AXYS Investment Outlook 2025 underscores the importance of balancing caution with strategic initiative 

AXYS has released its annual Investment Outlook report for 2025. This detailed report sheds light on the economic challenges and opportunities that lie ahead, providing investors with strategic guidance to navigate the shifting global and local landscapes effectively.

In November 2024, Mauritius held its highly anticipated general election, resulting in a decisive victory for the “Alliance du Changement.” The party’s overwhelming success signifies a clear and robust mandate from the electorate, signalling widespread support for their proposed reforms and governance agenda. This electoral triumph grants the Alliance du Changement a five-year term to implement the measures they outlined during their campaign, which include ambitious plans for economic reform, social development, and enhanced  governance. With the public’s trust firmly behind them, the party is now poised to usher in a new era, aiming to transform the nation’s economy and set the foundation for long-term prosperity.

GDP & Public Debt

The Mauritian economy remains predominantly service-driven, with the tertiary sector projected to contribute 72.6% to total GVA by the end of 2024, down from 74.3% in 2023. In 2024, Nominal GDP is expected to reach Rs 734M (+10.8% YoY), and Real GDP Rs 564M (+6.5% YoY). Key growth drivers include household consumption and imports of goods. The main contributors to the 6.5% growth in GVA would be “Construction” contributing 3.3%, and sectors like “Accommodation,” “Financial Services,” “Manufacturing,” and “Retail” adding smaller shares.

As of June 2024, Mauritius’ Gross Public Debt reached 74.5% of GDP, surpassing pre-COVID levels. While the majority of the debt is domestic, foreign debt has grown faster over the past five years. Nevertheless, year-on-year, foreign debt increased by +0.4%, whereas domestic debt grew only +0.26%. Despite the high debt ratio, Mauritius remains in a better position compared to many African nations.

Outlook: According to the IMF, the Real GDP is expected to grow by 3.5% in the medium term, which is in line with pre-pandemic growth. The Gross Public debt is expected to drop to 71.1% and 67.7% of the GDP by June 2025 and June 2026 respectively. Domestic debt is forecasted to increase by +12.2% by June 2026. Similarly, foreign debt is estimated to grow by +19.1%.

Government Revenue & Expenditure

In FY24, government revenue and expenditure are estimated to stand at Rs 174.8 Bn and Rs 202.1 Bn. This correlates to a +13.9% YoY growth for expenditure and a +18.4% YoY growth for revenue. For FY25, expenditure is expected to grow by +17.4% to Rs 237 Bn and revenue by 19.3% to Rs 207 Bn. Value Added Tax (VAT) remains the largest contributor to government revenue, consistently accounting for around 34% of total revenue since FY16. VAT was estimated to grow by +17.5% to Rs 56 Bn in FY24 and it is expected to grow further by +16.9% to Rs 65 Bn.

Outlook: The newly elected regime’s promise to reduce excise duty and VAT on fuel prices poses fiscal challenges. Fuel-related taxes form a significant portion of government revenue, and their reduction could lead to a drop in government income. We estimated that for FY25 and FY26, this measure will reduce revenue by Rs 2.2 Bn and Rs 4.3 Bn respectively. However, this policy could positively impact the economy as lower fuel prices would entail a reduced cost of goods and services dependent on transportation. As such, this will exert a deflationary effect on the overall price level of these goods and services, boosting affordability and economic growth. Since FY23, social protection has come to represent more than one-third of total government expenditure, representing 34.7% of the total expenditure in FY24 and is expected to represent 35.8% of total expenditure in FY25. On a YoY basis, expenditure on social protection is expected to grow by +17.4%, +8.3% and +5.2% in FY25, FY26 and FY27 respectively to eventually reach Rs 95 Bn by FY27.

A major driver of this fiscal pressure is Mauritius’ aging population. The increasing number of retirees, along with their longer life expectancies, has led to a significant rise in pension-related expenditures. Specifically, the cost of the Old Age Pension has escalated dramatically since FY16, placing substantial strain on the nation’s budget. Moreover, the increased pension, 14^th-month bonus and free transport electoral promises will further accentuate our fiscal burden. According to our estimations, the 14^th-month bonus will cost the government Rs 2.5 Bn for government employees and Rs 15.7 Bn for the private sector. For FY25 and FY26, we estimated that expenditure on these proposed pensions will cost an additional amount of Rs 8.3 Bn and Rs 11.7 Bn respectively. Finally, for FY25 and FY26, the estimated cost of the free transport scheme will be an additional amount of Rs 3.4 Bn and Rs 6.87 Bn respectively.

With the loss in revenue from the reduction in fuel prices and increased expenditures on these measures, the budget deficit is bound to deteriorate unless the regime introduces higher tax schemes or cuts expenditures on other government functions.

Rupee Depreciation & Key Rate

The Rupee maintained its depreciating trend against the USD after falling by -5.1% on a YTD basis. To emphasize, the local currency depreciated by -32.1% against the USD since 2014.

Outlook: Given the change in the government’s regime and their vow to stabilize the MUR, we expect this depreciating trend to be dampened or even reversed in the next 5 years.

Mauritius Key Rate vs US Key Rate

The lower Key Rate in Mauritius compared to the U.S presents economic challenges:

Exchange Rate Risk: The rate disparity increases pressure on the MUR, risking depreciation against the USD.

Capital Outflows: Higher Fed rates attract capital flows, potentially leading to outflows from Mauritius.

