Pacific Economic Outlook Ananya Basu Principal Economist Pacific Department Asian Development Outlook 2019 Pacific Roadshow Sydney / Canberra / Auckland / Port Moresby April 2019
Key messages • Disasters delayed economic recovery in the Pacific, with growth instead slowing further to an average of just 0.9% in 2018 • Earthquake in Papua New Guinea • Cyclone Gita in Tonga • Tropical Depression Jelawat in Pohnpei, Federated States of Micronesia • Cyclone Hola, and volcanic eruption in Ambae Island, in Vanuatu • Near-term outlook is for a strong rebound to growth of 3.5% in 2019 , with enough momentum to sustain a further 3.2% expansion in 2020 • Pacific economies progressing with reforms and other measures to reduce vulnerabilities, promote fiscal and economic sustainability
External economic environment • International fuel prices set to fall from last year’s sharper -than- expected increase • Global food prices projected to be mostly stable • World tourism growth to proceed at a brisk pace, continuing strong growth from previous 2 years • Uncertainties in outlook for major partners: • Australia and New Zealand: steady growth, but possible risks from ongoing slowdown in the PRC economy • US: growth slowing as stimulus from 2018 tax breaks fade, potential adverse impacts if trade conflict escalates
A cautious recovery ahead % p.a. GDP growth 15 Papua New Guinea 12 Disasters and declines in key sectors led to easing growth since 2014… 9 Pacific … but, the downturn appears to have 6 bottomed out, and near-term growth is seen to exceed 2016 – 2018 performance 3 Pacific excl. PNG 0 2014 2015 2016 2017 2018 2019 2020 Sources: Asian Development Outlook and Pacific Economic Monitor Forecasts databases.
Growth divides re-emerging? % p.a. GDP growth Larger more resource-rich economies 12 expected to grow at almost double the rate for the smallest islands 9 6 Larger economies 3 South Pacific North Pacific Small islands 0 Forecasts -3 2014 2015 2016 2017 2018 2019 2020 Larger economies = FIJ, PNG, SOL, TIM, VAN; North Pacific = RMI, FSM, PAL South Pacific = COO, SAM, TON; Small islands = KIR, NAU, TUV Sources: Asian Development Outlook and Pacific Economic Monitor databases.
Papua New Guinea: Reforms to assist economic recovery • Growth slowed to 0.2% in 2018 due to impacts of February earthquake • LNG output fell by 9% • Disrupted production in Porgera mine • Positive developments in other mines, incl. small-scale alluvial mines • Hosting of 2018 APEC summit helped keep growth positive • Coffee and logging exports also performed well
Papua New Guinea: Reforms to assist economic recovery • Growth to rebound to 3.7% in 2019 and 3.1% in 2020 • LNG and gold to return to full production • Further major resource extraction projects in pipeline • Fiscal reforms succeeding in raising revenues • But, more progress needed in controlling expenditure • Phasing out distortions in foreign exchange market key to boosting private investment
Fiji: Sustaining tourism-led growth • Growth maintained at 3.0% in 2018, with broad-based contributions • Visitor arrivals up by 3.3%; tourism earnings at 20% of GDP • Increased sugarcane, timber, food processing output • Strong construction activity • Despite frequent disasters, uninterrupted growth since 2010 • However, fiscal deficit increased to 5.3% of GDP — more than double from previous year • Public debt increased to 50% of GDP
Fiji: Sustaining tourism-led growth • Growth to accelerate to 3.2% in 2019 and 3.5% in 2020 • Construction fueled by bank lending for real estate, infrastructure projects • Strong tourism seen to continue • 5.5% annual average increase in arrivals from 2010 to 2018 • Rising arrivals from Asia with expanding flight services • Sustainable tourism paramount • Stronger environmental management • Investment planning and promotion
Timor-Leste: Moving past political gridlock? • A second consecutive year of contraction in the non-oil economy • Decline of almost 6% through 2017 – 2018, after decade of sustained growth • Total government expenditures fell by 3% in 2018 (adding to 26% decline in 2017) • Lower recurrent spending, but capital outlays recovered • Better enabling environment in 2019? • Improved political situation with 2019 Budget approved in February • Progress in Greater Sunrise development, Tibar Bay port project
