Indian Ocean Region Seychelles
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  • 1. HOW THE GLOBAL FINANCIAL CRISIS HAS AFFECTED THE SMALL STATES OF SEYCHELLES & MAURITIUS BY Dr. Gerard Adonis
  • 2. Seychelles
  • 3. Background Information • As a SIDS, Seychelles remains vulnerable to the vicissitude of the Global Economy • This is illustrated by recent financial crisis which unfortunately has exacerbated the already dire economic situation of the country • Being largely dependent on tourism (30% GDP) – make situation extremely difficult
  • 4. • Tourism expected to decline in 2009 by almost 25% • Impact of the global recession became apparent especially after defaulting on the sovereign bond repayment • Government sought the IMF’s assistance. • An emergency stand-by agreement was accepted, s.t. Government implementing some major structural economic reform • This came into effect in October 2008, with the support of IMF
  • 5. Economic Growth and FDI • Economic growth in 2008 has been predicted to fall to nearly 0%, down from 5.5% in 2007. • GDP growth for 2009 has been projected to fall further to -11%. • Main reasons; Contraction in public and private consumption expenditure due to the reform programme Sharp drop in tourism revenue expected as a result of the global economic slow down. • FDI is expected to drop to under US$ 200 mn compared to US$ 350 mn in 2008
  • 6. Tourism Sector • This sector expected to perform badly in 2009 both in terms of arrivals and FDI • Tourism is Seychelles leading source of employment and foreign currency earnings • Projected to fall by 25% in 2009)
  • 7. Public Debt • This is an area where Seychelles has been severely affected • Despite being one of the richest country in Africa with GDP per capita of US $9,440.095 at real exchange Seychelles is a very indebted country. • • In 2007 public debt stood at around 122.8% of GDP • In Dec 2008 public debt stood at 175% of GDP
  • 8. Public Sector Debt as of 31st December 2008 (USD million) EXTERNAL DEBT DOMESTIC DEBT Stock Arrears Stock Central Bank Multilateral 57.0 0.0 8.1 Advances Bilateral 259.3 176.2 Treasury Bills 103.6 Paris Club 143.6 115.8 Treasury Bonds 140.5 Other 115.8 60.4 Government Stocks 9.1 Bilateral Commercial 434.2 105.4 Treasury Deposits 1.4 Commercial 118.8 20.0 Commercial Loans 41.6 Loans Bonds and 315.5 85.5 Notes1(1) EXTERNAL DOMESTIC 750.6 281.7 304.3 TOTAL TOTAL Source: Ministry of Finance
  • 9. Evolution of Monetary and Exchange Rate after Implementation of Reform • Immediate effect following the floatation of the exchange rate was a sharp depreciation of the local currency by more than 100%. • As a result (depreciation):  Inflation escalated by more than 60%  Aggregate demand fell sharply  Cost of production increased due to doubling in the price of raw materials  Some businesses faced with bankruptcies  The Development Bank the heart of business development in the Seychelles was faced with the risk of closure.
  • 10. Interest Rate • As part of the economic reform IR was liberalised
  • 11. • As a result of higher return on Government bonds an unpleasant situation for private sector investment was created. • Both commercial banks and private individuals now preferring Government securities • In consequence most funds were deviating into Government securities and none were available for investment purposes.
  • 12. Business Confidence • Widespread belief that business confidence is at its lowest. • A combination of both local and international factors is responsible, notably; Recent global financial crisis Ongoing economic reform
  • 13. • Unfortunately Economic Reform has stripped investors and businesses of their ability to undertake new investments • Current climate characterised by;  falling aggregate demand  low confidence  high interest rate  undervalued currency  hyper-inflation  low investment  rising unemployment  increasing incidence of crime and social deprivation
  • 14. KEY ECONOMIC INDICATORS AND PROJECTION
  • 15. Economic Indicators and Projection Table 2 2007 2008(e) 2009(f) 2010(f) Nominal GDP (USD mn) 912.2 833.9 603.1 756.4 Real GDP Growth (%, annual change) 7.3 0.1 -9.6 2.6 Inflation (% year-end) 16.8 63.3 16.3 11.5 Primary Fiscal Balance (% of GDP) -2.3 4.2 9.8 8.2 Overall Fiscal Balance (% of GDP) -9.8 -3.7 -4.8 -2.0 Current Account Balance (% of GDP) -23.4 -32.1 -29.3 -24.7 Foreign Direct Investment (net USD mn) 224.8 353.6 199.9 210.6 Official Reserves (end of period, USD mn) 9.8 50.9 90.9 140.9 Reserves/Imports (end of period, months) 0.1 0.7 1.2 1.7 Exchange Rate (end of period, SCR/USD) 8.0 16.6 - - Public Sector Debt(1) (% of GDP) 146.0 126.5 174.9(2) - Source: Ministry of Finance, Central Bank of Seychelles and IMF (1) Exclude €30 million ‘premium’ associated with Amortising Notes due 2011 (2) Stock as of end December 2008 as percentage of forecast 2009 GDP; assumes no restructuring
  • 16. Fiscal Indicators and Projection 2007 2008(e) 2009(f) 2010(f) Total revenue and grants (SCR 2,214.2 3,189.7 3,410.5 4,041.4 mn) Total revenue as % GDP 36.9 36.2 36.1 34.8 Tax (SCR mn) 1896.4 2456.3 2854.5 3403.0 Non-tax revenue (SCR mn) 301.1 412.2 536.0 638.4 Total expenditure 2,810.2 3,482.9 3875.8 4,275.9 Current expenditure as % GDP 40.8 31.6 37.4 32.0 Overall Fiscal Balance as % GDP -9.8 -3.7 -4.8 -2.0 Primary Fiscal Balance as % GDP -2.3 4.2 9.8 8.2 Source: Ministry of Finance and IMF
