was mainly accounted for by an increase of 45.8 percent in public sector investmentwhich represented a substantial injection of public money in the building/renovation of road, educationand heath infrastructure as well as the purchase of aircraft. It actually served to offset the reducedinvestment by the private sector which declined by 2.1 percent following the completion of some majorbuilding projects and the postponement of others due to the uncertain economic climate linked to the

crisis. The share of private investment in total investment fell to 76.4 percent while public investmentrose to 23.6 percent in 2009.

The savings rate dropped further to 13.6 percent in 2009 from 16.9 percent and 21.2 in 2008and 2007 respectively. The declining trend in the savings rate widened the resource gap and led to anincreased dependence on the inflow of foreign capital for productive long term investment (see Figure5 below).

Figure 5: Investment and Savings

4.6. Trade and Foreign Direct InvestmentThe fall in import prices during 2009 was accompanied by a decline, of around 14 percent, in realimports due to the overall slowdown in domestic economic activity and lower consumptionexpenditure growth. Meanwhile, recession in our main export markets in the UK and EU meant thattotal exports fell by 6 percent in 2009. The trade deficit improved considerably, dropping to Rs56,763million in 2009 compared to a peak of Rs64,195 million in 2008. In 2010, the trade deficit rose againto Rs69,500 showing a rise of 22.4 percent (see Figure 6 below).

Figure 6: External Trade



9/17


In terms of FDI inflows, given the uncertain economic climate, many enterprises have put backtheir investment plans. While some construction projects in the private sector have been deferred; therehave been delays in the implementation of various public sector projects. Construction companies havereacted to the crisis by cutting costs, freezing wages, re-organising work systems and delayingrecruitments and investments. Figure 7 below shows the decline in FDI in financial services andinsurance and real estate activities from 2008 to 2009.

Figure 7: FDI in Mauritius (2007-2010)

0 1000 2000 3000 4000 5000

2007

2008

2009

2010

Accommodation and food service activities Real estate activities

Financial and insurance activities Wholesale and retail trade

Construction Manufacturing Source: Bank of Mauritius, Annual Report 2010

5. Mauritius in the Global Financial Crisis: Evidence from Enterprise Survey5.1. About the Survey

A total of 150 enterprises, of different sizes and from all the main sectors of the economy, participatedin the survey. A sectoral distribution of the firms can be observed from Figure 8 below, showing agood representation of all sectors within the economy.

Figure 8: Sectoral Distribution of Surveyed Firms

1%6% 3%

10%

20%

5%7%

20%

5%

5%

2%

16%

Agriculture Construction

Transport Storage & Communications EPZ Enterprises

Non EPZ Enterprises Finance

ICT Business services

Community, Social and Personal Services Hotels & Restaurants

Electricity, Gas & water Wholesale and Retail Trade


10/17


5.2. Crisis Impact on Firms

According to 59 percent of respondents, the impact of the crisis on the Mauritian economy has so farbeen generally moderate. At the level of the enterprise, 50 percent claim to have been only moderatelyaffected by the crisis compared to 26 percent who report a high adverse impact on their business.

From Figure 9 below, the majority of respondents (46 percent) rate the impact on theirrespective sector of activity as modest. In contrast, 54 percent of enterprises operating in internationalmarkets indicate that their overseas markets have been badly affected.

Figure 9: Impact on Business Situation

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

In the Country

In your Enterprise

In your Sector of Activity

In your Market Overseas

%

High Moderate Low No Adverse Impact

Sector wise, the survey shows that export-oriented manufacturing has been the worst hit by theglobal crisis followed by Hotels and Restaurants and Construction. ICT is the least affected sector. TheExport-oriented sector overall suffered from a decline in the level of orders due to recession in ourmain markets overseas. Moreover, cost increases have been absorbed internally by enterprises as theyface difficulty to negotiate higher prices. A drop in profitability might increase the prospect of furtherjob losses. The actions taken to mitigate the impact of the crisis mostly relate to a reduction in

overtime, streamlining of costs, delaying investment and recruitments and increased marketing.Hotel operators have been affected by a significant decline in tourist arrivals although in some

cases last minute bookings have allowed to compensate for the loss in revenue. On the whole, theindustry responded promptly by implementing key strategic actions focusing on cost control andefficient management of resources. There has also been a fruitful public-private partnership to marketthe Mauritian destination abroad. These measures have contributed to a less pessimistic outlook andhelped to uplift the mood of operators in the sector.

