Mauritius wants to lose reputation as a tax haven

There is some encouraging news well off the coast of southeast Africa: The government of Mauritius no longer wants the island to be seen as a tax haven and is trying to rebuild its reputation. Can it succeed?

Capital News Africa: From the Trading Floor – Week 43-2022

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Mauritius is a remote island in the Indian ocean just 65 kilometres long and 45 kilometres wide. The next populated island is about 270 kilometres west of it, namely the French island of La Réunion. And from La Réunion, it is another 1000 kilometres to the south-eastern African island of Madagascar.

Although small and remote, Mauritius has emerged as a textbook example of how an island can develop itself economically through trade. The island has emerged as one of Africa’s leading financial centres, having reached agreements with nearly all of the nations on the continent to avoid dual-taxation and to protect investment. In the past, Mauritius was also popular among international investors due both to low taxes and its, shall we say, investor-friendly regulation.

Two years on the EU’s “grey list” of tax havens

Yet precisely because the island – in the West’s opinion – plays loose with legality, Mauritius’ financial centre has suffered. In February of 2020, the European Commission added Mauritius to its “grey list” of tax havens. Moreover, the international Financial Action Task Force (FATF) placed the island under increased scrutiny due to what it called “strategic deficiencies in the Mauritian financial regulation.”

These decisions prompted nearly all US and European banks to leave the island. Only UK banking giant HSBC remains. Private equity funds, large companies and other western investors have since shunned the island as a base of operations. It seems that western investors will have nothing to do with an island that is seen as a tax haven and as a place for allegedly illegal offshore banking. Fortunately for Mauritius, the FATF ended its scrutiny of the island last January. In the meantime, though, Morocco has successfully positioned its economic capital Casablanca as a new financial centre. Further competition comes from Rwanda, whose government promoting that country’s capital of Kigali as another alternative to Mauritius.

Mauritius seeks to improve its reputation

Amid such challenges, Renganaden Padayachy, Mauritius’ minister for finance, economic planning and development, is trying repair the island’s reputation and to modernise its financial centre. An example: In May, the Stock Exchange of Mauritius (SEM) launched a new automated trading system (ATS), which according to a statement, “includes a rich and robust desktop trading front-end for brokers and a high-end my SEM App for investors.”

But Padayachy’s task will be difficult. Although Mauritius has made progress in the fight against money laundering, the reputational risk related to opening a subsidiary in Mauritius is simply too much to bear for many financial institutions and investors.

Big losses among bank and insurance stocks

Mauritius capital market is suffering from the absence of western investors. On the SEM, financials, hotels, and real estate firms are the dominant stocks. Although the exchange’s main index Semdex has held up rather well since January (-2%), the market has become softer recently.

This is particularly the case where financials are concerned. For example, MCB Group (ISIN: MU0424N00005), the holding company of Mauritius Commercial Bank, is down 1% this month. There is even more trouble at Mauritius Union Assurance (MUA) (ISIN: MU0624N00000), the island’s leading insurer. MUA’s share has lost a bruising 15% in the last six months. The share for investment company Ciel (ISIN: MU0177I00025) is also down 14% for the past few months.

Such weakness is not a good omen for Mauritius, as the financial sector accounts for more than 10% of the island’s gross domestic product (GDP). Despite Padayachy’s best efforts, it may take a long time before western financiers return to Mauritius. Therefore, those who want to invest on SEM-traded stocks will not have an easy time as long as the reputation of Mauritius’ financial centre does not improve.