But PNG seemed to be a success story

Baeau Tai
Economic uncertainty has accelerated in the Pacific due to political strife in Fiji, Solomon Islands and Tonga.

Fiji became the region's troubled spot last month when the military staged a bloodless coup, Fiji's fourth in 19 years, adding the nation to a long list of countries in the region which faced instability last year (2006).

With unrest in the Solomon Islands and Timor-Leste earlier last year, all these political events though seemingly unrelated, taken together, affect all the major economies in the region.

In the longer term, ongoing political troubles could affect these economies' growth rates and their creditworthiness.

Fiji has already been downgraded by Standard & Poor's Ratings Services (S&P).

In its Pacific Quarterly Report for November 2006, Australia and New Zealand Bank (ANZ) assessed the economic impacts of recent events, and how long they are likely to be felt.

ANZ concluded that economies with rich reserves of energy and base metals like PNG, Solomon Islands and Timor-Leste are in a better position to withstand political uncertainties given the rapid improvements in their budget positions and trade balances.

On the other hand, economies such as Fiji's and Tonga are losing their competitive edge and require more proactive policies to sustain sufficient growth rates.

ANZ's Head of International Economics, Amy Auster gave an insight into ANZ's forecasts for the Pacific and an outlook for PNG in the "global boom years" during a breakfast meeting at the Crowne Plaza Hotel in Port Moresby last month.

Auster said the Fiji coup which has attracted world attention came amid a rapidly deteriorating economic environment. The negative effects of structural changes brought about by a decline in the textile sector and the sugar industry are being exacerbated by a tight monetary policy and strong exchange rate.

"The economy is in a weak position and if the coup continues, there will be a further downgrade in the economy," she said. 

Fiji's foreign exchange reserves declined significantly last year. Tightening measures adopted by the central bank are being countered by expansionary fiscal policies and the trade deficit continues to widen. The budget for 2007 remains in deficit (2% of GDP) although it is narrower than the 2006 estimate of 3.2% of GDP.

Sugar, textiles and garments, fish and gold collectively accounted  close to 70% of Fiji's exports in 2005. The current account deficit for the first half of 2006 widened to US$392 million compared with US$242 million in the first half of 2005. However, net investment (direct, portfolio and other) was positive due largely to large capital inflows in the second quarter of 2006 under "other" investment.

Tonga

In Tonga, the scale of destruction that occurred in November 2006 is expected to have a significant negative impact on the local economy, particularly in the capital of Nuku'alofa. Most of the population can easily subsist in the agricultural sector, but tourism will decline and overall growth would remain very weak.

The government had forecast growth in FY2006/07 (fiscal year beginning July) to come in at a relatively weak 0.9%. However, the damage to the economy from the riots has been significant and the disruption to activity is expected to be ongoing over the next 12 months. Tourism and related services which account for just under 20% of GDP is expected to be hit hard in the short-term. The impact on the agriculture sector, however, is likely to be limited.

"Depending on how long the disruptions will last, we believe the economy could contract by at least 3% in  2006/07. Going forward, to 2007-2008, it is expected that economic growth will be lifted by the reconstruction efforts," ANZ said.

Solomons

In contrast, the Solomon Islands and Timor-Leste appear to have recovered from earlier political uncertainties, for now. Capital inflows and commodity exports are supporting strong economic growth.

From a political perspective, the major risk in the Solomons is the longer-term prospect for RAMSI in the country. Prime Minister Manasseh Sogavare has demanded that the Australian role in RAMSI be minimised. The Pacific Islands Forum has agreed to review RAMSI's structure, although the timeframe for the review has not been articulated.

Nonetheless, with RAMSI responsible for much of the improvement in the business environment in the Solomons, the risk of a change to its structure or its outright removal represents a significant risk to the economic outlook for the Solomon Islands.

Timor-Leste

In Timor-Leste, security remains a critical issue with disturbances still occurring and divisions between ethnic groups in the western and eastern districts persisting.

However, the situation has improved relative to the period of violence in late May. The presence of foreign peacekeeping forces remains essential for the maintenance of law and order especially as the country heads to the polls in April/May.

Samoa

The Central Bank of Samoa has estimated that real GDP growth for Samoa rose 4.6% in 2005/2006, while annual inflation was 3.2% year on year as at the end of the fiscal year  June 2006. On the production side, GDP data showed that the main driver of growth was investment, boosting construction by 9% over the year, with building underway for the South Pacific Games in August, as well as university expansions and the building of the Development Bank of Samoa headquarters.

Vanuatu

Economic growth in Vanuatu is likely to remain above 3% for 2006, supported by continued strength in the tourism sector. In addition, the Millennium Challenge Corporation funding is beginning to flow in, bolstering growth in the construction sector. The first installment of US$1.1 million (of the US$65 million total) is slated for use in developing roading infrastructure, primarily the Efate ring road and the Luganville-Port Olry road.

Foreign investment continues to be directed into key sectors of the economy. According to the Vanuatu Investment Promotion Authority (VIPA), the value of proposed investment peaked in late 2005 with strong inflows boosted by economic development funding. Despite this, UN data suggests that actual FDI inflow fell in 2005-following a trend that occurred across the region. In the first half of 2006, investment growth is reported to have been robust. Statistics from VIPA indicate that well over half of its foreign investment comes from Australia (67%) and New Zealand (10%), with smaller contributions made by Canada (3.3%), China (2.5%), and France (2.9%).

Papua New Guinea

Papua New Guinea has been an economic success story of late under a stable government. But it faces a national election in August (2007). If PNG can move forward with economic reforms through the upcoming political cycle while maintaining a stable government, it may be poised for further credit rating upgrades.

The latest quarterly bulletin from the Bank of Papua New Guinea (BPNG) confirms that the PNG economy remains on a firm path of expansion. The employment index was reported to have risen by 6.9% in the June quarter after rising 7.2% in the first. Growth in the non-mining sector was up 7.8% year on year over the same period, confirming a broad-based expansion of economic activities.

Credit growth to the private sector is still rising at a blistering pace, up 30% year on year in August and 33.5% year on year in September. However, market interest rates have begun drifting up and perhaps have helped to dampen the expansion of the monetary base where growth has slowed from an average of 35% in the first quarter to 27% in September 2006. The reduction of government debt seems to be "crowding in" the private sector.

Despite stronger employment and high levels of credit growth, inflation has been muted. Investment inflows and a trade surplus of Kina 3.8 billion have led to ongoing reserve accumulation; foreign exchange reserves are now above Kina 3 billion (US$1 billion), or more than 6 months of imports.

The government handed down its 2007 budget in November 2006. For 2007, the government is projecting a 4.5% real GDP growth and 1.5% inflation while assuming an average oil price of US$65/bbl. However, the budget foresees a 12% drop in revenue and a 0.2% GDP deficit.