Budget 2014 expertspeak: Creativity and access are key to Mauritius
AfricaMoney spoke to Sridhar Nagarajan, CEO, Standard Chartered, Mauritius, in an hour-long interview where our financial expert took us through a one-on-one on banking, budget measures to boost the financial sector and his take on the Mauritian economy.
AfricaMoney spoke to Sridhar Nagarajan, CEO, Standard Chartered, Mauritius, in an hour-long interview where our financial expert took us through a one-on-one on banking, budget measures to boost the financial sector and his take on the Mauritian economy. The suave and sophisticated banker had many interesting insights to share on how Mauritius can promote itself to the rest of the world, and how the resilient island economy bounces back against all odds.
Edited excerpts from the interview:
Do you feel Budget 2014 has done enough to boost financial services, considering widespread concerns on lack of economic substance and slowdown in fresh investments into Mauritius in the backdrop of tax treaty issues with India, and lately South Africa?
I will comment on the budget from two perspectives – the short term and the long term.
Over the long term horizon, the budget is certainly positive for the financial services sector that derives a lot from the real sector. If you look at the real sector and how the Budget is boosting economic pillars – port development, ocean economy, aviation hub and so on – we are more than happy with the budget.
However, in the short term, it is a separate matter. We must strike a balance between taxation and growth. Now that the special levy on banks is to be commuted at 10% of chargeable income, the effective tax rate has skyrocketed to 25% for a bank in Segment A business. This type of measure can be a deterrent to growth.
What do you feel is the single most important measure taken by the government under Budget 2014 to bolster financial services?
There is no single measure but rather a two-pronged focus on the extended Africa strategy and boosting air connectivity that has my vote.
To elaborate, the Africa Strategy has worked very well and the Africa Centre of Excellence offers a state-of-the-art brick and mortar presence as well as online presence to gain access to countries across Africa. A very large Japanese corporate has recently used the Africa Centre of Excellence and, with the help of the Board of Investment, has tapped into four governments across Africa. Courtesy these, and other measures, Mauritius is slowly becoming the knowledge center of Africa. Just to understand how the Africa strategy is paying off, in 2013 till date, 50% of flows which have come into Mauritius have been directed to Africa. The government is truly replacing the threat of the uncertainty over the tax treaty with India into an opportunity for Mauritius to become the preferred route for investments into Africa.
The other area where much needs to be done, and which has been finally acknowledged in this Budget, is air connectivity. An increasing percentage of the air load of Air Mauritius is contributed by business travelers coming for board meetings, financial conferences and so on. It is welcome news for us that the finance minister has commissioned a study to find out the economic impact of the cost of an air ticket. It is high time we rationalise air fares and increase flight frequency to boost business travel to Mauritius. We need to get warm bodies inside, and that in itself will create economic value. Singapore is one country that seems to have got the model right, with a consistent, low-cost fare strategy on the understanding that once an individual enters the economy, he may end up doing five times as much business as the cost of the air ticket.
Overall, the financial sector will gain on greater air connectivity and the revamped airport with 24 bays will certainly give a boost to this initiative.
Your views on the in duplume rule introduced by the government to prevent banks from charging interest on interest? Further, lending institutions will not be authorized to charge a penalty on early repayment of debts. Is such as measure fair on banks as it is in line with the customer mandate or does it place financial institutions under a huge strain in case of defaults/ early repayments?
Banks are very prudent in looking at the problem of debt. If you take a normal secured loan, (basically, loans other than credit card transactions which are unsecured and attract about 30% annual interest rate), you would not usually be paying an interest rate in excess of 10%. So, only in exceptional circumstances, if an individual has not paid for almost a decade would the interest be equivalent to the principal amount of the loan. In any case, given stringent International Financial Reporting Standards (IFRS) for financial accounting, a bank stops accruing interest into its profits after three cycles of non-payment of dues. So, if for three payment cycles, an individual does not pay us the interest on the loan, and the portion of principal due, we will in any case stop accumulating it into our profits, while we continue to enter it into the books of the customer. Hence, it is only from a litigation perspective that now, a bank would not be claiming interest at other than the repo rate beyond the point where the accumulated interest equates the principal amount of the loan.
Having covered the bank’s view, I would like to comment on the implications of this rule for individuals. Frankly, with the Mauritius Credit Interest Bureau (MCIB) compiling personal credit ratings, it is an individual’s best interests to avoid a default in the first place. A default would automatically reflect in credit rating and prevent him being eligible for other loans.
Ultimately, in applying the in duplume rule, the island is following in the footsteps of developing economies like South Africa which have successfully applied this principle to crackdown on usurious rates, with emphasis on protecting individual borrowers, especially vulnerable categories.
