Harvesh Seegolam: Current economic conditions and outlook
Statement by Mr Harvesh Seegolam, Governor of the Bank of Mauritius, at the post
Monetary Policy Committee (MPC) press briefing, Port Louis, 14 December 2022.
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Ladies and gentlemen, members of the media, good morning.
Welcome to this press briefing for the fifth Monetary Policy Committee (MPC) meeting
of the year.
Today's MPC meeting was held in the background of latest global developments with
the objective to further shield the country and its people against the growing pressures.
At the outset, I wish to put in context the situation. You would recall that, at the very
start of the pandemic, the MPC had promptly adopted an accommodative stance and
reduced the KRR in line with that was needed across those testing times. There had
been two successive cuts, one to the tune of 50 basis points, and the other to the tune
of 100 basis points, which brought the Key Repo Rate to 1.85% from 3.35%. It should
also be noted that year on year inflation rate in March 2020 was at 2.9%.
The accommodative stance was maintained for the last two years. Thereafter, the MPC
decided to embark on a normalisation process in the light of the pace of economic
recovery and inflationary pressures. This means that the KRR is now being raised
because the economic conditions warrant such a normalisation approach.
International Economic Developments
I will now provide you with an overview of global economic developments.
The global economy continues to be characterised by challenges amidst high price
pressures due to the ongoing geopolitical conflict and slower growth momentum
stemming from rapid global monetary policy tightening in advanced economies, leading
to a slowdown in economic activities in several countries.
The IMF, in its October 2022 World Economic Outlook, maintained global growth at 3.2
per cent in 2022, amidst growing uncertainties tied to the ongoing war and China's
zeroCOVID strategy. The OECD, in its November 2022 Economic Outlook Report, has
forecast global growth at 3.1 per cent for 2022.
Inflation remains elevated in many countries amidst the delayed pass-through of past
increases in food and energy prices. Price pressures are now deemed to be more
broad-based, extending beyond food and energy prices and spilling over to higher core
goods and services inflation. In October 2022, year-on-year inflation stood at 7.7 per
cent in the US, 10.6 per cent in the euro area and 11.1 per cent in the UK. In emerging
economies, inflation continues to surge. For instance, in Turkey, it has reached 85.5%
and in Nigeria it reached 21.09%, in Argentina it reached 88% and in Ghana it stood at
40.4% in October 2022.
Central banks across both advanced and emerging economies became aggressive in
tightening their monetary policy to prevent high inflation from becoming more
entrenched and anchor inflation expectations over the medium term. The US Fed, the
ECB and the BoE are all expected to raise their policy rates at their forthcoming
meetings today and tomorrow.
On the positive side, global commodity price pressures are moderating. This may augur
well for medium-term global inflation. Brent crude oil prices averaged $91 per barrel in
November 2022 compared to $94 per barrel in the previous month. The Food and
Agriculture Organisation (FAO) Food Price Index was down for the eighth successive
month in November 2022. Similarly, the Baltic Dry Index which measures the cost of
shipping goods worldwide has been on a declining trend over pretty much of the second
half of the year, barring a brief uptick in September.
Domestic Economic Developments
While economies across the world are experiencing deceleration in their economic
activities, the Mauritian economy continues to recover. The domestic economic
recovery has progressed well, supported by greater dynamism across key sectors of
the economy. The services sector strengthened further in 2022Q2, underpinned by the
buoyancy in tourism, with positive spill over effects to other areas of the economy.
Tourist arrivals reached 755,655 during the period January to October 2022. This week,
the MTPA announced that Mauritius welcomed 870,000 tourists from January to end of
November. Bookings for the tourism sector show that tourist arrivals are expected to
gather further momentum due to the high season. The target of one million tourists set
by the authorities remains attainable. Gross tourism earnings amounted to Rs 6.7 billion
(USD150 million) in October 2022 compared to Rs5.4 billion (USD149 million) in
October 2019. Since the start of the year, gross tourism earnings amounted to Rs48.3
billion (USD1,090 million) compared to Rs50.5 billion (USD1,436 million) for the period
January to October 2019.
The performance across most economic sectors is expected to be sustained in the last
quarter of this year. The manufacturing, financial services, construction and wholesale
and retail trade sectors continue to maintain good momentum and prospects are
promising going forward.
The recovery in economic activity impacted favourably on the labour market. The
unemployment rate further fell to 8.1 per cent in 2022Q2, from 8.7 per cent in 2022Q1.
Labour market conditions are expected to improve further and move closer to
prepandemic levels as overall economic activity continues to pick up.
The current account deficit is projected to be slightly lower at 14.0 per cent of GDP in
2022 compared to the previous estimate of 14.7 per cent, mainly reflecting a much
better-than-expected performance of the services account in 2022Q3. This helped
offset the deterioration in the goods account.
