Posted on Raw Fiji News - 14 December 2011
The Pacific Economic Monitor provides an update of recent developments in the region and explores topical policy issues. The ADB publication uses data from Australia, New Zealand, US, and Asia to supplement data from the region and to provide up-to-date assessments and better understanding of the Pacific Island economies.
Fiji
Recent developments
The Government revised its 2011 growth forecast from 2.7% in April to 2.1% in November. This was higher than the 2011 budget forecast of 1.3% and ADB‘s estimate of 1.5%. The recovery in 2011, which followed 2 years of contraction, was driven largely by a post-cyclone rebound in agriculture (mainly taro, pawpaw, and sugarcane production), manufacturing, and increased tourism.
The medium-term outlook is less encouraging. Slower growth in major economic partners is expected to affect exports and tourism, exacerbating structural weaknesses in the domestic economy. ADB‘s growth projection for 2012 is 0.7%, which is closer to the average growth rate over the past 6 years. New construction activity and capital purchases linked to mining investments could boost growth. For example, investment to date for the Namosi Copper Mine has been equal to about 2.2% of GDP, or $86.2 million of a planned total of $1.1 billion. However, this has largely been spent on exploration and feasibility studies, and much of the capital is expected to be imported, so it is unclear how much impact the investment will have on growth in Fiji.
The current account deficit is expected to remain at around 10% of GDP in 2011, driven by the country‘s persistent trade deficit. This is forecast to moderate slightly in 2012 although a rise in consumer spending could lead to more imports and worsen the trade balance. Foreign reserves remain at comfortable levels in 2011, at around $880 million and are sufficient to cover about 5.1 months of imports.
Key issues
The Fiji government‘s stronger fiscal consolidation bodes well for debt reduction, but achieving long-term reductions in the country‘s debt burden rests upon the achievement of revenue and growth targets.
In 2011, the government increased the balance of its offshore sinking fund by 9.0% (to $37.2 million) in order to ensure it is well placed to repay the international bond issue of $250 million maturing in March 2016. However, there is a risk that these funds may be used to finance current expenditure, particularly if revenue targets are not achieved.
The 2012 Budget aims to stimulate economic activity through tax cuts to boost spending, but this objective will not be met if consumer and business confidence does not improve due to lingering political and policy uncertainties.
Structural reforms are critical to improve growth prospects. A recent ADB assessment of private sector development in Fiji identified the following strategies for improvement: creating a stable policy environment, minimizing the role of the state in the economy, and streamlining business regulatory processes.
Standard and Poor’s
There is a special article from Standard and Poor’s embeded within the ADB Report on the sovereign credit rating of Fiji in light of prospects of weaker global growth and financial market volatility in 2012.
S&P warns that despite the lifting of Fiji’s credit quality to B from a B- on August 5 2011 due to a revision in its own methodology and Fiji’s improved external position, Fiji’s reliance on Tourism to spur growth quite apart from domestic inflationary pressures would undermine its credit quality in the new year. Fiji issued a US$250m bond in March to replace the US$150m issue that matured in September.
S&P noted that its “ratings also reflect Fiji‘s challenging political and policy environment, diminished institutional transparency and independence, and decrees that weigh on civilian and media freedoms. Standard & Poor’s expects these to weaken prospects for investment and for donor re-engagement, and thus the nation’s growth prospects.”
The full text of the ADB Pacific Monitor dated 14 December 2011 can be downloaded
here.
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