Samoa’s dream run flashing amber

Dev Nadkarni

Apia, Samoa: sailing into choppy waters? (Pic: Dev Nadkarni)

Through the past four or five years, Samoa’s economy has cruised along comfortably, contributing consistently to the nation’s overall growth and development.

In many of the United Nations agencies’ development indices, the country has hauled itself to the top of the heap of Pacific Islands nations.
Its political stability, efficient implementation of projects and consistent growth has made it the ‘darling’ of aid agencies across the globe.

But after that dream run, the country’s economy is beginning to encounter speed bumps and potholes in the road. The green light has clearly turned amber.
In just the last two months or so, interest rates have gone up by one whole percent, liquidity has dropped from 85 percent to below 15 percent in the last 12 months, both commercial and personal credit have all but dried up, and the country’s foreign exchange reserves have dipped to its lowest in four years.

One bank branch that ISLANDS BUSINESS visited in Apia had posted a sign that said it had stopped lending. Last year, there was a 30 percent increase in private sector credit against a forecast of just 14 percent. Little of that seems to have gone into productive investment, however.

“Most credit has been used up in a consumptive manner, therefore not growing wealth and income,” says one observer.

The evidence for that is on Apia’s roads. There are more glitzy Japanese and Korean cars—most bought on hire-purchase schemes—than ever before.

Earlier this year, a leading car import company sold 40 units in a calendar month—double what it sold in the corresponding month last year.

New car sales have nearly doubled this year. So has the sale of white and brown goods.

James Lowrey... the next 12 to 24 months will be tough. (Pic: Dev Nadkarni)

Says James Lowrey, Westpac Bank’s senior business banking manager in Apia, “The merchandise sector is disproportionate to the size of the economy and that makes Samoa one of the biggest skews in the Pacific.”

Last year has been tough for the government financially. It has had to settle the New Zealand dollar loan pertaining to its troubled Polynesian airline and also having to pay a heavy penalty for the return of a leased Boeing 737 aircraft it used for its international flights.

The bill is said to have been in excess of T$50 million. It also invested heavily in Aggie Grey’s new lagoon resort. Additionally, it had to spend resources in the capitalisation of the new joint venture airline with Virgin/Polynesian Blue. Incidentally, the new airline has performed well, notching up a profit of ST700,000 in just the first nine months.

Last year was also an election year and the government doled out hefty pay increases to staff. “There was an 18 percent increase in government jobs in the election year,” says Papali’i Grant Percival, President of the Samoa Association of Manufacturers and Exporters (SAME).

Other expedient pre-election spending such as the fast-tracking of infrastructure projects also contributed to pressure on the government’s finances.

It has also had to commit resources to the merger of its two biggest educational institutions—the National University of Samoa and the Samoa Polytechnic.

In the near-term, the government’s investments are committed to time-critical projects like sporting and hosting infrastructure for next year’s 13th South Pacific Games (SPG) and the ongoing construction of the Development Bank Building in downtown Apia.

No benefits would be tangible from those investments at least until the next fiscal year. The government’s bill for the Games alone is expected to be close to ST75 million.

“Continued investment in the construction and infrastructure sector after the Games may help alleviate the current squeeze,” says Percival. That may indeed be a possibility.

Two or three mega hotel projects are in the pipeline with major groups like Warwick Hotels and the Fiji-based Y.P. Reddy Group already having identified sites.

Also, Samoa’s Trade Commissioner for New Zealand, Va’atu’itu’i, Apete Meredith, told ISLANDS BUSINESS there were at least two major projects close to finalisation, one in the manufacturing sector, but he would not divulge details.

In the last 18 months, the building and construction sector has gobbled up two-thirds of all credit, with a considerable chunk having gone into imports of materials.

And with hardly any growth in its export sector, the pressure on the country’s foreign exchange resources is growing.

Reserves have fallen from a high of six months worth of imports to about three-and-a-half months worth—lower than the country’s target of four months.

The country’s new finance minister Niko Lee Hang admitted to ISLANDS BUSINESS that the economy did need some quick action, while saying that he had inherited the legacy.

