HOW THE GLOBAL FINANCIAL

CRISIS HAS AFFECTED THE SMALL

STATES OF SEYCHELLES &
MAURITIUS

BY
Dr. Gerard Adonis
Seychelles
 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
• 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
 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
 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)

 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

 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

 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.
 Interest Rate
• As part of the economic reform IR was
liberalised
• 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.
 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
• 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
 KEY ECONOMIC
INDICATORS AND
PROJECTION
 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
 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
 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

MAURITIUS
 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
 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
• 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
• 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%)
 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
 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
 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
 Tourism Arrival: Monthly Comparison

120,000

100,000
80,000
No. of Tourists

60,000
40,000

20,000

0
July September November January March
Time

2007-08 2008-09
 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
• 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
 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
 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
 BALANCE OF PAYMENT
DEVELOPMENT
• Overall BoP for 1st quarter of 2009 recorded a
surplus of US$ 5 million
 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