Macroeconomic Trends in the Pacific Region --Implications for Budgeting and Financing

1. Macroeconomic Trends in the Pacific Region --Implications for Budgeting and Financing Pacific Economic Management Technical Assistance (PEMTA) November 2011

2. Outline • Key international and regional developments • Fiscal & debt trends in the Pacific Region • Monetary trends in the Pacific Region • Growth and inflation outlook • Conclusions

3. 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=projection Sources: IMF. 2011. World Economic Outlook (Sept). ADB. 2011. Asian Development Outlook 2011 Update

4. 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.

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

6. 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 Pacific Tourism departures to selected Pacific countries (‘000; January–August totals) Sources: ABS and Tourism Strategy Group, New Zealand Ministry of Economic Development.

7. 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

8. External balance Current account (% of GDP) Source: IMF, World Economic Outlook and Article IV reports

9. Outline • Key International and regional developments • Fiscal & debt trends in the Pacific Region • Monetary trends in the Pacific Region • Growth and inflation outlook • Conclusion

10. Fiscal Trends

11. Fiscal Trends

12. Fiscal trends • Fiscal balance (% of GDP)

13. 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 growth • Leading 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…

14. 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. Debt levels & risk of debt distress

15. Indebtedness • External debt (% of GDP)

16. Total Debt to GDP From: IMF Staff Report for the 2010 Article IV Consultation

17. Outline • Key international and regional developments • Fiscal & debt trends in the Pacific Region • Monetary trends in the Pacific Region • Growth and inflation outlook • Conclusions

18. Monetary Trends • Low 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

19. Outline • Key international and regional developments • Fiscal & debt trends in the Pacific Region • Monetary trends in the Pacific Region • Growth and inflation outlook • Conclusion

20. Prospects for GDP growth Pacific region: 6.4% in 2011; 5.5% in 2012 Pacific islands (excl. PNG and Timor-Leste): around 2% Source: ADB estimates.

21. Inflation outlook Pacific region: 8.4% in 2011; 5.9% in 2012 Pacific islands: 6.4% in 2011; 3.4% in 2012 Source: ADB estimates.

22. Outline • Key International and regional developments • Fiscal & debt trends in the Pacific Region • Monetary trends in the Pacific Region • Growth and inflation outlook • Conclusions

23. 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.

24. 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

25. Vinaka For more information: http://beta.adb.org/publications/series/pacific-economic-monitor pacmonitor@adb.org