In the construction sector, given the uncertain economic climate, many enterprises have putback their investment plans including investment in buildings. While some construction projects in theprivate sector have been deferred, delays in the implementation of public sector projects also posed aconstraint on the growth of the industry. Construction companies reacted to the crisis by cutting costs,

freezing wages, reorganising work systems and delaying recruitments and investments.Global business activities dropped as a consequence of a decline in confidence in the

international financial system, falling stock markets and a reduction in global capital flows andinvestment. Operators in the sector have for the most part frozen wages and postponed recruitments tocope with the crisis. The outlook is expected to improve as confidence slowly returns to financialmarkets worldwide. Wholesale and Retail Trade and Non-EPZ Manufacturing are highly dependent onhow other sectors and the economy as a whole perform. Both sectors have been hit by a slowdown inbusiness activities and cautious consumer spending. Operators have adopted cost saving measures,reorganised work systems and increased marketing to mitigate the impact of the crisis on theirbusiness.


11/17


The ICT sector, on the other hand, fared better than most economic sectors. Many ICToperators have seen their business activities expand as a result of increased outsourcing by enterprisesabroad seeking to cut cost. They also gained market share as a result of a better service delivery thancompetitors.

5.3. Business Predictions

64 percent of respondents are of the view that the business situation in the country may worsen before

getting better. 31 percent expect conditions in the country to remain unchanged while only 5 percentanticipate an improvement. This is primarily explained by our high dependence on external marketsand the lack of foresight about any future recovery of the global economy. Furthermore, very fewrespondents expect the situation within their own enterprise, sector of activity or their markets overseasto considerably improve in the very near future.

The business mood across all the major industries is rather negative but more so in EPZ andconstruction. Enterprises mainly serving the domestic market in sectors like wholesale and retail tradeand non-EPZ Manufacturing are also concerned given the significant slowdown of the Mauritianeconomy (see Figure 10 below).

Figure 10: Business Situation in the Near Future

0 10 20 30 40 50 60 70

In the Country

In your Enterprise

In your Sector of Activity

In your Market Overseas

%

Better (%) Same (%) Worse (%)

Further in Table 4 below, we show the predictions of respondents on the main businessindicators. The statistics are generally indicative of a low level of confidence among businesses in theprivate sector. For instance, 51.2 percent expect a decline in their volume of demand and 57.9 percentpredict a reduction in investment. Lower profits and exports are anticipated by 71.4 percent and 66.1percent of enterprises respectively. Furthermore, in light of decreased business activity, the averagelevel of capacity utilisation is expected to be reduced to 72 percent in 2009 compared to 82 percent in2008. An analysis by sector reveals that the Construction, Manufacturing (both EPZ and non-EPZ) andWholesale and Retail Trade expect the highest drop in demand, profit, investment and capacity

utilisation.

Table 4: Business Predictions

IndicatorUp Same Down

(% of Respondents)Volume of demand/ Business activity 15.5 33.3 51.2Employment 10.9 57.8 31.3Average selling price 8.8 54.4 36.8Investment 7.1 34.9 57.9Expenditure on training 15.7 44.1 40.2Profit 9.5 19.0 71.4Exports (if applicable) 14.3 19.6 66.1


12/17


It is worth noting that despite the depressing economic environment, massive redundancieshave been avoided. The level of employment would remain unchanged in 57.8 percent of cases and10.9 percent of respondents even plan to increase their workforce compared to 31.3 percent who arecontemplates a reduction in employment. The likelihood of redundancies is highest in the EPZ andConstruction sectors. Besides, 36.8 percent of respondents, mainly from Construction, EPZ and Hotelsectors, expect to have lower prices for their products and services. But for the majority of respondents(54.4 percent), selling prices should remain unchanged in the near future. Only 8.8 percent of

enterprises anticipate an increase in prices. A downturn can either be seen as an opportunity forsustaining training efforts as to bounce back even stronger when the recovery comes or may trigger acut back on the training budget as part of a general cost cutting exercise. The Survey results show thatmost respondents (44.1 percent) will maintain their planned spending on training and 15.7 percentanticipate increasing their training budgets. 40.2 percent of respondents, however, expect to spend lesson training.

