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Pacific recover, but ‘development challenges’ remain: ADB
- Dionisia Tabureguci
Aggregate numbers from the Asian Development Bank may have put a positive spin on economic recovery in the Pacific this year, but any sign of a sustainable move forward is yet to emerge.
Countries in the region, notably the three big economies—Papua New Guinea, East Timor and Fiji—still face a host of challenges that would derail national progress if not dealt with.
In April, the bank released the Asian Development Outlook (ADO) 2010, its flagship annual economic publication that covered 13 Pacific islands economies.
In it, the ADB tagged an average overall growth of 3.7 percent for the Pacific this year; however, it’s a number powered mostly by the economic might of resource-rich Papua New Guinea and Timor Leste.
The general trend across the Pacific, it seems, is a very feeble nudge towards prosperity.
“We’re forecasting a Pacific-wide growth of 3.7 percent this year (compared to 2.3 percent last year) and we expect a five percent growth for 2011,” said Craig Sugden, ADB’s senior economist at its Pacific department in Manila, Philippines.
“That’s for the Pacific region as a whole and it’s very much driven by the two resource-rich countries: Papua New Guinea and Timor Leste. Now if you look at the Pacific islands—which is the Pacific region less Papua New Guinea and Timor Leste—there is also recovery but the growth rates are much lower.
“We estimate the Pacific islands contracted by 1.4 percent last year and this year, we are expecting a small expansion of 0.5 percent, increasing to an expansion of 1.4 percent in 2011.”
The picture that emerged from ADB’s ADO 2010 is that the Pacific’s recovery this year is a marked improvement, albeit slow.
This is recovery when seen against the gradual turnaround of the global economy from the recent financial and economic crisis that hit it.
The region, thought at first to reel in the consequent contraction of major economies, was relatively cushioned. It is also recovery considering that just one economy—Fiji—is expected to contract this year.
Last year, seven Pacific economies, including Fiji, had contracted.
“That’s a substantial improvement,” said Sugden, adding that the recovery is linked to high commodity prices—good for most countries in the region as they are commodity exporters; a rebound in the number of Australian and New Zealand tourists who are suppliers to most Pacific tourist destinations; as well as the fiscal stimulus packages adopted by some countries in the region.
But while it may be an indication that economic recovery for the Pacific is in sight, any rosiness to the picture is purely superficial.
“It must be noted that some developed economies central to the Pacific’s growth remain at risk of faltering,” said Jong-Wha Lee, ADB’s chief economist.
“Governments must remain vigilant in their efforts to help guide the Pacific economies to firmer economic ground.
Managing the fiscal pressures still being felt in the region will be the key to sustaining economic recovery.”
The ADO outlines a number of challenges still being faced by the Pacific’s developed economies, notably PNG and Timor Leste, two countries that have a lot going for them—PNG with its US$15 billion natural gas project soon to get off the ground and Timor Leste with its petroleum production strongly supporting government spending over the years and fuelling economic growth in the medium term.
Despite their wealth-soaked prospects, both countries are grappling with socio-economic issues. “The latest national poverty survey shows that the share of the population living below the poverty line increased to about 50 percent in 2007, from 36 percent in 2001,” ADB’s ADO 2010 said of Timor Leste.
“Most of the population relies on agriculture, but low output, high post harvest losses, and limited alternative sources of income have resulted in rising numbers of poor people in rural areas.
“High population growth rates of over three percent annually, rapid urbanisation, and a small formal sector have resulted in slow rates of job creation in urban areas and have also pushed up poverty rates there.”
PNG is also described as being in the same situation. “Even with eight consecutive years of economic growth, poverty incidence remains high at about 50 percent, much public infrastructure is in poor `condition`, and human development indicators are low; PNG is ranked 148 out of 182 countries in the human development index compiled in 2009 by the United Nations Development Programme,” said the ADO 2010.
The message for both countries is about prudent financial management so that monies flowing in from their resource projects are channelled to effectively benefit the grassroots.
