« It is a fallacy to state that a depreciation of the rupee will soothe the crisis »

The CEO of Thomas Cook (Mauritius) talked to us about what’s moving the currency markets. Separately, he said a 3% growth rate remains achievable this year.

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BUSINESSMAG. Since a few weeks we have seen that the rupee is on a downward trend. How would you explain this sudden depreciation of our currency?

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The depreciation or appreciation of any currency is with regard to another one, and since Mauritius has a floating exchange rate regime, our rupee has to be viewed with our main trading currencies which are the USD and the Euro. The Euro has been pummeled of late against the USD and we have reached a low cross currency between Euro and USD, only seen in 2010. It is currently trading at a cross rate of 1.2120.

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The Mauritian rupee has effectively been following the international movements and coupled with our local market forces and factors, we have seen the Euro weakening and the USD strengthening vis-àvis the rupee. The market forces are also subject to policies and soft factors that influence the views on the currency levels and thus trigger actions that directly impact our currency. The stated objective of the Central Bank of building up its reserve has had such an impact.

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BUSINESSMAG. To what extent has the value of the rupee been impacted by this decision of the Bank of Mauritius (BOM)?

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The use of direct interventions in the FX market remains a stabilization instrument in the hands of the central banks. While the BOM has been increasingly reluctant to rely on such interventions since some times until this measure, the market conditions in the Euro zone, the outcry by exporters and the dynamics of our market all made it necessary for the BOM to intervene in that manner.

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« Given the size and nature of our market, we have to be extra cautious in all interventions and use of such terms like ‘depreciation’ or ‘pressure’ should be made with caution. »

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The free falling mode that the Euro zone has been into, and the structural situation that we face of having around 60% of our foreign revenues in Euro and almost the same percentage of our payments in USD, measures had to be taken to secure a proper balance between the Euro and USD and at the same time not creating a situation where speculators can take advantage of any currency asymmetry created by such measures.

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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, hovering around the Rs 31 range. 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.

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BUSINESSMAG. Do you expect further interventions of the Central Bank on the market to put pressure on the rupee?

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I am among those who feel that direct interventions but only exacerbate the volatility in the currency market. However, given the size and nature of our market, we have to be extra cautious in all interventions and use of such terms like ‘depreciation’ or ‘pressure’ should be made with caution. Through interventions, the market picks up some fundamental information about the Central Bank’s future policies.

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I am tempted to mention what is happening in India, a country similar to ours in terms of its revenue and payment currency denominations. India has also been facing such challenges and we have seen that the interventions of the Reserve Bank of India have tried to contain the speedy depreciating of its currency. In Mauritius, we being a net importer, a secluded small island structure, with size-bound commercial activities, we have no alternative but to also intervene in the currency market with the sole objective of the greater economic good of the country.

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BUSINESSMAG. Recently you mentioned a decline in activities on the foreign exchange market. Is that still the case?

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With the global confidence indices being at the lowest, declining private investments, decelerated growth, lack of job creation among others all imply that currency movements too will be affected. And that is what we are facing.

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It is no secret that the global economy is facing lackluster growth perspectives. Mauritius remains no exception, more so being highly linked with the debt-rotten euro countries. The Greece situation already being compared to the ‘Great US Depression’ and Spain having banned short selling of all stocks to mainly stabilize the banking and insurance sectors, we can see that our main market is struggling to resolve its own problems, and these have direct bearing into our business.

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BUSINESSMAG. Although being faced with exchange rate volatility, exporters are not showing a lot of interest for the line of credit offered by the Bank of Mauritius. Why?

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Mauritius has traditionally faced a depreciating rupee and this has created a syndrome of expectancy like ‘more of the same’. The irrational exuberance and the corporate greed of profiteering from an ever depreciating currency have created its own culture, and adepts are not going to become fresh converts of free markets overnight. This frame of mind has set in motion a set of pressures at all levels that can destroy rather than create economic value to the nation. Let me christen it the ‘corporate heroin’.

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However, exporters are not to be blamed in such a scenario where the economic visibility is blurred and where growth is shrinking at breakneck speed. 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 optimization for their operations and the rationalization of finance charges remain a priority for all. Thus, in such a situation, the line of credit will be but used as and when the situation so calls for, but surely not for new ventures at this moment in time.

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BUSINESSMAG. Some people believe that the export sector would be worst off if they take advantage of the line of credit while the rupee maintains its downward trend. Do you share these views?

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The perceptual fear of some has effectively brought about a contagion effect among others in such a thorny economic situation where the confidence is already very low. Exporters can comfortably avail of this line of credit to mitigate their currency risk for their future foreign income inflows by creating a natural hedge. If an exporter earns in Euro, a similar line of credit can be contracted in Euro. This tool already exists among commercial banks and I remain sceptical to their fears.

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Where I do understand their fear for the line of credit is when they have to pay for their raw materials in USD and thereafter face a strengthening USD. Such risks can be easily toned down by the use of other financial tools available in the market.

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BUSINESSMAG. Where do you see the rupee against the euro and the dollar by the end of the year?

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This is a million dollar question that cannot be predicted with any accuracy, even by using the latest simulation systems that we have. However, what we can provide are our own predictions that can be easily distorted by so many factors beyond the control of anyone. My appreciation is that the Euro will continue being weak vis-à-vis the USD, and the Mauritian rupee will probably continue on the path of stability. I foresee a Euro-USD of 1.20.

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« My appreciation is that the Euro will continue being weak vis-à-vis the USD, and the Mauritian rupee will probably continue on the path of stability. I foresee a Euro-USD of 1.20. »

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BUSINESSMAG. What is the situation on the international Forex market?

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The international Forex market is behaving to the whims and caprices of information coming from the major 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 safe havens like the USD and the JPY, but also against all major currencies. It seems that the needy countries for additional financing are surfacing by the ticking of the clock. Spain has declared six more of its regions requiring Government funding and this is not the end of the story.

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In the US, we have also noticed that growth in terms of consumption is not to the expected levels and major indices are extremely volatile from one period to the other. Although a declining claim for jobs demonstrates certain recovery, the economy still remains brittle. The currency market is lingering in the turbulence zone where even the best pilots cannot predict its duration.

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BUSINESSMAG. How could a depreciation of the rupee help the export sector weather the crisis?

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It is a fallacy to state that a depreciation of the rupee will soothe the crisis. It is the stability of the rupee that is required and exporters are not the only stakeholders in the economy. A global stand of stability is required by reducing the volatility, thus ensuring predictability.

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A rupee depreciation will in effect make our exports cheaper and our imports costlier. Such a move will, in the very short-term, mean a higher revenue for exporters and is not sustainable over time. The market forces will react. The crisis is now the new ‘normal’ and we can’t expect depreciating the rupee in such normal scene. We have bigger challenges to surmount and adapt to this new ‘normal’.

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Do we need to infer that the crisis is only hitting the exporters? We have to maintain the social structures and a fast rising price level may have such negative impacts that we may take years in overcoming the shocks. I am referring to such situations where the population is unable to bear the increasing costs of living and their reactions. This is what is bringing about the fall of long established regimes and governments. Mauritius cannot afford to have such social unrests and the consequences are going to be too deep to overcome quickly.

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BUSINESSMAG. There has been an erosion of the growth forecast since the start of the year. Where do you see growth this year?

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Across the globe, growth perspectives are being reviewed southward. We have been able to harbor a decent growth level of around 3% during such times. My appreciation remains that a 3% growth remains achievable and will portray our decent surfing of this transitional time where turbulences and shocks are normal news.

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