In an interview to Business Magazine, Mike Rees, Group Executive Director and CEO Wholesale Banking at Standard Chartered Bank, talked about the possible outcomes of the euro zone crisis and the challenges for Mauritius. He is convinced the country can play a central role as a bridge between Asia and Africa.

If you had to make a review of 2011 what would you say?

I think we need to go back to 2008/2009. In 2008, the world was on the verge of a major economic and financial catastrophe. The policy makers and the politicians around the world did not do the job. It was the financial stimulus packages that were put in place in late 2008 and in 2009 that actually did the job. So from 2009 to 2010 we saw the global economy growing. From where we stood in 2008, the policy response was a good one.

The challenge that we have is since 2010 the global economy has been slow. In the second half of 2010 into 2011 and certainly into the first half of 2012 we will see the global economy continue to slow. That is because what we were given was an artificial stimulus. It was a financial stimulus aimed to get economic activity going but since then global demand has not been able to pick up.

What we are seeing today with the challenges of the world is that the demand side is still a problem. Global demand is still a problem and it is slowing.

Why is it slowing?

Well, in Asia very successful financial stimulus package has nurtured inflationary pressures. In the last 10 to 15 months, local authorities have been dealing with these inflationary pressures. While containing inflationary pressures, they have been putting constraints on growth and on consumer growth. It was absolutely the right thing to do.   

Apart from India, those policy measures in slowing inflation particularly China has been successful. The slowing inflation has come at the expense of slowing economic growth.

In the west particularly in Europe, austerity measures to deal with the sovereign debt problem and fiscal deficits clearly had an impact. Similarly, in the US, the overheads of the housing market are continuing to depress consumer demand. So it is not a surprise that the global economy has slowed.

The good news is that as it slowed in Asia there has been another policy response and because they have got inflation under control they are able to loosen policy again now in order to stimulate the economy again. You have seen that happen in China, Philippines, Indonesia and Singapore where policy response has been positive. However, they are dealing with a momentum which is downward so these policy responses will take time to come into effect.

In our view, the GDP growth in Asia was around 9.1% in 2010. We think it probably slowed to 7.3% in 2011. We think that is going to slow again to 6.5% in 2012 before recovering in 2013 to 7.5%.

The US had a very strong second half generating growth of about 2%. However, I think the problem is a lot of that is due to financial stimulus and tax packages. It is not sustained yet as evidenced by consumer demand. We are not seeing investment which is actually creating jobs. Last week, we had a more positive unemployment figure. But to be honest, it was the first sign of any change in that for over a year or two years.

Coming to Europe, undoubtedly the austerity packages are having and will continue to have an effect. In UK, for example, unemployment is a real issue. Of course the big issue is about the euro zone.

What could be the outcomes of the euro zone crisis?

In our view, there could be four potential outcomes. One is to muddle through which we do not think is a sustainable strategy. It will not inspire confidence and it will continue to keep the pressure and uncertainty around European economies. The second strategy which we think is unlikely is a breakaway of strong countries like Germany and France and leaving the Euro Land with weaker countries in it.

The third strategy which we actually believe is the right strategy is to create a mechanism for the weak to leave the euro because we think at the moment the euro is a currency which is fundamentally sound but it lacks two fundamental building blocks. One is fiscal discipline. To be a member of this club, you need to have fiscal discipline. If you remember when the euro was put together the pact talked about a maximum fiscal deficit of 3% of GDP. It was the right idea but during the first years of the Euro, all the countries including France and Germany broke those rules. They need to be established again.

The second issue is that they mixed too many countries into it that clearly were not sustainable in the Euro structure. There need to be a mechanism for those weak countries to leave the Euro again. If that happens and if we get fiscal discipline and the exit of Greece, there will be a substantial resurgence of confidence in the Euro. However, that’s quite a complex issue because it means the Greek banks will basically be bankrupt. We will see nationalisation of banks and exchange control being put in place. It should not be taken easily. However, it has been done in the past. Argentina is an example.

Against that background Europe is going to struggle in terms of economic growth in 2012. We see overall for the euro zone a negative growth of around 1 to 1.5% for the year with a particularly bad situation in the first half.

What are the main lessons that should be learned from the past years?

I think the lessons from the last year or the lesson from 2009 is that fundamentals matter. Getting fundamentals right matters. Managing an economy in a responsible way matters in the long term. So managing fiscal deficits, current account deficits and managing sustainable economic growth actually matters. If you look at what the Asian economies have been able to do from 2008 up to now and now onwards is by getting the fundamentals right they have been able to create sustainable economic growth.

What would an explosion of the euro zone mean for Mauritius?

I think the challenge for Mauritius is twofold. Over the next 12 to 18 months, we are going to see a big political change in the world. In Asia alone there are 36 changes of leadership and elections coming up in 2012. From the Chinese leadership change to elections in Korea to elections in Indonesia, in Thailand and probably elections in Japan, the other thing to bear in mind is the huge political agenda coming against the very weak economic outlook and the challenges of unemployment.

India’s economy is undoubtedly suffering from a lack of political leadership. And that has manifested itself into a number of things namely a lot of issues around corruption and a lack of inward investment at a time when inflation is a problem because of food. The challenge in India is more of a political leadership than economic fundamentals. For the rest of the world also political challenges remain an issue.

The challenge for Mauritius is a very substantial part of its economy is dependent onto areas which are faced with political challenges. How does Mauritius anticipate and built a better diversified economy recognising some of the trends of the world? Africa will continue to sustain strong economic growth because of demand for resources and energy.

This is a great opportunity for Mauritius. When you think about Mauritius and its history one of the things that is coming through is that lessons of history tend to come back. Going back to the 18th and 19th century at the days of the spice route, Mauritius was a very important geopolitical point. I think that will re-emerge because Mauritius is important to the Indians and to Asia at large and more specifically to the Chinese.

I know there is a lot of an issue around the tax treaty between India and Mauritius. I questioned whether India would do anything about the double taxation avoidance treaty given the importance of Mauritius as a gateway to Africa.

By Jean Paul Arouff

Business Magazine

Jean Paul Arouff