The Mauritius IFC continues to attract robust financial flows as global economic
activities picked up from pandemic level, and cross-border investment activities
continue to remain buoyant. With respect to the non-GBC flows, the real estate sector
continues to support the influx of foreign direct investment in Mauritius, in particular, as
a result of easing of travel restrictions in 2022. Mauritius is also expected to receive
fresh sources of foreign direct investments amid the emergence of new sectors of
activities. The EDB has forecast FDI for this year to be above Rs20 billion.
Inflation
Inflation in Mauritius, majorly driven by external factors, has been pronounced through
2022 due to a mix of international and domestic factors. Headline inflation accelerated
further to 10.3 per cent in November 2022, from 9.9 per cent in October 2022, while
year-on-year inflation rose from 11.9 per cent to 12.1 per cent.
Money Market
Short term yields moved in line with the 100 basis points increase in the Key Repo Rate
(KRR) at the last MPC meeting and remained within the interest rate corridor. The
91Day Bill yield, which is the current operating target, increased by 150 basis points up
from 1.75 per cent as at end October 2022, to 2.80 per cent by mid-November 2022
and was at 3.25 per cent on 9 December 2022 moving closer to the Key Repo Rate.
Following the open market operations conducted by the Bank, the level of rupee excess
liquidity in the banking system stood at Rs9.9 billion on Friday 9 December. As part of
the New Monetary Policy framework, the Bank continued to issue the 7-Day BoM Bills
to all banks, with a weekly average issuance of around Rs8.5 billion.
The level of outstanding BoM instruments, which stood at Rs113.1 billion on 28
September 2022, increased to Rs118.3 billion as at 9 December 2022. Securities
totalling Rs129.2 billion were issued against maturing securities to the tune of Rs124.0
billion, resulting in a net issuance of Rs5.2 billion.
Concurrently, sale of FX by the Bank absorbed rupee excess liquidity equivalent to
around Rs18.1 billion over the period 28 September 2022 to 13 December 2022.
Foreign Exchange Market
The month of November was marked by the significant intervention amount of USD300
million, representing the highest amount sold by the Bank in any given month. In the
month of December, the Bank has intervened for an amount of USD50 million. From
January to 06 December 2022, the Bank injected a total amount of USD1.0 billion in the
domestic market.
Activity on the FX market remained buoyant, with total turnover for the last eleven
months hovering around USD8.6 billion, a significant improvement of 21 per cent
compared to the corresponding period of last year. FX turnover in November itself
amounted to USD1.2 billion.
The evolution of the exchange rate continues to reflect domestic economic
fundamentals as well as international exchange rate movements. Since 28 September
2022, the rupee has appreciated by 3.3 per cent against the US Dollar.
The Gross Official International Reserves (GOIR) remains at a level sufficient to provide
a buffer against adverse external conditions. The GOIR stood at US$6.7 billion as at
end-November 2022, representing 13.9 months of imports.
Financial Stability
The banking sector continues to be resilient, sound and thriving. The normalisation of
interest rates is not expected to undermine the soundness and stability of the banking
sector. The capital buffer of the banking sector remained well above minimum
regulatory limit, with the Capital Adequacy Ratio at 19.0 per cent as at end-September
2022. The banking system also held robust liquidity buffers. The aggregate Liquidity
Coverage Ratio (LCR) was 231 per cent in October 2022, exceeding the regulatory limit
of 100 per cent. In terms of material foreign currency, the LCR was at 173 per cent. The
high LCR denoted adequate liquidity buffers to support short-term net outflows in both
domestic and foreign currencies, as well as safeguard the resilience of the banking
system against liquidity strains that could impact credit flowing to the economy.
The banking sector provided continuous support to the economy by ensuring constant
flow of credit. Bank credit to the private sector grew, on an annual basis, by 2.4 per cent
in October 2022 compared to 3.1 per cent in July 2022. Credit to the corporate sector
contracted at an annual rate of 4.2 per cent in October 2022. This contraction was
primarily due to the decline in debt securities issued by the corporate sector and held by
banks. Moreover, key sectors have been reducing their FX borrowings from banks
since November 2021. As economic activity continued to gain momentum, the
corporate sector has been taking on more loans denominated in Rupees - the main
component of bank credit to the corporate sector - with the growth rate remaining in
positive territory since August 2022. Bank credit to households continued to grow
strongly, with an annual rate of 13.6 per cent in October 2022 compared to 14.5 per
cent in July 2022.
The asset quality for the banking sector has continued to improve and remained below
pre-pandemic levels. Non-performing loans represented 4.4 per cent of gross loans and
advances as at end-September 2022, an improvement from 4.6 per cent as at end-June
2022. The drop in the NPL ratio was driven by an improvement in the NPL ratio for both
the domestic and non-resident credit portfolio. The average NPL ratio in the two years
preceding the pandemic, that is 2018 and 2019, was around 5.5 per cent, indicating
stronger asset quality currently.
