Islands Business - Cover Story: THE GOOD, THE BAD AND THE UGLY

Economic prospects for the new year

Satish Chand
Happy New Year! If the political unrests of 2006 are past us, then 2007 holds the promise of being a prosperous year for the Pacific.

The above assumes that 2007 remains free of any major disasters, natural or man-made.

Influences from Asia... particularly China, Japan, Taiwan and neighbours, and possibly Indonesia, are likely to continue to increase.

While the Pacific collectively is poised for continued economic expansion, the economic prospects for individual member states differ considerably. Let us start with the good news before moving on to the bad and the ugly.

The international economic environment remains highly favourable for growth of the Pacific.

The New Year could see further improvements in their terms of trade (that is, the price of exports from the region is likely to improve relative to the price of imports), bring in more tourists and foreign aid to the region, increased remittance receipts, and increased income from trust funds invested abroad.

Global Gross Domestic Product (GDP), according to projections provided by the International Monetary Fund, will expand by 4.9 percent in 2007, after having grown by an estimated 5.1 percent in 2006.
GDP for developing Asia is projected to expand by a whopping 8.7 percent in 2007. China and India, the largest economies in Asia, are projected to grow by 10 and 7.3 percent, respectively, in 2007.

The upshot of the above is that pressure on global commodity prices is likely to remain while China is likely to put continued downward pressure on the price of manufactured goods. The net impact of these price changes on the Pacific is likely to be positive since the region is a net exporter of primary products and a net importer of manufactured goods.

The pressure on crude oil prices could dampen these gains, except for PNG.

The Australian, New Zealand, and American economies are projected to grow by 3.6, 2.4, and 3.0 percent, respectively. The impact of the above will be felt within the Pacific islands region in the form of increased tourist arrivals, greater demand for their exports, and larger remittance receipts.

Remittances, moreover, are likely to receive a boost from the newly introduced New Zealand seasonal worker scheme that takes effect from the beginning this year.

The scheme will allow some 5000 workers from Vanuatu, Tonga, Samoa, Tuvalu, and Kiribati (Fiji has been suspended due to the coup) to enter and work in New Zealand.

Aid receipts are also due to rise. A renewed Compact of Free Association between the Micronesian states of FSM, Marshalls, and Palau with the United States will increase the volume of aid and potentially its impact, as well as the new institutional arrangements put in place to improve the effectiveness of these transfers.

Vanuatu will continue to draw down some of the US$66 million that has been allocated to it over the 2006 to 2010 period from the Millennium Challenge Account for improvements to its transportation infrastructure.

Australia and New Zealand will continue to pour aid into Nauru, Solomon Islands, and PNG.

Tourist numbers to the Pacific have the potential to continue to grow. Income growth in Australia and New Zealand and an economic rebound in Japan will likely boost the number of out-bound tourists for the Pacific.

Pacific islands nations with Trust-Fund investments abroad are likely to gain from a buoyant global capital market. Absent any major natural and/or man-made catastrophes for 2007, the Pacific islands economies can expect an international economic environment that is highly conducive to their developmental aspirations.

The domestic picture for the Pacific is murky, however. The Pacific islands region, according to the latest forecasts from the Asian Development Bank, will see an expansion of real (that is, constant price) GDP of 3 percent in 2007. The IMF forecasts real GDP growth for the Solomon Islands of 4.8 percent in 2007; the corresponding figures for Samoa and PNG are 4.5 and 4.0 percent, respectively. These three IMF-member nations are likely to see a rise in per capita income.

Real GDP for Vanuatu is forecast to grow by 2.8 percent but with a population growing at about the same rate, per capita GDP is unlikely to show any change.

Per capita incomes in Fiji, Tonga and Kiribati, the remaining Pacific-members of IMF, are likely to contract, thus poverty is likely to increase in these economies.

For the non-IMF members, per capita income, according to the ADB Outlook for 2007, is likely to increase in the Cook Islands, the Marshalls and Palau; remain stagnant in Tuvalu; and, fall in Federated States of Micronesia.

The bad news is that the recent political turmoils in Fiji and Tonga, unless resolved quickly, risk major economic collapses.

While the recent coup in Fiji will lead to a temporary surge in tourist arrivals in the Cook Islands, Samoa and Vanuatu, the total number of visitors to the region over the longer term will fall should the security scare in Fiji continue.

The 2007 growth forecasts for Fiji and Tonga may have to be revised downwards.

Amongst the ugly news, and thus the more pressing concerns for the region are the falling fish (and timber) stocks and the mounting challenges posed by climate change.

While some have argued that both of the above are 'acts of nature', international opinion is slowly turning to recognise that human actions have had a lot to do with each of the above-mentioned.

It is true that Pacific islanders have contributed minimally to the mounting levels of greenhouse gases in the atmosphere that is slowly cooking the planet, they certainly have had a hand in the rapid decline of regional fish (and forest) stocks.

A number of our economies are experiencing problems funding their national budgets.

Both the Samoan and Tongan treasuries will be stretched in meeting all of their past commitments.

For Samoa, several lumpy upfront payments are already straining its macroeconomic stability (see Dev Nadkarni's piece in the November issue of Islands Business, pages 23 to 25).

Tonga is in a worse position since bulk of the payments agreed-to for the salary hike of public servants last year are due in 2007.

Fiji is in the most precarious position. The dust from the last coup is as yet to settle, but reining in a growing deficit and rapidly dwindling foreign reserves whilst restoring investor confidence is like controlling a bucking wild stallion on a sack as saddle with rusty bits on rotten reins; having grown up on a cattle ranch I have experimented with that and have nearly always come out bruised and second best.

The greatest risk for the Pacific is from continued political and economic turmoil in Fiji, the impacts of which will reverberate throughout the region.

Fiji's size and location, its role as the regional transportation hub and Suva being home to several regional organisations and businesshouses, makes a stable and vibrant Fiji critical to the health of the Pacific.

Papua New Guinea of all the islands nations is the least exposed to this risk, but not immune from it as the Pacific Islands Forum Secretariat is headquartered in Suva.

It is thus in the collective interest of the region that the problems in Fiji are resolved quickly and peacefully early in the New Year.

In sum, the good news is that external conditions remain highly favourable for growth of Pacific Islands economies.

The worry is the worsening fiscal position of some Pacific economies, while of considerable concern is the potential for security and political problems in Fiji, Tonga, Solomon Islands, etc, spinning out of control.

Resolution # 2007: Let's sort out our own mess early and quickly in the New Year so as to realise the promise of a prosperous 2007.