5.4. Private Firms Intervention to Mitigate the Impact of the Crisis

82.8 percent of respondents have taken actions to resist the crisis. As shown by the range of measuresin table 5, the preferred actions of respondents relate to improvement of efficiency and cost cutting,increased marketing, postponement of recruitments and non-replacement of departing staff and

deferring investment. Most enterprises (68 percent) in the survey have adopted measures to restructuretheir processes, activities and functions in an effort to increase efficiency. They have also taken steps torationalise and better manage their expenses with the view of making cost savings. Many respondentshave also stepped up marketing and promotional efforts to limit the impact on demand. A significantnumber of enterprises have, in turn, frozen recruitments of new staff be it for new positions or toreplace departing staff. There has also been a cut back on investment plans as enterprises grapple withthe uncertain economic environment.

According to the Survey, only 19.5 percent of respondents have resorted to redundancies and11.7 percent have sought financial assistance. Similarly, very few respondents have givenconsideration to outsourcing their activities, reducing pay, renegotiating labour contracts and sale ofassets.

Table 5: Mitigating Actions at the Enterprise Level

Action % of Respondents

Reorganising work systems and functions to improve efficiency 68.0Streamlining and better monitoring of expenses to cut costs 68.0Increased marketing/promotional efforts 54.7Delaying recruitments 45.3Cutting back/Postponing investment plans 42.2Exercising non-replacement of departing staff 41.4Wage freeze/deferring wage increases 29.7Adjusting hours of work (e.g. reducing overtime; no. of shifts) 28.1Wage moderation 22.7

Reducing management salaries and/or bonuses 21.1Redundancies/downsizing 19.5Filling work gaps with training 18.8No specific actions taken or planned 17.2Debt restructuring 14.8Encouraging early retirement, voluntary/negotiated departures, leaves without pay 12.5Seeking financial assistance 11.7Outsourcing of activities 7.8Reduction in pay packets for working lesser hours 7.0Consultation with workers and/or unions to renegotiate labour contracts 6.3Sale of assets 6.3


13/17


5.5. Views of Enterprises on Government Policies

The survey also analyses the views of employers on Government actions. For 52 percent ofrespondents, the measures announced by Government to mitigate the impact of the crisis on theMauritian economy are adequate. Most respondents (43.8 percent) are neither confident norunconfident about the effectiveness of Government actions in shielding the economy against theadverse impact of the global crisis. 36 percent are generally confident compared to 20.3 percent ofrespondents who are unconfident (see Figure 11 below). The policy priorities according to respondents

should be to reduce the cost of finance, invest in infrastructure and pursue transparent and soundmanagement of public finances.

Figure 11: Confidence in Government Actions

0

5

10

15

20

25

30

35

40

45

50

Very conf ident Quite conf ident Neither conf ident

nor unconfident

Quite unconfident Very unconfident

%

6. Policy Responses of the Mauritian GovernmentThe world went through the worst economic downturn since the Great Depression of the 1930s. Caughtin the midst of a perfect storm, the small open island economy of Mauritius did not remain complacent.On the whole, the impact of the crisis on the Mauritian economy has been generally moderate. TheMauritian success in tiding over the crisis is due to a combination of factors.

First, rapid and coordinated action by policy makers worldwide has helped to avert a deeperand longer crisis which would have been more problematic for our small island economy. To mitigatethe negative consequences of the global economic crisis, some 200 specific and targeted measures wereannounced to achieve the short term priorities of protecting employment and maintaining livelihoodswhile keeping a longer term perspective by improving the capacity of the economy to take advantageof the economic rebound. The government emphasised on two aspects. The first one was to cushionand dampen the impact of the recession, on the economy, especially on jobs, and second to prepare forthe bounce back, by investing in infrastructure and capacity building.

