Pacific

Economic

Management

T.A.

Macroeconomic Trends in the Pacific Region --

Implications for Budgeting and Financing

Pacific Economic Management Technical Assistance (PEMTA)

November 2011

Pacific

Economic

Management

T.A.

Outline• Key international and regional

developments• Fiscal & debt trends in the Pacific

Region• Monetary trends in the Pacific Region• Growth and inflation outlook• Conclusions

Pacific

Economic

Management

T.A.

International developments• Global economic activity has deteriorated considerably. World

economy is now expected to grow about 4% in 2011-12, downgraded from an earlier forecast of 4.5%.

• US, EU, and Australian growth forecasts have been lowered; with US and EU declines driving the global decline

growth (%, annual)

DMC=developing member country, e=estimate, p=projectionSources: IMF. 2011. World Economic Outlook (Sept). ADB. 2011. Asian Development Outlook 2011 Update

Pacific

Economic

Management

T.A.

International developments• Major stock market indices have exhibited greater

volatility• European debt concerns persist• US & NZL credit ratings have been downgraded• Unemployment in major economies remains high

Unemployment in key economies (% of labor force)

AUS=Australia, NZL=New Zealand, US=United States Sources: Australian Bureau of Statistics (ABS), Statistics New Zealand, and US Bureau of Labor Statistics.

Pacific

Economic

Management

T.A.

Key regional developments High volatility in value of key imports and exports

Nonfuel exports to the Pacific (value; y-o-y % change, 3-month m.a.)

Sources: ABS and Statistics New Zealand.

Singapore fuel exports to the Pacific (value; y-o-y % change, 3-month m.a.)

Source: International Enterprise Singapore.

Mar10

Apr May

Jun Jul Aug

Sep

Oct Nov

Dec

Jan Feb

Mar11

Apr May

Jun Jul Aug

Sep

-60

0

60

120

Diesel Gasoline

Pacific

Economic

Management

T.A.

Key regional developments High volatility in value of key imports and exports

Commodity prices(Index Jan2007=100 based on nominal prices)

Source: IMF, International Financial Statistics database

Continued growth in tourism to the PacificTourism departures to selected Pacific countries (‘000; January–August totals)

Sources: ABS and Tourism Strategy Group, New Zealand Ministry of Economic Development.

Jan07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep07

Oct07

Nov

Dec

Jan08

Feb

Mar08

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan09

Feb

Mar09

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan10

Feb10

Mar10

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan11

Feb11

Mar11

Apr

May

June

July

August

September

50

150

250

350Crude oil Coconut oil

Logs Food index

Pacific

Economic

Management

T.A.

Pacific Island economies remain vulnerable to external conditions• Volatility in key factors contributing to current

account deficits:• Lower export revenues• Remittances have fallen from ‘07 highs• Slow growth in tourism receipts

• Declining terms of trade?• Exchange rate changes in the economies of key

trading partners

Pacific

Economic

Management

T.A.

External balance Current account (% of GDP)

Source: IMF, World Economic Outlook and Article IV reports

Pacific

Economic

Management

T.A.

Outline• Key International and regional

developments• Fiscal & debt trends in the Pacific

Region• Monetary trends in the Pacific Region• Growth and inflation outlook• Conclusion

Pacific

Economic

Management

T.A.

Fiscal TrendsGovernment revenue (in million local currency units)

2007 2008 2009 2010 2011p 2012p

Cook Islands 109.8 123.9 115.3 130.3 101.8 --Fiji 1,391.3 1,454.9 1,522.4 1,486.5 1,673.6 --Kiribati 91.3 101.5 93.1 88.6 84.1 --Marshall Islands 108.2 107.1 104.9 -- -- --Micronesia, Fed. States of 145.2 149.6 152.1 163.8 -- --Nauru 24.2 35.5 56.2 57.8 44.7 65.2 Palau 89.4 85.7 88.9 89.0 --- --Papua New Guinea 6,287.0 6,038.7 5,219.3 6,890.6 7,742.0 --Samoa 486.8 454.9 492.1 621.7 596.2 --Solomon Islands 1,213.4 1,550.8 1,704.9 2,257.3 -- --Timor-Leste 1,474.1 2,537.4 2,150.5 2,367.7 2,593.0 2,633.0 Tonga 171.0 171.0 225.7 192.1 181.9 206.7 Tuvalu 34.2 30.3 31.3 24.9 23.8 23.9 Vanuatu 12,032.8 16,631.5 16,906.2 16,873.4 17,424.3 21,191.7 p=projected-- = not availableSource: ADO 2011 Update database

Pacific

Economic

Management

T.A.