The latest stress testing exercise supported the resilience of the banking sector to
absorb and limit the amplification of plausible shocks emanating from the lingering
pandemic and prolonged Russia-Ukraine war. The capital and liquidity buffers of the
banking sector as at end-September 2022 were adequate to provide cushion against
potential shocks.
The Bank maintains its prudent approach in assessing and monitoring risks to financial
stability arising from within and outside Mauritius.
MPC Decision
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In a bulletin released on the 9 of December, the BIS stated that monetary policy
involves deciding on 'how fast, how far and how long' to tighten. The choice is often
complex and entails trade-offs. Over-tightening can cause a drag on real sector
activities and, in an environment characterized by relatively high indebtedness, induce
stress to financial markets and create financial stability risks. Under-tightening can
result in a de-anchoring of inflationary expectations and result in more entrenched
inflation, with potentially most costly and welfare-reducing actions down the road.
In Mauritius, we opted for a gradualist and cautious approach towards normalisation in
2022, whilst being mindful of the importance of not undermining the recovery and
growth objective along the way. The pace at which we tightened monetary policy over
the last four MPC meetings has been broadly appropriate to help anchor expectations.
It is expected that headline inflation will come down to 5-6 percent in 2023, from 10.6
per cent in 2022.
However, we need to remain vigilant about the potential effects that further tightening
policies by the US Federal Reserve Bank and the European Central Bank may have on
yield differentials. These could create pressures on the local currency, if unaddressed,
and could generate further inflationary pressures.
In view of the continued upturn in economic activity, Bank staff maintain their real GDP
growth forecast above 7 per cent for the year. The economy is forecast to grow by
around 5 per cent in 2023. The MPC noted that these growth projections remain subject
to headwinds stemming from current global uncertainties.
At its meeting today, the MPC observed that the strong growth performance across all
major economic sectors provides the Bank with leeway to respond accordingly.
We should not be oblivious to the fact that the MPC had lowered the policy rates down
to 1.85 per cent after two successive cuts to the tune of 150 basis points during the
pandemic so as to help relieve the financial hardship of borrowers during testing times
and prevent a real sector shock from undermining the financial system. Interest rates in
Mauritius remained at relatively low levels for nearly two years. The ongoing economic
recovery which is well entrenched has provided the MPC with leeway to continue with
the normalisation process in the face of heightened inflation since the beginning of the
year.
The MPC unanimously decided today to raise the KRR by 50 basis points to reach 4.5
per cent.
Here, I would like to also re-assure the population that the normalisation process is a
necessary response to help contain the negative effects associated with a high
inflationary environment. The inflation we are seeing remains largely imported, and has
a relatively big share of commonality with other countries. Central banks worldwide
have engaged in monetary tightening, with many continuing to do so. The long-term
losses of high inflation may outweigh the short-term pitfalls associated with policy
normalisation.
In this regard, to accompany the population and the business community, the Bank of
Mauritius is rolling out a series of measures.
First, banks are being provided with greater flexibility to restructure loan facilities such
that bank customers can continue to fulfil their financial obligations.
Second, the Bank is engaging with commercial banks to introduce a package of
measures geared towards households and SMEs with the objective of easing their debt
servicing.
Third, the Bank of Mauritius will also come up with additional macro-prudential
measures to ensure that the banking sector remains resilient.
Fourth, the Task Force on Financial Sector Resilience continues to meet, monitor,
analyse and make necessary recommendations. The Task Force will meet on the 20th
of December.
The Bank is also putting a dedicated channel at the disposal of businesses, households
and individuals should they need any support or clarification, or should they encounter
any issue with their bank. Queries and issues may be channeled by phone on 202 3800
or the support@bom.mu dedicated email.
I also wish to inform you that the Bank has completed its series of consultations with
respect to the New Monetary Policy Framework. The framework will be officially
introduced in January 2023. Under the new framework, the Bank is introducing flexible
inflation targeting. The inflation target for the country has been defined to be in a range
of 2 to 5 percent, with the aim to achieve 3 per cent in the medium term as
recommended by the IMF. The Key Repo Rate will also be replaced by the Key Rate.
As part of the introduction of the new Monetary Policy Framework, you will recall that
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the Bank started, with effect from the 4 of August 2022, the issuance of a 7-Day Bank
of Mauritius Bill to all banks. This instrument will further improve the transmission
mechanism of monetary policy signals and help anchor short-term money market rates.
The operational target, which is currently our 91-Day Bill, will be replaced by the
overnight interbank rate. An awareness and outreach campaign targeting various
stakeholders will also be rolled out in January.
Rest assured that the Bank will continue to work in the best interests of the country and
its population. We will continue to monitor the situation closely, and stand ready to
convene the MPC as and when necessary.
Before I end, I seize this opportunity to wish you and your family a joyous festive
season and a very Happy New Year 2023.
Thank you. I now welcome your questions.