Second, broad-based economic reforms undertaken since 2006 have made the economy moreresilient and have also given Government the fiscal space required to deal with the crisis. In May 2008,the government used the greater fiscal space the past reforms have generated to inject Rs 6 billion inthe economy. In particular, government applied pro-cyclical policies when the economy was on theupswing. The prevailing convention was to apply counter-cyclical policies which what the rest of theworld initially did. Mauritius went against that wave. The global events since then have provedMauritius right.

Third, sound economic management and timely Government intervention through theAdditional Stimulus Package (ASP) 1 and the successive national budgets have been crucial insustaining business confidence and economic growth. Mauritius is one of the few countries that haveintroduced an ASP in December 2008 and counter cyclical measures when the economy was not in arecession. UK, France, Germany and other countries waited to be officially in a recession in order to

1 A summary of the measures put forward in the Additional Stimulus Package is given in Appendix 1


14/17


mount their stimulus package. The ASP was a combination of three things: first, easing of monetarypolicy, second, expansionary fiscal policy, (certain taxes have been suspended over two years, intourism, construction and other sectors) and third a budgetary expansion for investment andinfrastructure. The package was primarily directed towards shoring up investment in publicinfrastructural development, accelerating and facilitating private investment and giving support tovulnerable sectors and enterprises that may be more affected. It involved the implementation over twoyears of six funds2 (namely, the Maurice Ile Durable Fund (MID)3, Food Security Fund, Human

Resources, Knowledge and Arts Development Fund, Local Infrastructure Fund, Social HousingDevelopment Fund and the Manufacturing Adjustment and SME Development Fund) created in the2008/09 budget and to which Rs6 billion have been allocated. The creation of the Funds amounted toover 3.4% of GDP which was significantly higher than the 2% fiscal stimulus that the IMF and G20called to boost aggregate demand.

Spending on infrastructure has powerful stimulating effects in the short term as it creates jobs,generates more income, boosts investment and in the medium to long term, it enhances theattractiveness of Mauritius as an investment destination, improves the doing business environment andexpands productive capacity. Besides public investment, some traditional sectors witnessed aslowdown in private investment including FDI. New legislations were passed to expand the range ofBusiness Process and Knowledge Process Outsourcing Services offered from Mauritius. The Board of

Investment approved around 15 private sector projects in the manufacturing sector, the building sector,a commodity exchange, a diamond exchange and a paper recycling plant. Legal process outsourcingand business process outsourcing offer potential for new business as firms in industrialised countriesare under pressure to further cut costs. To attract FDI in these specific areas the Board of Investmenthas been provided with an additional Rs 25 million for marketing and promotion. In the area ofbusiness facilitation, permanent resident status has been issued to purchasers in Real Estate Schemedevelopments provided they buy a property worth at least US$ 500,000. This will maintain themomentum to further improve on the progress made in the World Bank Ease of Doing Business Surveymoving up from 32nd in 2006 to 24th in 2008 and 17th in 2009. Mauritius is continuing to streamlineregulations to facilitate business.

Fourth, a strong financial and banking sector with sound regulations and generally prudent

investment policies has shielded our financial system from the adverse impact of the crisis. There hasalso been substantial monetary easing by the Bank of Mauritius to sustain liquidity in the system andimprove the cost of borrowing so much that between October 2008 and 2009 the key repo rate wasreduced by 250 basis points.