Economic Balancing Act: BoM faces limited flexibility to lower rates further without exacerbating currency risks.

Investment Climate Impact: Key Rate disparities may reduce the attractiveness of Mauritius for foreign investments.

Domestic Constraints: Stimulating local economic activity becomes challenging under these rate dynamics.

Outlook: Following the recent change in government regime and the BoM’s governor, we expect the key rate in Mauritius to either remain at the same level or to increase.

Inflation

YoY headline inflation stood at 7% in 2023. The Consumer Price Index (CPI) increased by 0.3% from 103.4 in September 2024 to 103.7 in October 2024. The main contributors to the change in CPI between September 2024 and October 2024 were the following:

• Interest rates on housing loans (-0.1point)
• Clinic fees (+0.1 point)
• Prepared foods (+0.1 point)
• Other goods & services (+0.2 point)

Headline inflation for the 12 months ending October 2024 worked out to 3.7%, compared to 8.4% for the 12 months ending October 2023.

Due to the import-dependent nature of Mauritius, the depreciating trend of the MUR against the USD led to higher costs for imported goods, hikes that were subsequently passed on to consumers, as such resulting in inflationary spikes.

Moreover, the current weights assigned to expenditure on key items in the CPI basket are not representative of their actual expense weight on households, as such leading to a skewed measure of the actual inflation rate in Mauritius.

Outlook: Unless the depreciating trend of the MUR is reversed or dampened, we expect more inflationary spikes. We expect a revision of the weights in the CPI basket to reflect the real spending patterns of Mauritian households.

Population, Labour Force & Employment

In 2023, the population stood at 1,260,767. According to the projections of Statistics Mauritius, the population is expected to decline to 1,248,176 by 2028, which is a decrease of -1.0%. Likewise, the working-age population is forecasted to decline by -4.0% to 853,751. The population cohort above 60 years old will increase by a staggering 14% and will represent 23.2% of the total population by 2028, compared to 20.1% in 2023.

Employment of Mauritians is estimated at 556,700 in the 2^nd quarter of 2024 compared to 558,600 in the 1^st quarter of 2024 and 553,200 in the 2^nd quarter of 2023. The unemployment rate for the 2^nd quarter of 2024 is estimated at 6.2%, compared to the rate of 6.3% in the 1^st quarter of 2024 and a rate of 6.4% in the second quarter of 2023.

The unemployment rate is also at a multiyear low figure.

Outlook: This demographic shift will lead to higher social security and healthcare costs, thereby intensifying the existing fiscal burden on government expenditure.

Furthermore, the increase in the old-age cohort and decline in our birth rate and fertility rate will continue to deplete our labour force and we might resort to migration to fill in the gap in the labour force in the future.

Banking

Mauritius maintained its investment grade status (Moody’s: Baa3 with stable outlook). With the continued rise in the number of newly licensed Global Business companies, we expect an increase in GBC deposits. YoY, bank loans increased by +10.5%, with households contributing 3.8% to the increase, followed by GBCs (3.4%), and the wholesale & retail sector (1.7%) and manufacturing sector (1.2%).

Despite high household indebtedness, according to BoM’s latest financial stability report, the household sector still has a stable level of indebtedness.

In September 2024, corporate credit experienced remarkable YoY growth, marking the most significant surge since December 2021.

Relating to strong credit quality, the NPL ratios of major Mauritian banks (especially within the local landscape) have reached multi-year lows, with MCBG at 3.1% and SBMH at 6.1% as of the quarter ending September 2024. Both institutions have substantially bolstered their Portfolio Coverage Ratios, surpassing 100%. Additionally, their cost-of-risk has declined to below 1%.

Outlook: MCBG and SBMH are currently trading at price-to-book (P/BV) ratios of 1.07x and 0.38x, respectively, both below their historical averages of 1.28x and 0.7x. Given their attractive valuations, improved credit quality, and robust loan growth, we maintain a bullish outlook on Mauritian banks.

Tourism

Tourism continues to be a cornerstone of the Mauritian economy, with earnings for FY24 reaching Rs 88.7 billion, a significant increase from Rs 61.6 billion in FY19. Between July 2023 and June 2024, Mauritius welcomed 1,311,009 tourists arriving by air, achieving a recovery rate of 97% compared to the pre-pandemic total of 1,351,512 tourists in FY 2018/2019. Notably, arrivals in March and May 2024 surpassed 2019 figures, highlighting a strong rebound in the sector. The robust performance of the tourism industry during this period demonstrates promising progress and indicates that the recovery efforts are yielding positive results. The sector expects tourist arrivals to hit the 1.4M threshold by next year. Europe remains our main tourism market and as a result, the bulk of tourism spending is effectuated in EUR. The Real Spending per Tourist (in EUR) has remained constant over the past 30 years, and it even fell by -6.8% YoY to EUR 114.95. Additionally, government spending on the tourism sector has drastically gone down post-COVID from Rs 810M in FY20 to Rs 387M in FY25. A rise in Minimum Salary, as well as labour constraints within the tourism sector, could drive up the costs of hotel companies and shrink their margins. On average, payroll expenses account for around 30%-35% of total revenue.

Outlook: Despite the expected increase in tourist arrivals for the next FY, we expect the Real Spending per Tourist to remain the same or even decrease. We also expect the government to shift to a more diversified tourism sector that not only includes hotels but also leisure entertainment offerings in a bid to convince tourists to spend more in the country. Finally, as we expect the MUR to appreciate against the USD, this might be a negative factor in the hotels’ financials.