Mauritius: Imports costlier as USD rises; export revenues dip as Euro depreciates
It is to be noted that approximately 60% of Mauritius’ foreign revenues are in Euro and almost the same percentage of payments are in USD, causing export revenues to fall as the Euro has depreciated by 10.2% while imports have become costlier as the USD has appreciated by 18.8% on an annual basis. (Image: Currenysymbols.in)
Since the beginning of the year, the Euro has depreciated by 2.8% and by 10.2% on an annual basis against the Mauritian Rupee (MUR), on the other hand the USD has appreciated by 12.9% since the beginning of 2015 and by 18.8% compared to the same period of 2014.
It is to be noted that approximately 60% of Mauritius’ foreign revenues are in Euro and almost the same percentage of payments are in USD. Thus most payments are in dollars and revenues are in Euro.
In effect, the depreciation or appreciation of any currency is with regard to another, and since Mauritius has a floating exchange rate regime, the Mauritian rupee has to be viewed with respect to our main trading currencies, which are the USD and the Euro.
The Mauritian Rupee has effectively been following international currency movements and coupled with local market forces and factors, the Euro has been weakening while the USD has strengthened vis-à-vis the rupee.
The international Forex market is behaving according to the whims of information coming from major economic blocks such as the US and the Euro zone. Euro is treading with a gap in response to all negative events in the zone. It is weakening not only against the USD and the JPY, but also against all major currencies.
On the other side, in the US, growth in consumption is not at expected levels and major indices are extremely volatile from one period to the other. Although declining unemployment demonstrates a certain degree of recovery, the economy still remains vulnerable to external shocks.
The use of direct interventions in the FX market remains a stabilisation instrument in the hands of the central banks. While the Bank of Mauritius (BOM) has been increasingly reluctant to rely on such interventions since sometime now, the market conditions in the Euro zone, the outcry by exporters and the dynamics of the market have all made it necessary for the BOM to intervene in this manner.
This decision of the BOM has certainly helped mitigate the threats of a further weakening Euro and has stabilized the USD to a reasonable level.
By intervening in such a way, the underlying signal sent by the BOM conveyed some information about fundamentals to market participants and therefore altered their expectations in terms of future values of the exchange rate. In this respect, it has indeed impacted the rupee vis-à-vis the USD and the Euro, and has been able to maintain the Euro in particular to an acceptable level.
A rupee depreciation will in effect make exports cheaper and imports costlier. Such a move will, in the very short-term, mean a higher revenue for exporters which is not sustainable over time as market forces will react.
Whilst for tourism operators, the current situation is not favourable, the fate of the Mauritian manufacturing sector, which relies mostly on the European continent for its exports, is also at stake. At a time when the current account deficit of the economy is relatively high, concerted efforts to reduce the deficit might get jeopardised.
The world market is characterised by fierce competition. Hence, an appreciation of the rupee vis-à-vis the euro which increases export prices is leading to a fall in export revenues as is being increasingly mirrored in the latest companies report which shows lower revenue and profits for companies like Air Mauritius and Rogers, among others.
Also, since imports have now become cheaper, import expenditure will rise. The fall in export revenue together with the rise in import expenditure give rise to increase in the deficit of the current account.
Moreover, modern economic growth depends a lot on capital inflows or FDI. If the domestic currency appreciates, it will become difficult for foreigners to buy capital assets in the economy. As a result, investment would fall and would lead to multiple falls in income and employment.
The excess liquidity in the market is a clear demonstration of the lack of appetite for credit, even for operational expansion. Corporate entities are also heavily and rightly focusing on the cost optimisation for their operations and the rationalisation of finance charges remain a priority for all. Thus, in such a situation, the line of credit will be used as and when the situation so calls for — not for new ventures but as a survival tactic.