In a big boost to SMEs, commercial banks have agreed to extend an additional Rs 2 billion to extend the SME financing scheme up to 2016. How important would you say SMEs are to the banking sector and could you suggest other measures the government could consider in partnership with banks to promote their growth?
As mentioned earlier, banks generally partner the government in growth measures for the industry, including SMEs. But, when it comes to other measures to boost their growth, a bank cannot put up projects of its own, but can only support projects started by other businesses. Banks channelize savings of individuals into productive assets for the economy by doing a risk assessment of corporate projects and identifying projects across industries which will give maximum return on the savings of the common man. So, effectively, if the existing risk of a corporate project is high, which is often the case with SMEs, bank will find its hands tied and find itself unable to lend to a small business in Mauritius. As per international norms, a bank cannot have more than 3% of its overall deposits go into the ‘bad or doubtful’ category, and this puts us at risk while lending to small businesses where risk is higher. So, any bank cannot prudently lend more than 25-30% to SMEs.
But, doesn’t the bank lend extensively to SMEs in other countries, India for instance?
Yes, it does. In fact, not only in India but across the world, the bank lends extensively to SMEs. For instance, Standard Chartered Bank lent even more during the financial crisis when there was a need to kick-start the economy and generate jobs. The crucial difference between the island economy and other emerging economies lies in the presence of assembly-line industries, which are virtually absent in Mauritius. Assembly lines, such as for white goods, for instance, need components which are manufactured by small players, the SMEs of the country, and assembled by larger players, the LGs, Samsungs, and the Kelvinators of the world. In the case of Mauritius, the main, traditional industries – tourism, sugar and textiles – do not have much scope for SME involvement. Thus, apart from the risk factor, there is lack of absorption capacity in the existing sectors of Mauritius for banking funds. However, we have reason to believe that with the Budget’s thrust on new economic hubs – petroleum, marine services and aviation – there is a new wave of opportunities for supportive, ancillary players which will emerge from the ranks of the SME space. With a well-developed Freeport, Mauritius already has an enabling environment in place for white goods manufacture (consumer durables such as washing machines, refrigerators, air conditioners and so on). Mauritius can manufacture white goods for Africa, tie up with LG, Samsung and Kelvinator to assemble goods in the island economy. SME businesses will automatically cluster around such manufacturing hubs. Given that the SADC, COMESA offer tax free exports to member countries, this is an opportunity waiting to be seized by the island economy.
The Investment Promotion Act is to be amended to include IPO investment as a qualifying business activity for Permanent Residence in Mauritius; also up for amendment are the Investment Promotion (Real Estate Development Scheme) Regulations to allow GBL1 Companies to purchase residential property in Mauritius under the IRS/RES schemes. What is your opinion on these incentives to GBCs, and, are there any other measures you think could be considered as well?
Mauritius has always been open and this is an additional measure to attract global business companies (GBCs). The island economy, for the first time, seems to have realized that it is competing for investments with other hot destinations such as Singapore, Dubai and London, and is pulling out all stops to attract GBCs. The above measures will ensure that GBCs put down their roots in the economy and anchor their investments here, rather than moving away before doing any substantial business. It is important indeed to put positive rules and regulations in place, to attract global talent.
Also, Mauritius is increasingly taking a hit from a ‘tax haven’ tag while all facts augur against this perception. About 6% of our economy is contributed by global business companies (GBCs), while a classical tax haven would have more than half its GDP arising from GBCs. We must showcase that our island economy is a real economy and attract more businesses into Mauritius. In this regard, international law firms setting up base on the island economy will act as a boost to its image, since these agencies will be the best champions of Mauritius’ cause as a low tax jurisdiction and counter allegations of the island being a tax haven.
Any country that you feel has gotten its global business focus right and can act as a reference point for Mauritius?
Singapore is one country which has got its global business focus right. In Singapore, they are extremely focused on attracting and retaining the right global talent. For instance, if a candidate is identified as a good resource, his occupation permit is fast tracked and extended with a waiver of prohibitive terms and conditions, and high-performing professionals are incentivized to take up permanent residence in the country. Singapore has realized that this talent pool will create GDP growth, and Mauritius must follow in its footsteps. The recognition from the government that we must actively attract rather than passively stay open to global talent and businesses, is extremely important.
With measures such as creation of a Serious Fraud Office and a coordination committee among all agencies combating financial crime, and expanding the definition of “financial crime” to include any offense under its existing laws and acts, do you feel the government has extended sufficient ammunition to banks or more needs to be done?