Fifth, economic growth was held up and remained positive thanks to our diversified economicbase and, in particular, relatively good performances were recorded in sectors like FinancialIntermediation, Business Services and ICT. But for other sectors like manufacturing and tourism, therewas considerable government intervention and spending. Government reacted swiftly by adopting anexpansionary fiscal policy stance and implementing policy measures to support enterprises andsafeguard employment. Special focus has been given to the consolidation of our economic sectors,SMEs and human resources development. For export oriented firms, government gave assistance in the

form of marketing back-up and marketing intelligence to make up for falling demand in Europe.Further, SMEs faced particular difficulties in responding to the adverse environment due to their sizeand lack of expertise. In this respect, government set up the Manufacturing Adjustment and SMEDevelopment Fund to support SMEs mainly women entrepreneurs to meet the challenges arising fromthe crisis. These include upgrading of standards, quality and packaging for export readiness;productivity and competitiveness improvement; market intelligence and export promotion; equipmentmodernisation scheme, market development and marketing, market diversification and product

2 The Maurice Ile Durable Fund (MID), Food Security Fund, Human Resources, Knowledge and Arts Development Fund,Local Infrastructure Fund, Social Housing Development Fund and the Manufacturing Adjustment and SME DevelopmentFund

3 Mauritius, the Sustainable Island


15/17


development. Government further helped firms on three main fronts namely to reengineer to becomemore competitive and to ensure their long term survival; to improve access to financing, in particularworking capital, at concessionary interest rates; and to restructure their debt. In addition, tourism wasthe most affected sector in the global economic downturn. Additional funds were injected in thetourism sector to finance promotion to raise our visibility in existing markets such as South Africa andother short and medium haul destinations. The funding was also used to attract visitors from the uppermarket segments of India and to carry out intensive marketing campaigns in markets with great

potential, including Russia, China, Nordic countries and the East European nations.Moreover, to give maximum protection to workers in the textile sector, export support

institution like the Mauritius Export Association and the National Empowerment Foundation wereengaged in re-skilling of textile and apparel workers who could lose their jobs for placement in othersectors. In both the public and private sectors, there is a dearth of skills and expertise that hindersproject implementation, undermines the countrys competitiveness and constrains growth potential.Investment in education through greater access to tertiary education has been promoted. This aimed atcreating jobs for graduates and researchers; attracting expertise from other countries and makingMauritius a centre of excellence in the region. This would also help in protecting the income sourcesfor thousands of families from the clutches of one of the worst global economic recessions aneconomic scourge that already caused social despair and unrest in many other countries.

Sixth, there was a prompt reaction by the private sector. Many enterprises sought to restructuretheir activities and undertook measures to improve efficiency, cut cost and increase marketing in orderto mitigate the impact of the crisis. Similarly, positive public-private consultation, dialogue andpartnership ensured that there was consensus and a common effort in defining and implementing policymeasures. The government encouraged the private sector to spend some of their profits on CorporateSocial Responsibility schemes. All profitable firms were required to either spend 2 percent of theirprofits on CSR activities approved by Government or to transfer these funds to Government to be usedin the fight against poverty.

7. Conclusion

Since the end of 2009, there have been encouraging signs of recovery of the world economy but as theIMF pointed out the current rebound will be sluggish, credit constrained and for quite some time,jobless. Recovery is likely to be slow in our main export markets namely, the UK and EU which havebeen in recession in 2009.

The policies set out by the government to take Mauritius through the global economic crisis areessentially in terms of the ASP and the 200 specific and targeted measures. These strategies were toachieve the short term priorities of protecting employment and maintaining livelihoods while keeping alonger term perspective by improving the capacity of the economy. Most macroeconomic indicatorsare currently better than expected. However whilst the economy is resisting well, we must recognisethat no country is out of the crisis. There are still a lot of uncertainties. The Mauritian economy may bebuffeted by still more unexpected shocks. It is therefore crucial that local enterprises - strong or

vulnerable - realise that global competitiveness is the surest route to resilience. They must alsounderstand the importance of building the necessary cushion to face the unexpected.

