“We are anything but resilient! That’s the plain truth”

Interview: Kevin Teeroovengadum

Government will not be able to bail out everybody, in fact it should not bail out everybody…

Why bail out companies in sunset industries or companies that have had structural problems or weak management?’

Kevin Teeroovengadum worked for KPMG, Deloitte, Ernst & Young in corporate finance and strategic consultancy before moving to Loita Capital Partners Group based in South Africa. He joined Actis in 2007, the leading emerging market private equity firm. He was the co-founder and CEO of AttAfrica in 2013 which became the premier investor of shopping malls in Africa. Like other observers, he also sees a major recession coming with an unfavourable global environment that is likely to keep investors away. He feels that government must bring about targeted reforms in the education sector and rope in the talents of Mauritians wherever they are to get the country going again. He makes a number of suggestions about a way forward, among others improving efficiency, reducing wastage, putting a hold on big projects among others.

Mauritius Times: How bad is the economic situation globally in the wake of the coronavirus outbreak and lockdown in most countries of the world, and what is your assessment of its impact on the Mauritian economy?

Since the outbreak that started in China, a bit more than four months ago already, the situation has evolved from what initially started potentially as a slowing down of the global economic growth to a global deceleration much worse than the financial crisis of 2008. It has now reached a stage where it is the worst crisis since the great depression of 1929/30s.

I do not believe we have reached the bottom yet; it will be a much prolonged recession. This is a combination of a health crisis, an economic shock with a sudden stop of many economic sectors, leading to massive unemployment, bankruptcies both at corporate and household levels, de-globalisation in the short- to medium-term, repositioning of geo-politics, advent of technology that’s already forcing billions of people to embrace Industry 4.0 and disrupting companies and economies that relied heavily on Industry 3.0 and all these culminating in the short- to medium-term with a lot of fear amongst the population. In short, what we are witnessing is a shift from the old to a new paradigm which was bound to happen during this decade, but I never expected it would be in such a disruptive and fast-track manner.

As for Mauritius, we are in our first recession since the early 1980s and unfortunately it will be a very severe contraction that will leave our nation very scarred and will take a longer time to heal and recover.

* The first estimates as regards the performance of our economy in the wake of the Covid-19 pandemic point to a GDP contraction of around 6% in 2020. What’s your take on that estimate? An understatement?

The estimate of 6% contraction put up by the Minister of Finance and IMF was a couple of weeks ago. I have been saying since beginning of April that it would be a double digit contraction with a best case scenario of low teens, a base case of mid-teen and worst case scenario that could go well beyond 20%. I would like to highlight that the IMF generally tends to be late in providing real updates of the situation on the ground and that is why I would discard the IMF’s forecast made 3 weeks ago. The situation has since evolved negatively, with the lockdown in Mauritius extended till the end of May with a soft opening around mid-May; moreover the economic damage in our main export markets in Europe is more severe than what was expected a couple of weeks ago.

* Does that mean that all economic sectors here – whether it’s tourism, financial services and manufacturing, sugar, etc., with their focus on foreign markets for business and customers will go through difficult times beyond 2020 and well into 2021?

Unfortunately yes! We should not underestimate the difficulties being faced in our export markets and also the ripple effect that Covid-19 is having just like a tsunami or an earthquake that have multiple waves or shocks.

The “V” curve recovery is wishful thinking since a long time ago and even the “U” curve recovery would be a very optimistic scenario. I believe it will be an “L” curve along the lines of a “Nike” logo. It is going to be very slow, and it will take us a good 3 to 4 years to be back to where we were in 2019. This is assuming there’s no second wave of Covid-19 as countries start to open up softly.

* To make matters worse, there is likely to be bad news for our financial services sector this week. Reuters has reported that the “European Commission is set to include Panama, the Bahamas, Mauritius and nine other countries to its list of states that pose a financial risks to the bloc because of anti-money laundering and terrorism financing shortfalls”. That’s going to be a hard blow to the sector, and it’s coming at the wrong time, isn’t it?

