MONETARY POLICY COMMITTEE (MEETING OF 30 SEPTEMBER 2013) Ministry - PowerPoint PPT Presentation

PRESENTATION FOR THE MONETARY POLICY COMMITTEE (MEETING OF 30 SEPTEMBER 2013) Ministry of Finance and Economic Development

Recommendation: Keep rate steady 6 Key Repo Rate 5.5 5 4.5 4 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13  Taking developments since the last MPC into account, the Committee may wish to keep the interest rate steady.  However, inflation is quiescent and the economy remains fragile. This offers the MPC the opportunity to have a rate that is aligned to the normal quarter point scale rather than the odd 0.15%. As such an interest rate of 4.5% would make more sense than the current 4.65%.

Global economic context: recovery is gathering pace in the advanced economies but risks remain • Growth in major advanced economies, GDP Growth in the major including US, has been stronger than economies (%) initial forecasts in the second quarter. 10.0 • Eurozone is now out of recession with 8.0 a growth rate of 0.3% for the second quarter. For the year as a whole, 6.0 • France is expected to register a 4.0 positive growth of 0.3% in 2013 2.0 compared to a contraction of 0.3% projected in June 0.0 • The growth rate in UK is projected -2.0 at around 1.5% - almost double the -4.0 0.8% growth initially expected in June Jun 2013 forecast • Germany is expected to perform Sep 2013 forecast better with a growth rate of 0.7% in (Source: OECD Sep 2013 Interim Economic 2013 compared to June forecast of Assessment) 0.4%

Inflation even less of a threat than in June  Global inflation projections FAO Food Price Index and ICE Brent Crude price for 2013 and 2014 are even (USD/bbl) 250.0 lower than stated during the 200.0 last MPC. 150.0  Inflation continues on a downward path compared 100.0 with 2012 and is projected to 50.0 be 3.8% in 2013 and 2014, 0.0 helped by stabilizing Nov-01 Apr-02 Sep-02 Feb-03 Jul-03 Dec-03 May-04 Oct-04 Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 commodity prices. ICE Brent Crude (US$ per barrel) FAO Food Price Index

Domestic inflation is stabilising at near historical lows…  Headline inflation for the Headline, CORE1 and CORE2 inflation (%) year ending August 2013 7.0 stood at 3.5% 6.0  Over the same period, CORE1 and CORE2 inflation 5.0 continued on a downward 4.0 trend at 2.7% and 2.8% respectively 3.0  Inflation projections are now 2.0 3.5-3.7% for the year and 1.0 similar for next year compared with June 0.0 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 projections of 4.1% for 2013 and about 4.0% for 2014. Headline CORE1 CORE2

Inflation expectations remain well- anchored  4.1% in August 2013 Inflation Inflation expectations for December 2013 and a year Expectations Survey instead of ahead 4.3% in May 2013. 6.0  This reinforces the argument of 5.0 MOFED that the implementation of 4.0 the PRB and Errors Omissions and 3.0 Anomalies Commission (EOAC) 2.0 report would not affect inflation as 1.0 it has had a limited impact on 0.0 Nov Feb May Aug permanent income expectations. 2012 2013 2013 2013 Dec 2013 Year ahead

Growth prospects: Positive but Fragile and below par  The growth outlook for Mauritius remains broadly positive, with GDP Growth Rate (2001-2013) GDP growth expected to be 7.0 close to 3.2% this year. 6.0  However, output remains below trend and the economy 5.0 remains fragile 4.0  Assuming the recovery in our 3.0 traditional markets gathers pace, we are confident that 2.0 Mauritius can achieve 3.5-4% 1.0 growth in 2014, and close to 5% by 2016. 0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013  However, monetary and exchange rate policy must be aligned with fiscal policy and supportive of growth and recovery.

Sectoral outlook: Construction, Tourism & commerce under threat. New sectors, financial services & manufacturing drive resilience In 2013 growth will be driven by both traditional sectors like manufacturing, financial services as well as emerging sectors such as ICT and Seafood. 20.0 Construction • The construction sector continues to struggle and is 15.0 expected to contract in 2013, with the completion of major projects such as the airport extension as 10.0 well as the major shopping malls. 5.0 Commerce (wholesale & retail trade) • This sector is suffering from weaknesses in tourism 0.0 2007 2008 2009 2010 2011 2012 2013 and the dominance of the precautionary demand -5.0 for money. Consequently, for the first time since 2009 the sector will fail to grow faster than overall -10.0 GDP. This sector would benefit from improved confidence. Inter alia, this could come from the -15.0 MPC better aligning monetary policy to fiscal Tourism Wholesale & Retail Trade Construction policy.