Our request is slightly different, and is that the financial sector’s regulator should be the first point of contact for us. In other words, if there is any issue, we suggest the Financial Services Commission (FSC) as being the first point of reference instead of financial offences being directly passed to the police.
The creation of a Serious Fraud Office (SFO) is definitely a welcome step, but we must go one step up, and ensure that any financial malfeasance is not passed on to the Serious Fraud Office by default. Instead, it should be first evaluated by the FSC to identify if it is a commonplace civil matter and needs to be passed to a civil court, or indeed a criminal matter worthy of being taken up by the SFO. Also, the FSC is more capable of comprehending a financial transaction, and whether or not fraud is involved in a complaint. Further, they should continue to be a part of the investment even after a matter is passed on to the police.
The Board of Investment (BOI) will set up a joint public-private sector Financial Services Promotion Committee for a campaign to promote Mauritius as an international financial centre, backed by a special fund of Rs 50 million. Your views?
Banks have been asking for a promotional campaign and welcome this move of the BOI wholeheartedly. And, Rs 50 million is a good start. Last year’s budget allocated Rs 130 million towards promotional measures which was largely used for a very successful campaign on CNBC Africa. We must tell the world the success story of Mauritius and focus on the island being a low tax jurisdiction with real sectors such as manufacturing and ICT contributing as much as 17% and 7% respectively to the GDP. I visualize a set of teaser campaigns which will shock and awe the world: Do you know Mauritius is the second highest exporter of textiles to Europe? Do you know the global business sector contributes only 6% to the GDP of Mauritius?
What do you think of the BOI’s role in supporting financial institutions and what more can be done?
While the BOI is doing a great job, we cannot expect it to particularly highlight the banking sector, as it is expected to look at investments across sectors. For the banking sector, a promotional authority of its own is eventually needed, along the lines of the MTPA for the tourism sector. And, considering that the financial sector contributes 10% to the GDP while tourism contributes merely 8%, I think it is high time that concrete steps are taken to conceptualize and set up a promotional authority for this critical pillar of the economy. Only then can we take the financial sector to the next level of sophistication.
Given the Africa strategy is reaping rich dividends, with the government stating that more than 60% on new businesses in the GBC segment are Africa focused, how is the banking sector planning to capitalize on the same?
This is certainly an area of focus for domestic banks as they are all eying Africa. For an international bank like Standard Chartered, we have already established sizeable presence in Africa before we ventured into Mauritius. For instance, SCB covers 32 countries in Africa (around 90% of the Sub-Saharan economy) and is physically present in as many as 16 countries. We also have many firsts in Africa to our credit such as introducing interest rate swaps on the continent and setting up ATMs in Kenya and Uganda. Recently, we opened in Angola and are close to opening in Mozambique. We are actively looking at establishing a presence in Ethiopia and Senegal. Besides, according to a study done by the INSEAD institute in France, SCB contributes 2.6% of Ghana’s GDP and is responsible for generating as much as 1.5% of direct and indirect employment! Our presence in Africa is strong and deep, and we are listed in most African economies that we operate in.
Having said this, we certainly feel that it is Mauritius’ destiny to reclaim its position as the gateway to Africa. So, the Africa strategy is a very important measure for the financial sector in general, and especially in case of SCB, as it completely dovetails with our internal strategy. For SCB, this measure allows us to connect Asia to Africa, and makes the Mauritius franchise an important link between two emerging continents. The trade corridor between China and Africa is worth $198.5 billion and total trade between the two continents is estimated to reach $1.7 trillion in 2030. Imagine the opportunity for Mauritius as a hub port for Africa.
If you could describe the budget in one word, what would it be?
Catalytic. The Budget contains enough measures to act as a catalyst for industry growth, but, it depends on us to implement these measures in our businesses to reap the benefits.
Finally, your thoughts on Mauritius?
Two words – access and creativity – define this resilient island economy.
Take sugar, for instance. Sugar grown here is less than sugar grown in one district in India but where the island had an indisputable advantage was in terms of preferential access to Europe. Now, this brings us to the next leg – creativity. As soon as the access to Europe was taken away, the sugar industry did not shrivel up and die. Instead, it adapted to the new situation, started investing in refineries and catering niche industries like chocolatiers.
Similarly, for financial services, they were earlier catering for investments made in Asia. Now, with the access to Asia ebbing away as tax treaty negotiations drag on between India and Mauritius, creativity has come to its aid, shifting the focus to Africa as an important destination for investments.
To conclude, the island economy has a bright future as it attracts industry with ease of access and sustains them by the innate creativity of its people.