It can be a difficult task to handle as governments of both countries have been accused in the past of financial mismanagement and corruption.
For the other smaller countries in the region, recovery may not be so pegged on oil and gas but they have Vanuatu to look to for inspiration. Vanuatu is the only country apart from PNG and Samoa where private sector credit grew last year, reconfirming a view long held by the ADB that a vibrant private sector is the true driver of an economy regardless of the type of industry it is built on.
“In a seventh consecutive year of growth, the Vanuatu economy expanded by an estimated 3.8 percent in 2009, driven by tourism and construction. However, agriculture and retailing were soft.
“The net effect was that the pace of growth was well below the average of 6.5 percent recorded in the previous five years, driven largely by private sector investment and underpinned by policy reforms that included the opening of the aviation and telecommunications markets,” said the ADB.
Fiji braces for US$150m bond payment
Making a US$150 million bullet payment to retire a mature sovereign bond can be stressful for a tiny island nation.
Especially if it is already struggling to keep its foreign exchange reserves on a manageable level.
For Fiji, having to fork out that much is indeed a big ask, albeit being the only Pacific island nation that has successfully used the international capital markets to raise budget-related finance.
The country has been trying for ages to widen its export commodity base—from one major commodity sugar to several other potential earners in its fisheries and forestry sectors.
Of late, it has taken steps to try to tighten up on leakages in its thriving tourism industry, which its central bank once said is able to retain only F$0.30 cents from every F$1 earned.
Remittances, once a big earner, slowed recently as tough times force Fiji people living abroad to send less money home.
And foreign investments dollars are much more difficult to get, with the global financial markets trying to recover enough to regain investor confidence, which, even in bigger economies, is still struggling.
Against all that, juggling whatever foreign dollars there are to cater for the now higher cost of fuel as well as keeping the balance of payment in check is already a handful for the Reserve Bank of Fiji.
Throw in a bullet payment of US$150 million (around F$300) and it’s a situation the authorities could very well do without.
“I would suggest it was a poor decision made at the time, to supplement declining foreign reserves with offshore borrowing. They could have devalued (the Fiji dollar) in 2006 and achieved some results in 2009,” Fiji’s Finance Permanent Secretary John Prasad told ISLANDS BUSINESS.
“Because raising a bond of that size—US$150 million, which is roughly F$300 million in today’s terms—you will always put pressure on your economy to pay that lump sum,” Prasad added.
The debt is inherited from the ousted Laisenia Qarase government, which had launched Fiji’s visibility in the international financial market in September 2006, via the issuance of a debut five-year sovereign bond.
The issuance was made at a time when domestic liquidity `condition`s were tight and local bond yields were costly for issuers.
It coincided too with an enthusiastic international investment community that showed keen interest in sovereign bonds.
Fiji’s bond issue, according to a Government statement at the time, was almost 10 times oversubscribed and attracted around US$1.4 billion in orders.
The Qarase government only needed US$150 million to fund its projected 2007 national budget deficit, and its bond was finally priced with a coupon of 6.875 percent to yield seven percent, which some considered cheap.
In 2006, five-year government bonds were yielding over five percent in March, April and rising over eight percent in May, according to Reserve Bank data.
While the bond issuance was seen as a sensible move then—as Fiji’s foreign exchange reserves level was at a critical low and the funds raised cushioned further deterioration—the exercise was met with reservations.
Critics questioned how the debt would be settled when it matured come September next year.
There were speculations that the government may have to borrow again from overseas—whether through another bond issuance or from international financial agencies—in order to roll the debt over.
Points were made on the urgency to address what was suspected to be the main reason behind Fiji’s decision to look overseas for deficit financing—the need to reinforce a seriously drained foreign exchange reserves.
“At a time when domestic financial market has excess liquidity and the economy is struggling, one may wonder why it (government) chose to issue bond in the international market,” wrote one academic after government’s announcement of the bond issuance. One reason countries do that is when they want to diversify their debt portfolios. However, Fiji’s debts are sourced domestically and there certainly seems no reason to do so. This leaves only one reason…a desperate attempt to raise our reserves.”