Timor-Leste: Moving past political gridlock? • 2019 State Budget • Strong fiscal stimulus, full implementation will result in 22% increase in public spending • Significant increases for education and health programs • Infra spending mostly on roads and bridges, Tasi Mane project • But, excess withdrawals to erode Petroleum Fund to $15.1 billion by 2020 (from $16.9 billion in 2016) • Sustainable forestry development of could contribute to medium-term growth and job creation
Solomon Islands: Toward a sustainable reinvigoration of growth • Further slowdown in growth to 3.0% in 2018 • Reduced fiscal stimulus, particularly capital projects • Lower exports of most crops, e.g., copra and coconut oil • However, logging and mineral exports continued to rise • Growth seen to continue to fade in near-term • El Nino impacts on crops and fisheries • Construction of large infrastructure projects to support modest growth
Solomon Islands: Toward a sustainable reinvigoration of growth • Forestry Sustainability Policy 2018 • Export caps to reduce log production to sustainable rate • Expected to result in reductions in government revenues (e.g., logging export duties to fall by 16% in 2019) • Ongoing tax reform measures showing progress • First phase focused on tax administration • Next phase to lower marginal income tax rates to expand tax base and encourage compliance
Vanuatu: Inclusive growth through tourism linkages • Growth eased to 3.2% in 2018 as agriculture suffered from disaster impacts • Cyclone Hola and volcanic eruption in Ambae Island • Strong construction activity on major transport projects • Wharves in Port Vila and Luganville, airports, roads • Robust tourism performance • Visitor arrivals up 7.8% to historic high of 358,000 • Travel and tourism contributed about 45% of GDP
Vanuatu: Inclusive growth through tourism linkages • Although GDP growth is seen to ease in the near-term, tourism is expected to remain strong • Completion of tourism-related infrastructure projects • Prospects for increasing flight connections and frequency • Tourism-led growth can be made more inclusive by: • Strengthening linkages with local suppliers and communities • TVET programs focusing on hospitality and transport sectors
North Pacific: Managing economic volatility • Flooding and landslides slowed growth in the FSM , but capital investment to support better near-term performance • Growth easing in the RMI due to project implementation capacity constraints • Tourism downturn persisted in Palau , but economic recovery underway • Highly volatile economic performance, even relative to Pacific peers, calls for: • Fiscal buffers or trust funds to smoothen government spending • Stronger public investment planning and implementation
South Pacific: Ensuring sustainable growth in tourism • Strong growth in the Cook Islands underpinned by robust tourism performance and infra projects • Impact of Cyclone Gita slowed growth in Tonga , but reconstruction to boost near-term prospects • Growth also eased in Samoa with the closure of a large manufacturing firm; buoyant tourism to support acceleration • Safeguarding the environment — and infrastructure development to encourage industry diversification — keys to sustainable tourism-led growth
Small islands: Reforming state-owned enterprises • Infrastructure development driving steady expansion in Kiribati and strong growth in Tuvalu • Economic stagnation in Nauru amid scaling down of RPC • SOEs provide essential services, particularly for remote communities, but operating costs tend to be high • Need to recalibrate utility tariffs to reflect cost recovery • Targeted community service obligations • Strengthen SOE governance
Thank You
Summary: Growth performance and outlook GDP growth (% change) 2014 2015 2016 2017 2018e 2019p 2020p Pacific 9.6 8.0 2.5 2.4 0.9 3.5 3.2 Cook Islands 3.2 4.5 6.0 6.8 7.0 6.0 4.5 Fiji 5.6 3.8 0.7 3.0 3.0 3.2 3.5 Kiribati -0.7 10.4 5.1 0.3 2.3 2.3 2.3 Marshall Islands, Rep. of -0.7 -0.6 1.8 3.6 2.5 2.3 2.2 Micronesia, Fed. States of -2.2 5.0 0.7 2.4 2.0 2.7 2.5 Nauru 36.5 2.8 10.4 4.0 -2.4 -1.0 0.1 Palau, Rep. of 3.1 10.4 0.5 -3.7 0.5 3.0 3.0 Papua New Guinea 12.5 10.5 2.0 3.0 0.2 3.7 3.1 Samoa 1.2 1.7 7.2 2.7 0.9 2.0 3.0 Solomon Islands 1.8 2.6 3.4 3.2 3.0 2.4 2.3 Timor-Leste, Dem. Rep. of 4.1 4.0 5.3 -5.4 -0.5 4.8 5.4 Tonga 2.1 3.7 3.1 2.8 0.4 2.1 1.9 Tuvalu 2.2 9.1 3.0 3.2 4.3 4.1 4.4 Vanuatu 2.3 0.2 3.5 4.4 3.2 3.0 2.8 FIJ, PNG, SOL, TIM, VAN 10.4 8.5 2.2 2.3 0.7 3.7 3.3 North Pacific -0.3 4.9 1.0 0.9 1.7 2.7 2.6 South Pacific 1.9 2.8 5.8 3.5 1.9 2.8 3.0 Small islands 10.7 8.4 6.3 1.6 1.3 1.6 1.9 e = estimate, p = projection.
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