  • 17. Balance of Payment Projection USD million 2008(e) 2009(f) 2010(f) Current Account Balance (as % GDP) -32.1 -29.3 -24.6 Trade Balance -234.9 -106.1 -108.7 Exports of goods 491.4 370.2 404.0 Imports of goods -868.2 -555.3 -593.1 of which: FDI related imports -237.3 -156.0 -164.2 Services Balance 141.9 80.0 80.4 Export of Services 522.9 383.0 400.6 of which: Tourism earnings 276.0 207.0 217.3 Capital and Financial Account Balance 168.5 123.5 161.6 Capital Account 4.6 2.7 3.3 Financial Account 163.9 120.8 158.2 Foreign Direct Investment, net 353.6 199.9 210.6 Portfolio Investment, net 1.0 0.0 0.0 Overall Fiscal Balance -115.7 -53.2 -24.8 Source: Ministry of Finance, Central Bank of Seychelles and IMF
  • 18. MAURITIUS
  • 19. Background Information • As for Mauritius the initial impact, was not as severe as in the case of the Seychelles • The well diversified aspect of the Mauritian economy and the stimulus package help • However, since the beginning of the year Mauritius is feeling the heat of the global crisis
  • 20. Impact of the Credit Crunch on the Economy • Nearly all of the key sectors of the Mauritius economy have been hit by the global economic crisis. • Signs include; decline in the tourism industry, closure of textile firms and slowing down of the construction industry (worse of all) the miscalculated decision by Air Mauritius was fatal
  • 21. • Mauritius is now in discussion with IMF, World Bank and AfDB for financial assistance to help deal with the impact of the global economic crisis • Bailout of Air Mauritius Started when the airline hedged 80% of its fuel consumption at US$105/bbl Immediately afterward global economy entered into recession and oil price slumped to a record low Air Mauritius found itself in deep financial problem and was on the verge of collapse until the Government step in with a bailout
  • 22. • Unemployment Pressure Statistics indicate a drop in unemployment rate, from 8.5% in 2007 to 7.8% in 2008. With key sectors in recession it is expected that figures for 2009 will be on the upside • Inflation Inflation has gone down and MPC declared that they expected inflation (both average and year-on-year) to converge to around 4% in 2009. (Now below 4%)
  • 23. Economic Risk • Mauritius is already suffering from a drop in domestic demand. • Real GDP is projected to grow between 2-2.5% in 2009-07-01 • The fact that most of the major world economies already entered into recession, is posing major risks to the important export industry in Mauritius • With demand expected to drop by almost 15%, is a real blow to this sector • Despite the large fiscal stimulus of US$ 310 mn Mauritius could not be rescued from the vicissitude of the global economy
  • 24. Macroeconomic Imbalance • With tourism, textile, FDI and domestic demand all declining, additional pressure was being put on the budget. • Overall budget deficit has now been revised upward to 3.9% of GDP from earlier forecast of 3.3%. • According to Reuters, the Mauritius Finance Minister had expressed views that the deficit could be even worse if necessary measures not taken. • Dr. Sithanen hinted a deficit of 7% by the end of 2009
  • 25. Tourism Sector • Growth rate in tourism arrivals declined by 9.9% in 1st quarter of 2009 • Global economic recession in key European market, (accounts for 66% of total arrival) is the main reason • Outlook for 2009 is expected to be worse, both in terms of arrivals and FDI
  • 26. Tourism Arrival: Monthly Comparison 120,000 100,000 No. of Tourists 80,000 60,000 40,000 20,000 0 July September November January March Time 2007-08 2008-09
  • 27. Business Confidence and FDI • FDI is expected to be on the decline in 2009 • FDI for 1st quarter 2009 shows an amount of only MUR 1.3 billion (compared to MUR 11.42 bn in 2008) • According to MPC current environment is characterised by weak business sentiment • Even the large fiscal stimulus was not enough to overturn the shattered business confidence
  • 28. • In response to the falling international demand for Mauritian products, the Mauritius Exports Association is lobbying the Government to react swiftly by devaluing the local currency (MUR) by a further 30% • Government is resisting pressure to do so as it fears this will compound on the already flimsy domestic demand, with many households finding it hard to manage
  • 29. Exchange Rate Movement End Period Exchange Rate MUR vs USD 36 34 32 Rate of Exchaange 30 28 26 24 22 20 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov -08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May -09 Time
  • 30. Repurchase (Repo) Rate • Between 31st October 2008 and 26th March 2009 the MPC cut IR twice by 1% Repo Rate now at 5.75% Special Deposits Facility dropped to 4.75% Overnight facility slipped to 7.25% IR payable on the Standing Facility dropped further to 11.75% per annum
  • 31. BALANCE OF PAYMENT DEVELOPMENT • Overall BoP for 1st quarter of 2009 recorded a surplus of US$ 5 million
  • 32. Balance of Payment Projection (USD million) 20081 20092 2008 USD million 1st Quarter 1st Quarter Current Account Balance (as % GDP) -974 -188 -52 Trade Balance -1,376 -300 -129 Exports of goods 2,399 517 428 Imports of goods -4,398 -1,045 -713 of which: General Merchandise -2,184 -547 -309 Services Balance 623 228 155 Travel 1,453 432 304 of which: Personal 936 279 191 Capital and Financial Account Balance 758 189 106 Capital Account -1 -1 0 Financial Account 760 190 106 Direct Investment, net 325 41 30 Abroad -52 -19 -6 In Mauritius 378 60 36 Portfolio Investment, net -170 -46 -28 Overall Fiscal Balance 178 211 5 Source: Bank of Mauritius