Sectoral outlook (Contd) Tourism • For the first semester of 2013, tourism earnings declined by 6.5% compared to the corresponding period in 2012. • Government action, particularly subsidising direct flights to China and more marketing, has begun reversing trends. Over the period January to August 2013, tourist arrivals increased by 2.2% to 622,492. The 2.9% contraction in arrivals from Europe has been offset by strong growth in new markets such as China (+93.9%) and the UAE (+66.5%). • Overall, for 2013 growth of 2.5% is expected compared with no growth in 2012. • Tourist arrivals will be around 990,000, compared to around 965,400 registered in 2012, while tourism earnings are expected to increase only marginally to around Rs 45 billion this year compared to Rs 44.4 billion last year.

Sectoral outlook (Contd) Seafood Growth rates (%) • The seafood sector is expected to grow by +14.0 6.5% in 2013 – same as in 2012. • Exports of seafood products increased by +12.0 13.6% during the first semester 2013 to Rs +10.0 7.1 billion. (mainly due to price increases) +8.0 Information & Communication Technology • +6.0 To grow by around 7.9% in 2013 compared to an average annual growth of +4.0 10.3% over the past three years. +2.0 Financial Services +0.0 • The financial services sector will grow by a 2008 2009 2010 2011 2012 2013 -+2.0 slightly lower rate of 5.3% in 2013 – but same as the average growth recorded over -+4.0 the past three years. ICT Sea food Financial and insurance activities

Fiscal sector  For 2013, the budget deficit will be around 3% of GDP, higher than the 2.2% estimates. This is mainly the result of lower revenue while savings in some items of spending will be absorbed by unforeseen expenditures arising mainly from the implementation of the Errors, Omissions and Anomalies Committee Report, increased spending on land drainage and road decongestion.  The Discounted Public Sector Debt as a share of GDP is thus likely to increase this year. This would be a reversal in the declining trend registered over the years.  However, Government remains committed to bringing public debt down to 50 per cent of GDP by 2018. Government will be taking measures towards this end in the forthcoming budget.

Conclusion and recommendations  It appears that the global economy is entering a new phase, characterised by mild recovery in the advanced economies and a pickup in the emerging economies without resurgence of inflation.  At the domestic level, we are witnessing the emergence of a two speed economy, with traditional sectors (such as construction, textiles and tourism) displaying low growth and “new” sectors (Seafood, ICT/BPO and to a certain extent financial services) growing in excess of 5% annually.  Fiscal policy is constrained, and with public debt likely to increase this year, the ability of the public sector to boost growth through investment will be limited.  Despite the fiscal constraints, Government has contributed to keep enterprises globally competitive through a multitude of programmes financed by the NRF.  Unless the MPC believes the fiscal stance is wrong, it needs to contribute to restoring confidence by aligning monetary policy to fiscal policy.

Conclusion and recommendations (Contd)  However, the context remains difficult for the business sector. Our key sectors are heavily indebted, and this is impairing their capacity to grow, invest in machinery and equipment, and generate employment, as they struggle to deal with a crisis in demand in their main export markets.  Inflationary pressures will remain subdued both locally and internationally. This gives the MPC the room to support the competitiveness of our enterprises by operating low interest rates in support of the NRF interventions and in coordination with the fiscal policy.

Conclusion and recommendations (Contd)  Non-performing loans of banks have increased over time to reach 5.2% of total private sector credit in March 2013. Major sectors being affected are construction and the export-oriented enterprises sector.  The financial crisis has never been attributed to interest rates that are too low but to poor regulation. In order to address the issue of risky lending by banks, there is need for Central Bank regulation rather than using interest rate policy that would be ineffective.  Whilst it is true that conditions are improving on the external front, our local enterprises will not be able to benefit from this recovery unless monetary policy remains supportive.