Government expenditure (in million local currency units)

2007 2008 2009 2010 2011p 2012p

Cook Islands 104.8 121.1 143.6 102.7 101.2 107.4 Fiji 1,709.0 1,426.8 1,715.2 1,706.6 1,841.0 --Kiribati 85.8 98.7 90.3 87.5 88.5 --Marshall Islands 107.8 101.3 107.7 -- -- --Micronesia, Fed. States of 151.6 154.2 157.6 162.9 -- --Nauru 22.9 35.4 56.0 57.8 44.3 66.1 Palau 101.7 92.3 95.0 94.3 -- --Papua New Guinea 6,552.4 7,551.8 6,706.9 7,591.2 9,328.2 --Samoa 478.4 481.8 551.1 818.5 746.9 --Solomon Islands 1,193.7 1,552.0 1,701.0 1,871.9 -- --Timor-Leste 408.6 737.1 825.3 1,094.7 1,460.0 1,393.1 Tonga 163.5 161.4 220.6 230.1 238.0 232.1 Tuvalu 40.6 30.3 31.4 35.8 30.2 31.0 Vanuatu 12,485.0 16,765.3 17,376.9 19,815.8 17,954.8 20,734.5 p=projected-- = not availableSource: ADO 2011 Update database

Fiscal Trends

Pacific

Economic

Management

T.A.

Fiscal trendsFiscal balance (% of GDP)

Pacific

Economic

Management

T.A.

Fiscal policy guidelines Fiscal deficits have been used by some Pacific

countries to compensate for a perceived lack of private investment and dissatisfaction with rates of growthLeading to accumulation of debt

Sustainability of this course of action? Think Greece…

Fiscal stimulus should be reserved for Keynesian responses to economic downturns

Need to recognize structural sources of low growth and address these…

Pacific

Economic

Management

T.A.

Debt levels & risk of debt distress• Total debt is high in the region, but so is debt globally

• 59% Total Debt to GDP Ratio globally (CIA estimates)• High debt is a significant policy concern because it:

• restricts fiscal space and ability to engage in fiscal stimulus

• has implications for future resources constraints • Policies to address debt are affected by monetary policy

goals, share of external to total debt, and policy actions can strongly affect future debt & investment

• For example, Fiji has low external debt but central government net debt is estimated at more than 50% of GDP in 2010. Nauru moving in a similar direction as it resolves its outstanding external debt.

Pacific

Economic

Management

T.A.

IndebtednessExternal debt (% of GDP)

Pacific

Economic

Management

T.A.

Total Debt to GDP

From: IMF Staff Report for the 2010 Article IV Consultation

Pacific

Economic

Management

T.A.

Outline• Key international and regional

developments• Fiscal & debt trends in the Pacific Region• Monetary trends in the Pacific Region• Growth and inflation outlook• Conclusions

Pacific

Economic

Management

T.A.

Monetary TrendsLow growth and high foreign reserves have led to

accommodative monetary policies to support growth (e.g. Fiji, Tonga, Samoa)

Concern over inflation has led some central banks to raise rates (e.g. PNG)

Recent exchange rate movements have adversely affected overseas investment

Capital market developments have affected valuations of trust funds in the Pacific

Pacific

Economic

Management

T.A.

Outline• Key international and regional

developments• Fiscal & debt trends in the Pacific Region• Monetary trends in the Pacific Region• Growth and inflation outlook• Conclusion

Pacific

Economic

Management

T.A.

Prospects for GDP growth

•Pacific region: 6.4% in 2011; 5.5% in 2012•Pacific islands (excl. PNG and Timor-Leste): around 2%

0 2 4 6 8 10 12

Tuvalu

Tonga

Kiribati

Marshall Islands

Cook Islands

Fiji

FSM

Palau

Samoa

Vanuatu

Nauru

Solomon Islands

Papua New Guinea

Timor-Leste

Change in real GDP (%)

-3

0

3

6

9

2007 08 09 10e 11p 12p

Pacific regionPacific islands

2011

2012

Source: ADB estimates.

Pacific

Economic

Management

T.A.

Inflation outlook

•Pacific region: 8.4% in 2011; 5.9% in 2012•Pacific islands: 6.4% in 2011; 3.4% in 2012

0 2 4 6 8 10 12

Tuvalu

Nauru

Tonga

Cook Islands

Samoa

Solomon Islands

Marshall Islands

Vanuatu

FSM

Palau

Kiribati

Fiji

Timor-Leste

Papua New Guinea

Change in consumer price index (%, annual average)

0

4

8

12

2007 08 09 10e 11p 12p

Pacific regionPacific islands

2011 2012

Source: ADB estimates.

Pacific

Economic

Management

T.A.

Outline• Key International and regional

developments• Fiscal & debt trends in the Pacific Region• Monetary trends in the Pacific Region• Growth and inflation outlook• Conclusions

Pacific

Economic

Management

T.A.

Conclusions• The Region remains vulnerable to an

uncertain and challenging global economic environment.

• Debt has risen as countries have attempted to stimulate growth. This has restricted the fiscal space for Keynesian stimulation.

• There is a need to expand the fiscal space so that the Government has the ability to act in the case of adverse external shocks.

Pacific

Economic

Management

T.A.

Conclusions (continued)

• Urgent need to focus on fiscal and structural adjustment to generate resources for development

• Medium-term budgeting framework provides an effective tool for resource allocation and prioritization

• Generating the political will is essential• Importance of an open policy making process

in which public views are solicited

Pacific

Economic

Management

T.A.

VinakaFor more information:

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