Air Mauritius: ‘Vulture investors are already lined up to devour the injured animal’

Interview: Kugan Parapen

‘If those who hold the wealth do not cooperate, they will find themselves in a hole which they would have dug themselves’


‘We could have a once-in-a-lifetime opportunity to further the land reform agenda. A land-for-cash scheme could also be envisaged for the land-rich but cash-poor companies’

Kugan Parapen, economist and a member of Resistans ek Alternativ analyses the contemporary socio- economic landscape in the context of the Covid-10 pandemic and makes some suggestions for a way forward to cope with the hardships that the country and the people as a whole are going to face as a result. This is an opportunity to implement some pragmatic solutions, but they will involve bold measures to be taken about land reform and a reorientation of the economy towards import substitution so as to make it less dependent on sectors such as tourism, among others.

Mauritius Times: Can it be said that the decision to place Air Mauritius under voluntary administration constitutes a foreboding of the bad things to come on the economic front, or does it merely add up to what was already considered inevitable?

Kugan Parapen: Airline companies have one of the most leveraged business models in the business world given the high fixed costs involved. So it is with no surprise that we see airline companies worldwide being among the first economic victims of the pandemic. However, it must be said that Air Mauritius has been among the first of these aviation companies to wave the white flag. It therefore beckons the question as to whether the company was already in a bad shape going into the crisis. I believe readers are savvy enough to know the answer to this question.

Our national carrier has been one of the worst managed public entities over the years. Internal rife, political interference, nepotism and sheer incompetence have created a toxic situation which was bound to end in tragedy. Many will say that it is only a ‘voluntary administration’ and that there are chances that the company will re-emerge from the abyss it finds itself in. That could well be so. But in any case, the public funds invested in this company will either be wiped out or at best, be revalued significantly downwards. But there seems to be more to the Air Mauritius story. To some well-informed observers, there are a few potential private investors already lined up to devour the injured animal. In financial jargon, they are called ‘vulture investors’, you wonder why.

If our government were to sell the public stake in Air Mauritius in the worst crisis the company has ever found itself, it will be a major act of treason. You do not get rid of your most prized assets when they are at their lowest valuation ever. Unless you find yourself in default. If the country is in default, then the government needs to say so and tender its resignation as well!

* To come back to the situation on the economic front, how deep will the downturn be — and how long will it last?

From a global perspective, the quarterly contraction over the second quarter of 2020 will be the deepest on record. So, there cannot be any doubt as to the magnitude of the crisis on our hands. For Mauritius, relative to the 2008 Financial Crisis, the tables have turned. While global GDP contracted by 1.69% in 2009, Mauritius was left better off and even registered a growth rate of 3.3% that year. In the current crisis, the latest IMF forecast growth to decelerate by 3.0% while it expects the Mauritian economy to contract by 6.9%. This is quite a change of fortune, isn’t it?

It is also worth pointing out that the local economy has not experienced such a downturn since 1980. That is forty years ago. While there have been periods where the recessionary environment has been masked by the artificial depreciation of the Mauritian rupee, it will be the first time on record that the economy will contract since 1980. For many generations, this will be a first-hand experience of a recession and unfortunately it will not be a pleasant one. I’m afraid the horizon is quite gloomy for the foreseeable future.

“Whenever the economic elite has had to endure economic downturns (either due to collapse in sugar prices on global markets or devastating cyclones hitting Mauritius), it has always resorted to selling part of its land to resolve its cash flow problems. We could have a once-in-a-lifetime opportunity to further the land reform agenda on the horizon and instead of equity stakes, a land-for-cash scheme could also be envisaged for the land-rich but cash-poor companies…”

As to the length of the downturn itself, it is still quite uncertain and anyone’s guess to be honest. In the best-case scenario, assuming a V-shaped recovery, the global economy could regain the lost economic value by end of 2021. The likelihood that the downturn is more prolonged and far-reaching is high though. Economies follow cycles of booms and busts and since the world economy emerged from the 2008 crisis, it hasn’t encountered any major crisis bar the 2012 European sovereign debt crisis and maybe the initial collapse in oil prices to USD 40 per barrel in 2016.

Over the last months, many have warned about the current economic cycle reaching a matured stage and as such, the covid-19 pandemic could prove to be the catalyst to a bigger economic crisis that has been forthcoming. If that is the case, we should expect the length of the downturn to be much longer than expected.

* Consumer spending on goods and services other than grocery purchases is taking a hit; tourism is on its knees and is likely to remain at that level through the end of the year, but things may take a different turn once a vaccine is developed and people feel safe to go out or travel. Do you nevertheless subscribe to the view expressed by some economists that things are not going to rebound back to exactly as they were before?