In Fiji’s case, the unprecedented rise in the cost of fuel imports could not be matched by an under–performing export sector, driving up balance of payments and putting pressure on its reserves. Hence, such options as overseas borrowings for deficit financing as well as recalling offshore investments held by Fiji’s financial institutions had to be taken as short term solutions to a foreign exchange substantially eaten away by the high cost of fuel alone, not to mention the higher cost of food imports that Fiji relies on so much.
But as maturity date for the bond draws near, the Fiji government has revealed to Islands Business that there may not be a need to borrow further in order to pay off the bond.
And although it is currently seeking around US$500 million stand-by financing facility from the IMF to reinforce foreign reserves—funds that could very well pay off the debt if the loan is approved—the government still expects to retire the bond with money from its own pockets.
Fiji’s international bond, said Isikeli Voceduadua, director Financial & Asset Management division at Fiji’s Ministry of Finance, is backed by a sinking fund, which the government has slowly built up with surplus funds from government operations.
“We are on track with that (building up the sinking fund). We now have US$54.7 million in the fund and we are about to put in another US$30 million. By September next year, we should be able to build it up to pay off the US$150 million,” Voceduadua said.
Since the bond’s issuance, Fiji’s external debt rose from F$163 million (3.6 percent of GDP) to F$416 million (7.6 percent of GDP) at the end of 2006, considered low and manageable.
Traditionally, the Fiji government is a domestic borrower—mostly from the country’s only workers’ pension fund.
In its 2010 Budget papers, it estimated its total debt stock (excluding contingent liabilities in the form of government guarantees) would stand at F$3.09 billion (51.9 percent of GDP) at the end of last year. Of that, domestic debt is projected to stand at F$2.533 billion while external debt would stand at F$564.4 million.
Fiji’s commitment to its international bond forms a large part of its external debt. — By Dionisia Tabureguci
Bemobile fined for failure to meet launch date target
- Robert Matau
Bemobile has been slapped with a US$1.5 million for failing to stick to its launch target in the Solomon Islands.
Solomon Islands Telecommunication Commission’s Nicholas Williams said from the Solomons that it has taken action against bemobile for its failure to launch a network by the due date in its licence (June).
“Specifically, the Commissioner has taken US$1.5 million from a demand guarantee provided by bemobile to ensure its compliance with the network coverage obligation in its licence.
“The coverage obligation included an initial threshold requiring bemobile to launch a network serving 25% of the population by 18 June 2010.”
The Commissioner has granted bemobile an extension until 30 August to become compliant with its licence.
If bemobile does not meet this new deadline, the Commissioner may take an additional US$$1million from the demand guarantee.
There are further coverage thresholds that bemobile is required to meet.
bemobile was awarded its licence to operate a mobile telecommunications network on 18 December 2009 after the Solomon Islands Government agreed to open the mobile market which exclusively belonged to Our Telekom.
The Commissioner also revealed to ISLANDS BUSINESS that it is expecting to open up the market to another player by April 2011.
Williams said the Telecommunications Act passed last year introduces liberalisation of the sector.
“Initially it allows for a second mobile operator (Bemobile) to offer services from 1 April 2010. It then foresees full sector liberalisation (whereby anyone can enter the market) from 1 April 2011,” he said.
“At this time, given that there is a moratorium until April 2011 on new service providers, we do not know who is planning to enter the market or cannot reveal commercially confidential information on other people’s business plans.”
Williams said the Telecommunications Act gives very limited grounds for refusing a licence, ‘so we would hope to attract and be able to licence a good number of new service providers.’
“An obvious area for market entry is as an internet service provider. We might also expect greater competition on international traffic, both voice and data, plus we may see more targetted and specialist services focussed on outlying rural areas,” he said.
Williams said there was nothing unusual about the economics of the Solomon Islands telecommunications sector.
Digicel Fiji’s chief executive Matt Davey said if the tender process was reopened they would definitely relook at it.
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