From our survey findings, we observe that the global economic crisis has so far affectedMauritian businesses only moderately although its impact has been unevenly transmitted across thedifferent economic sectors. The Survey results indicate that enterprises in Export-orientedManufacturing, Hotels and Restaurants and Construction sectors have been the worst hit while ICT hasbeen the least affected. In the face of global economic uncertainty, the level of confidence among theMauritian business community is generally quite low. Most respondents in the survey are of the viewthat the business situation in the country and their sector of activity may deteriorate in the short termbefore getting better. Although there are signs that the global recession is levelling out, it may still besome time before the green shoots of recovery become visible. In fact, job markets worldwide remain


16/17


precarious and consumer confidence low. It should also be pointed out that any recovery, when itcomes, will be transmitted to the Mauritian economy with a lag. Lower demand and business activity,reduced profits and investment are thus anticipated, particularly in construction, manufacturing (EPZand non-EPZ) and wholesale and retail trade. It is nonetheless reassuring that a majority of enterprisesare not considering laying off workers as a means of coping with the crisis. Instead, the most commonmeasures being contemplated relate to the improvement of efficiency, cost cutting and increasedmarketing.

AcknowledgementPaper presented at the the AERC International Conference, Rethinking African Economic Policy inLight of the Global Economic and Financial Crisis, Nairobi, Kenya, December 2009

References[1] The Additional Stimulus Package (2008), Ministry of Finance and Economic Development,

Mauritius[2] Budget Speech (2009), Ministry of Finance and Economic Development, Mauritius.[3] Cali, M., I. Massa, and D. W. Te Velde (2008), The Global Financial Crisis: Financial Flows

to Developing Countries Set to Fall by One Quarter. ODI Report. London: OverseasDevelopment Institute. Available at: www.odi.org.uk/resources/details.

[4] Naud W (2009), The Financial Crisis of 2008 and the Developing Countries, DiscussionPaper No. 2009/01.

[5] Ratha, D., S. Mohapatra, K. M. Vijayalakshmi, and Z. Xu (2007). Remittance Trends 2007.Migration and Development Policy Brief 3. Washington, DC: World Bank.

[6] World Bank (2009), Swimming against the Tide: How Developing Countries are Coping withthe Global Crisis. Paper prepared for the G-20 Finance Ministers and Central Bank GovernorsMeeting, Horsham, United Kingdom, 1314 March. Washington, DC, World Bank.

Appendix 1

Some Key Objectives and Features of the Additional Fiscal Stimulus Package

Bring forward and increase public expenditure on infrastructure

Remove bottlenecks, accelerate private investment projects and attract foreign businesses

Support enterprises by helping them to reengineer and increase quality, productivity and competitiveness; providingaccess to finance and facilitating debt restructuring

Increased role of the National Empowerment Foundation in terms of training, reskilling and job placement ofretrenched workers

Tax Concessions to Hotels, Construction and Freeport operators:o Suspension of solidarity levy imposed on Hotelso Payment of Environmental Protection Fee only applicable if Hotel is profitableo Land transfer tax and registration duty for approved projects suspendedo Land transfer tax to be allowed as deduction for income tax purposeso Reduction of import duty on iron bars in coils from 15 to 7.5 percento Tax exemption for Freeport operators extended by further two years

Government expectations: enterprises to protect employment and where possible lower consumer prices

Implementation of stimulus package: a steering committee and ten sub-committees set up


17/17


Appendix 2

Summary of Main Government Actions

Government actions to mitigate the impact of the crisis on the Mauritian economy have been as follows.Expansionary Budget (May 2008)

Creation of 6 funds to the tune of Rs6 billion

Setting up of a contingency fund of Rs1.8 billion

Payment in full of the PRB recommendations costing Rs5.2 billionAdditional Stimulus Package of Rs10.4 billion (December 2008)

Bringing forward and increasing public expenditure on infrastructure

Supporting enterprises by helping them to reengineer, providing access to finance and facilitating debtrestructuring

Tax concessions to Hotels, Construction and Freeport operators

Removing bottlenecks to accelerate private investment projects and attract foreign investment

Increasing training and reskilling of retrenched workersBudget 2009 (May 2009)

Planned injection of Rs14.2 billion over next 18 months

Creation of a Saving Jobs and Recovery fund to support and modernise SMEs and large enterprises

Massive investment in infrastructure and boosting up of project realisation capacity

Social measures targeting the poor and vulnerable

Cost cutting exercise in Government

Flexible Monetary Policy

Coordination with the Bank of Mauritius to lower interest rate and increase liquidity

Documents

Financial Crisis and Mts Paper