A vaccine will be a major breakthrough in this crisis as it will probably spell the beginning of the end of the pandemic. But such a vaccine will take time as it needs to undergo thorough clinical tests that take at least six months to complete in the best of cases. We can compare this pandemic to a cyclone in that they are both exogenous factors which affect an economic model. Does life go back to normal straight after a cyclone or is there a rebuilding period before life resumes normality?

We can say that this pandemic is a trauma which has affected the psyche of many around the world and as trauma goes, there is bound to be post-traumatic syndromes. If you are involved in a serious car accident, does your driving behaviour change after the accident? Of course, it does, at least for the immediate time following the accident. In extreme cases, some may never want to drive a car again. These economists suggesting that things are not going to rebound back to exactly the way they were before are right in their approach I believe.

From a local perspective, you can be sure that many households will be storing a spare cooking gas bottle after their queuing experience. It is difficult to predict the extent of the change in human behaviour even though we know that human behaviour will certainly be altered when the pandemic comes to an end. The same goes for our economic model for it is a mere reflection of human behaviour and psychology.

* In the meantime how bad is it going to get for the country – for consumers, businesses, investors and for workers, especially for those of us who do not benefit from the security of government jobs?

We need to prepare ourselves for the worst. I hate to be the bearer of such grim news but there is no other way to put it. The main pillars of the economy are in for a severe downturn while the main contributors to economic growth in recent years will suffer significantly. As previously mentioned, our economy will be among the most severely affected from the pandemic worldwide and the degree of contagion to other sectors of the economy could be severe. The tourism industry will likely be shut down for the rest of the year at least; our offshore sector will suffer from the global risk aversion while the real estate sector could crater due to a dual demand and supply shock. In such times, it is usually up to the government to step in and splash out on capital projects and deploy the welfare safety net to cushion the shortfall in expenditure elsewhere. Can it play its role though?

When the central government decided to raid the reserves at the Central Bank last year, it was akin to breaking the ‘piggy bank’ and was a measure of last resort. Such a move underpinned the frailty of our public finances and suggested that the country’s financial reserves were running dry. We could not be in a more unprepared situation to face this crisis. Hence my concern about the current situation. In such dire times, solidarity must be the key concept guiding our actions. We need to beware of the boomerang effect. If those who hold the wealth do not cooperate, they will find themselves in a hole which they would have dug themselves. If in such exceptional and crucial moments, the holders of wealth insist on receiving their interest, dividend and rent as in normal times, they will be exacerbating the crisis and will deeply regret doing so in the future.

For example, if all house tenants insist on being paid their rental, we could potentially have a situation whereby the whole rental market collapses and the price of houses fall sharply on the market. Because let us not forget that the government is only guaranteeing the salaries of most employees in the private sector (for how long?) while those in the informal sectors are only receiving a meagre allocation. Which, by the way, is outrageous given the burden of the fiscal model which resides on their shoulders.

We are a society – be it the government, the corporate sector, or the household sector – which has lived beyond our means for such a long time that our economic model is similar to a debt house of cards. If a few of those cards start to give way, the whole structure could disintegrate. And this is why the government must make sure that the economic contagion is kept to a minimal.

* The Government has indeed already stepped in with its wage assistance scheme and other business support schemes. How much more will it be able to do to mitigate the damages of a recession on family finances and to support the main pillars of our economy?

The government must be prepared to do WHATEVER it takes to support our economy and minimise the economic impact. From an absolute perspective, we find ourselves in a dire situation, but we should not forget that this is also the case for the rest of the world. Therefore, from a relative perspective, the situation is not as bad as it is from an absolute standpoint. If we were asked to run a 100 metre race and given an extra 10m penalty at the start, we should be concerned. But in the current situation, everyone racing the 100 metre race has been given a penalty such that, in the grand scheme of things, none is really heavily disadvantaged.

Can we say that if everyone faces the same problem, then it isn’t that much of a problem? Yes and no. Different economies have different structures and while some are designed to cope under stress, others might not survive. However, given the global nature of the problem, I believe that at some point, supra-national solutions will have to be found. Increasing the debt level would be the more sensible situation as opposed to the much-debated helicopter money. The latter is a moral hazard concern in that once it has been used in this instance, we can be sure that politicians will revert to it again and again to mask their governance shortcomings in the future.

The idea of a perpetual bond issuance with callable optionality is one to explore in that it wouldn’t disrupt the short- to medium-term debt profile of the country. It remains to be seen who finances such an issue, given that the sheer magnitude of the issuance (possibly more than 10% of GDP, that is above Rs. 50bn) would make it difficult to generate enough demand in Mauritian Rupee terms without crowding out the banking sector. Issuing debt in hard currency should also be considered because it will act a future deterrent for irresponsible currency manipulation by local authorities and bring about the much-sought structural reforms.