If what’s reported becomes real, which I really hope not, this will be a massive blow for Mauritius. There’s no good or wrong time for this. But at this juncture where we have so many economic fires to deal with, we really do not need another big one. This would mean that Mauritius has failed to do the necessary “cleansing” asked of us over such a long period of time. The implications will be multi-fold:

  • Potential global investors will shy away from Mauritius at a time where we badly need new investors;
  • Existing global investors who currently use Mauritius will look to relocate elsewhere to mitigate the risk of being at odds with the European Commission
  • A withdrawal of deposits from global investors and hence risk for our local banking sector
  • Foreign owned banks might question the rationale of being based in Mauritius.

It’s important to understand that from the global perspective Mauritius is a small jurisdiction and we are competing with other jurisdictions. The complexity has increased since the beginning of the year, post Brexit in January and also now with recession in Europe. The bottom line is very simple. Great Britain will try to protect its own offshore jurisdictions to the detriment of other countries such as Mauritius, while Europe will need every euro possible to rebuild its economy and hence can hit at jurisdictions like Mauritius.

We have seen already a number of European countries saying that companies which have structures in offshore or tax efficient jurisdictions will not benefit from bailout money from their respective governments. The pressure was already mounting in Europe even pre-Covid-19 and now with Covid-19 we are in a situation where it is a bit like “Chacun pour soi, Dieu pour tous”.

Let’s hope that our government has done the necessary lobbying with our European friends and that we obtain a favourable response from the European Commission.

* Mauritius does have otherwise its strong points: a rather well-diversified economy, low unemployment and low inflation, its Welfare State with strong social security safety nets. These should help to see us through the economic storm, isn’t it?

We lost the last 10 years (the lost decade) by failing to carry out the much-needed economic transformation that would have shielded us better during the current crisis. Instead we kept saying our economy was resilient and well diversified. But the reality is very different today. Why? Because our economy has been surfing on the global wave; that wave was receding and it’s not there anymore. We could see that situation unfolding even before Covid-19 with our GDP growth slowing down by end 2019 to 3.1% – that is much lower than the initial 4% forecast.

We never managed to bring our debt to GDP ratio to the 60% level and in fact in 2019 it went up beyond 65%. I won’t be surprised if it goes well beyond 80% in the wake of the current crisis. And for years we have not been able to tackle our budget and trade deficits year after year, yet Mauritius has spent more than Rs75 billion in various projects of dubious relevance. Worse successive annual government audit reports have drawn attention to the staggering level of waste year in year out. Add them up and you get to more than Rs75 billion which have gone down the drain!

Imagine if we didn’t waste that much money, we would have less debt (as these projects were all funded by debt), and we would have had the necessary reserves to help weather the tough current economic storm on our hands. Let’s be honest with ourselves: instead of rhetorically talking about Mauritius being resilient, we are anything but! That’s the plain truth.

* A number of measures have been taken to assist both employees and employers during the lockdown, and more is likely to come in the weeks ahead. In case the situation doesn’t improve soon, what are the government’s choices?

As we stand today, the situation is already extremely complex as the whole economic value chain – from our export-oriented sectors to our domestic market – is currently being impacted. When there is a recession and, on top of that, an economic sudden stop and fear from people, this leads to a domino effect.

After the lockdown, it will be hard for people to just go out and consume the way they did before and for a number of reasons – such as some would have lost their jobs, others would be asked to reduce their salaries and, generally speaking, this trauma of being locked-down would lead to people shying away from consumerism at least in the short- to medium-term. Hence this leads to multiple waves of contraction which is the opposite of the multiplier effect when you have economic growth.

If the situation doesn’t improve by early June, Government will have to deal with an unprecedented situation. They have very limited options; one of them will be to borrow to “limiter la casse” as much as possible. In any case, Government will not be able to bail out everybody, in fact it should not bail out everybody. Why bail out companies in sunset industries or companies that have had structural problems or weak management?

