We forecast a real GDP expansion of 3.1% in Mauritius in 2017, which would mark a mild downturn on the 3.7% we estimate in 2016.
We expect that sluggish demand in Europe and amendments to Mauritius's tax treaty with India will weigh on the finance, tourism and manufacturing sectors, although construction will grow strongly.
In 2018, we expect that growth will remain fairly sluggish owing to a number of political constraints on the country, both external and internal.
The fiscal deficit in Mauritius will widen further over the next year as a result of the government's policy of tax breaks and an expansionary budget which have fallen on a year when government income will see only a very weak expansion on the back of weaker exports to Europe. We forecast that Mauritius will see its budget deficit widen considerably in 2017/2018 (ending June 2018), coming in at 4.1% of GDP compared to 3.7% in the previous year.
The Bank of Mauritius will cut by 50 basis points in H217 monetary policy stance through the course of 2017, cutting the benchmark key repo rate to 3.75%. In 2018, we expect that the bank will hold rates as sluggish demand in Europe will continue to weigh on growth, and inflation will rise meaning a neutral stance will be maintained.
Political risk will rise in Mauritius as the opposition disputes Prime Minister Anerood Jugnauth's resignation in favour of his son, despite the succession being constitutionally legitimate. While Mauritius will remain among the most politically stable markets in Sub-Saharan Africa, protests by opposition politicians have led us to revise down the country's score in our Short-Term Political Risk Index.
Major Forecast Changes
We have amended our forecast for the Central Bank Policy Rate, having previously argued that the bank would cut rates by 50bps in 2017 and hike in 2018. We now expect that the bank will cut by 25bps in 2017 and hold in 2018. This is on the back of an inflation spike in May and June 2017 and – although we expect this spike to pass in H217 – we believe the central bank will be deterred from a bigger cut of 50bps. Nonetheless, we believe that weaker than expected loan growth data for the first quarter of 2017 combined with sluggish performance in several important sectors, will still drive easing.