Assuming the government can assemble such a formidable monetary arsenal, it should however ensure that there is no free lunch. In that economic actors should not be able to benefit from such State largesse without the State being fairly compensated for the bail out. Many have floated the idea of the State taking significant equity stake in the distressed businesses, but this should be carefully assessed, especially for already highly leveraged business entities.

* The view has been expressed that the Covid-19 pandemic provides a once-in-a-lifetime opportunity to revisit our economic model, correct a number of dysfunctions in the system and bring about a good measure of structural reforms. Where should the works start?

History teaches us that the process of land democratization in Mauritius has never been more relevant than when economic crisis has hit our shores. Whenever the economic elite has had to endure economic downturns (either due to collapse in sugar prices on global markets or devastating cyclones hitting Mauritius), it has always resorted to selling part of its land to resolve its cash flow problems. We could have a once-in-a-lifetime opportunity to further the land reform agenda on the horizon and instead of equity stakes, a land-for-cash scheme could also be envisaged for the land-rich but cash-poor companies.

As for the economic model, if we do not learn now, we will never learn. Anyone with a sound knowledge of economics will tell you that the Mauritian economic model is a flawed one on multiple counts. We suffer from so many structural imbalances that our policymakers should be embarrassed about their legacy. With the pandemic, the chickens have come home to roost.

The first major takeaway from the looming economic crisis is that our export-oriented economic model needs to be changed. This is not even a choice but rather a necessity. Numerous economists have been highlighting the risks inherent to such a model but unfortunately policymakers did not pay heed to them. In a nutshell, when an economy relies too much on exports, its corollary is that the needs of the domestic economy are ignored and not catered for such that those needs must be imported. The case for food and energy security are major examples of this shortfall.

Also, the major risk with an export-led model is that the whole economic model is subjected to international risks. When an industry as volatile and sensitive as the tourism industry becomes the main pillar of your economy, you put yourself in a situation whereby a shift in sentiment against that particular industry can derail your whole economic model. Had it not been a pandemic, it could have been something else, may be the impact of climate change, an ecological catastrophe, a terrorist attack or simply a change in preference of holiday goers.

We are not arguing against the tourism industry here but rather for the need to strike a right balance within the economic model. As risk management goes, diversification of the economic sectors is essential, a feature sorely lacking within our current model.

The export-led model has also meant, over the years, a worsening trade deficit with the rest of the world. With the lapse of preferential quotas and AGOA, we should have revisited our model but instead we tried replacing one industry with another and thought that things would be the same. Unfortunately, with deteriorating terms of trade, our trade deficit just kept on worsening such that we suffer from a chronic hard currency deficit on our trade book. We can only print Mauritian Rupees; the hard currencies we desperately need to finance our import bill can only be earned through exports or Foreign Direct Investments (FDI). No one outside our borders will accept Mauritian Rupees as a token for payment. With the deteriorating trade deficit, the need for these hard currencies has kept on increasing such that we increasingly rely on foreign investors to provide us with them.

In this current crisis, we could face a major currency crisis, especially if the downturn persists over a relatively long time period and the economy is deprived of the much-needed foreign income. Our Central Bank does have satisfactory currency reserves but those are decreasing as our imports are more inelastic than our exports. Also, we’ve heard stories of a few big players in the offshore industry becoming increasingly uneasy with their exposure to the domestic financial system, especially in light of Moody’s latest report about the exposure of some major players to the oil sector. Considering the above, the case for import substitution industries has never been more relevant such that we de-risk our economic model and move towards a more sustainable economy. Such a model would have fared better in such a crisis, or any crisis for that matter. We need to develop our local economy much more and make it more buoyant by developing such sectors as arts and leisure, sports, agriculture, and fishing. The SME sector should also be greatly empowered and given the means to become pioneers in these new fields.

Last but not least, we need to find a long-lasting solution to the public governance conundrum. This is an issue which has cost us billions over the years and will cost us much more going forward if we do not find a concrete solution to it. Take the Air Mauritius saga for example – many are in favour of privatising the carrier because they have resigned themselves to the fact that all governments are going to produce the same results – that is gross mismanagement of public affairs amid corruptive and nepotistic behaviours.

How do you call a population which democratically elects a government which it knows will invariably engage in such poor governance practices? What would you say of that same population that will eventually favour some form of privatisation of the public institutions rather than letting the government which it elected continue mismanaging these public institutions? Must be a Mauritian paradox! Unless and until we have the solution for this paradox, our collective pain will unfortunately endure…

* Published in print edition on 28 April 2020

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