Government will need to start offloading assets as it is sitting over a lot of these scattered around the island. For example, Landscope, SIC, shares in banks and insurance companies, our famous new stadium in Cote d’Or; it should even consider privatising the rail infrastructure of the new metro, as well as reducing its stake in Mauritius Telecom by divesting at least 10% shareholding, etc. Whatever option the government will look at, the reality is it won’t be smooth riding for a number of years to come.

* Once economic recovery begins, what should Mauritius go big on first in the short and medium terms?

First of all I really hope the government will upgrade its team across the board. We need new faces, fresh ideas and Mauritians who have the expertise and skills to take Mauritius to the next level. In this lockdown, I have come across Mauritians in Mauritius and also the diaspora who are real talents. If only they were part of the decision making and execution processes, it would have been a totally different ball game. Mauritius needs to be able to do this human capital upgrade and transition as soon as possible.

Second, the government should change the way it used to operate. We cannot carry on with inefficiencies, where we have waste of money every year.

Third, Government will have to re-prioritise its infrastructural projects. For example, the new airport terminal should be put on hold for a long time to come.

Fourth, government should focus on reducing our import bills especially on foodstuff and make self-sufficiency a 2- to 3-year objective.

Fifth, bolster our healthcare sector not only for us Mauritians, but also to position it for our neighbours in Africa who could shy away from Europe and come to Mauritius instead. That’s a big and growing market. But for that we need more and better healthcare facilities and there are possibilities for public-private partnerships.

Sixth, reposition our tourism sector. The first step would be for existing hotel groups to consolidate, restructure their debts, and with the possibility of separating the walls and operations.

Seventh, invest massively in education and overhaul our education system once and for all. Our human capital is what will take us to what the Minister of Finance referred to a high-income country, else this will remain but a dream. So we need a radically different human capital and, to be able to achieve that, we need a radically different education system. We cannot continue to get youngsters out of school and recurrent mismatch with job requirements and growing youth unemployment. We need a human capital that can fit within this new paradigm of Industry 4.0/5.0.

* What are your thoughts for the future as regards the economic model that we should strive to put in place or new paradigm to embrace?

I firmly believe that in a crisis you either die or you come out much stronger, wiser and smarter. For Mauritius, we should take Covid-19 as a blessing in disguise as it will force us to bring about the changes we didn’t bother with in the last lost decade and also force us to rethink how we want to position ourselves in this new paradigm.

The future is Industry 4.0/5.0; we can’t shy away from this future and we should promote innovation, science, research, and technology. We are seeing how technology has positively disrupted a number of traditional companies around the world. Classical examples are Amazon, Alibaba, Airbnb, Uber-eats. We need to embrace technology and promote agri-tech, edu-tech, fin-tech, health-tech, prop-tech, etc. For example, agri-tech can help us to become self-sufficient very quickly. Gone are the days of mechanisation of agriculture. If we can grow vegetables without land these days in other parts of the world, this tells you we have entered a new era. Other examples, we have seen during this lockdown period, is technology being used for education and also for tele-medicine. So the sky is the limit if we bring in technology in everything we do. But to be able to use technology, we need to have an open mind and get our youngsters to spearhead these changes.

We could also use this as a way to make Mauritius become the tech hub for Africa. There are plenty of African talents who are spearheading a number of tech products/companies and who would be keen to relocate to Mauritius if such opportunities were offered to them. We could very easily make Mauritius the “Silicon Valley” for Africa.

The other play for Mauritius is to become a science and research hub for Africa. We have seen over the last 20 years, we have had various viruses (H1N1, Sars, Mers, Ebola, etc) impacting the world and we might see other pandemics in the future. So why not developing Mauritius as a lab for Africa? Let’s get our Mauritian diaspora scientists who are working abroad in prestigious labs to set base in Mauritius or else lobby to get international labs established in Mauritius.

* Published in print edition on 8 May 2020

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