An accountant by profession, he has already introduced belt-tightening measures on government spending. He has put off non-essential purchasing such as vehicles for fleet replacement, curbed overseas travel for ministers and officials, and has put strict controls on vehicular usage by government departments.

Contractors ISLANDS BUSINESS spoke to complained about having to take assistance from commercial banks to service their working capital needs because of delayed payments from the government.

Niko Lee Hang... tightening the belt. (Pic: Dev Nadkarni)

Lee Hang admitted the government’s commitment to large infrastructure investment like the SPG had put pressure on liquidity, delaying payments. The current credit squeeze and increase in interest rates have worsened conditions for these contractors.

The real estate retail market too has been severely affected by the credit drought. “We don’t see how the liquidity situation is going to get any better,” says Lowrey.

“The next 12 to 24 months will see some tough times. Also, any temporary easing in the liquidity situation will see funds committed to public sector projects given the government’s ongoing time-bound commitments, rather than projects in the private sector.’

As in previous years, remittances continue to be the largest single revenue earner for the economy.

As well as his penny-saved-is-penny-earned approach, Lee Hang is looking at the bigger picture.

He pushed through an increase in the country’s VAGST (value added general sales tax) from 12.5 percent to 15 percent, effectively taxing Samoans new found love for consumption that is driven by remittances to quite an extent—something that cannot be taxed directly.

In that sense, the VAGST increase has been a smart move. “I would have liked it to be more like 18 percent,” says Lee Hang.

With private remittances expected to touch ST300 million this year, the additional 2.5 percent on VAGST will go some way in shoring up government’s resources, assuming that much of the ST300 million is pumped into the open economy.

That may be too optimistic if one is to go by a United Nations Development Programme (UNDP) report published earlier this year.
It reveals that Samoans contribute a whopping one million tala each week to the churches—that is every year ST52 million from those remittances go into a single sector that does not necessarily produce tangible benefits to the economy.

Though the increase in VAGST seems to have been quietly accepted by the public with almost no outcry, there are a few tax incentives coming their way as well.
January 2007 will see company taxes reduced from 29 to 27 percent. Personal taxes are also being lowered in a bid to encourage investments and savings. The banks have already announced interest rates of 9 to 10 percent on 12-month deposits. But deposits have been slow in coming.

The Central Bank has also been encouraging Samoan banks to enter the foreign currency markets.

But through all this, inflation is still low at 3.2 percent—down from 16-odd percent in December 2004—largely due to the Samoan tala having stood up well to the region’s bigger currencies like the Australian and New Zealand dollar.

“Management of the currencies has been good and has strengthened over time—a strong currency helps keep inflation low,” says Amy Auster, ANZ Bank’s chief economist speaking with ISLANDS BUSINESS on phone from Sydney.

This has made imports cheaper and making the sector grow. But exports have not kept pace, ever widening the gap.

Auster suggests a slight and gradual devaluation to bring the economy on an even keel. That may be too drastic a measure at this stage, and in any case as far as politics goes, devaluation is a dirty word and seen as only the very last resort.  

While it goes about implementing its quick-fix measures, Samoa will have to pro-actively address the bigger issues: a languishing export sector, land issues for overseas investors (the much-touted breakthrough strata-title legislation is still under cabinet consideration after several years, effectively standing in the way of overseas investment in small to medium hospitality projects that could do wonders for local economies), a severely under-employed workforce (estimated to be 70 percent of the total workforce), and low wages (two-thirds of the 22,000 in full-time employment earn less than ST10,000 to ST12,000 annually).

A significantly large part of Samoa’s workforce is engaged in two factories: an automotive harness component manufacturer and a fish cannery in American Samoa.

While the global automobile industry is not in the best shape, there has been some anxiety about the cannery that has to do with matters between American Samoa and the American mainland.

This is as good a time for the country to reassess its options and chart out new strategies. This may also be an easier time than before to push through otherwise tough reforms because of the almost complete absence of an Opposition Party (see page 26 for story.)

What will the amber light turn to: red or green? The run-up to next year’s Pacific Games will undoubtedly provide the answer.