Sada Reddy: Impact of the global crisis on Fiji's economy
Presentation by Mr Sada Reddy, Deputy Governor of the Reserve Bank of Fiji, to the Fiji
Employers Federation, Suva, 12 November 2008.
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Outline
The outline of my presentation is as follows:
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Global economic conditions
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Impact of the financial crisis on Fiji's economy
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Summary
Global economic conditions
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According to the latest International Monetary Fund's World Economic Outlook, the
"credit crunch" or "liquidity crisis" that first erupted with the US sub-prime mortgage1
collapse in mid-2007 has entered a new troubled phase in the recent months,
unfolding as the "2008 financial crisis". Regarded as the most severe shock since
the Great Depression of the 1930s, the impact has been felt across the global
financial system, and is expected to result in a major downturn in the world
economy.
• Intensifying solvency concerns have badly shaken confidence, pushing the global
financial system to the brink of meltdown, leading to emergency resolutions in the
major advanced economies. Stock markets across the globe have fallen significantly
and money and credit markets have frozen, causing severe stress in financial
systems and resulting in the failure of several large financial institutions in the United
States and Europe. The financial crisis together with high energy and commodity
prices is pushing many countries, including the most advanced economies, to the
brink of economic recession. Concerted efforts by central banks and governments to
mitigate the crisis, has seen financial rescue and economic stimulus packages
amounting to billions of dollars being implemented.
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Consequently, in its November 2008 forecast, the IMF revised its global growth
projection down to 3.7 percent from 3.9 percent for this year. The IMF further
revised the 2009 world growth projection down to 2.2 percent from the earlier
projection of 3.0 percent. We therefore expect our major trading partners to have a
sluggish outlook for the next two years. Emerging economies, like China and India,
are also expected to experience some slowdown in growth but will continue to
experience relatively high growth rates and may provide some stability to global
growth.
Economies 2007 2008(f) 2009(f)
Australia 4.2 2.5 2.1
New Zealand 3.2 0.6 1.3
US* 2.0 1.4 -0.7
Eurozone* 2.6 1.2 -0.5
Japan* 2.1 0.5 -0.2
China* 11.9 9.7 8.5
India* 9.3 7.8 6.3
Singapore 7.7 3.0 2.4
South Korea 5.0 4.3 3.8
Source:*IMF World Economic Outlook - Nov-08; Consensus Forecast & Asia Pacific Consensus Forecast -
Oct08
Impact of the financial crisis on Fiji's economy
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Fiji's financial sector: Overall, Fiji's financial sector is quite insulated from the
financial markets abroad and the banking, insurance and other financial institutions
remains sound. The crisis is affecting the financial institutions in foreign countries on
two fronts - (1) Financial Institution's ability to lend due to the liquidity shortage; and
(2) Confidence in the financial sector. In case of Fiji, both of these prominent
features are absent since - (1) our banking system is flush with liquidity; and (2) our
banking institutions are sound and prudent in their management of funds, thus it
provides the confidence for the depositors.
Regular updates and assurances by the Reserve Bank of Fiji to this effect play a key
role in maintaining confidence in Fiji's financial system. Moreover, unlike the foreign
banking system, the domestic financial system is financed from local depositors and
credit is extended to domestic entities - in this respect, Fiji is immune from the
global financial crisis.
The insurance industry is relatively sheltered from the effects of the financial crisis.
• Fiji, being a small open economy in the world, is heavily
Macroeconomic impact:
dependent on its major trading partners for trade and financial flows. Currently, the
US, UK Japan and Eurozone are directly exposed to the financial crisis, which will
have significant implication for other major economies around the world. In addition,
the possibility of a recession in the US, UK, Japan and Eurozone, will definitely have
repercussions for our other major trading partner countries (Australia and New
Zealand) given the strong trade and financial links with these mature economies.
The effects of the financial crisis could indirectly trickle down to the Fijian economy
transmitted via the possibility of economic downturn in trading partner economies
which could lower demand for exports and reduced financial flows from the major
trading partner economies. Overall, the potential risks to Fiji's macro-economy from
the financial crisis are on the downside.
•
Impact on exports: Exports may be affected selectively. Demand for fish, mineral
water and garments, textiles & footwear may ease somewhat as a result of the
slowdown in US, Japan and Australia, which are Fiji's major markets for these
products. Overall, a marginal adverse impact on exports is expected from the global
slowdown.
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Impact on imports: A relatively weaker domestic economy may also weaken the
import growth. This may be most evident in the import of intermediate goods, mainly
oil, and other investment goods. Lower prices of commodities in the international
markets will also help weaken import growth for other food items, such as wheat,
rice and dairy products.
Crude oil prices: In the first 10 months of the year, oil prices have averaged
US$108 per barrel. Since its peak of US$146 in July, oil prices have since declined,
currently around $US58 per barrel. Strong demand from emerging economies like
China, combined with supply disruptions, geo-political concerns, the weak US dollar
and speculative demand amidst the US financial crisis have underpinned the
movements in oil prices. Prices are anticipated to remain high in the months ahead.
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Impact on tourism and remittances: While there are mixed views on visitor
arrivals, there is a mild possibility of a slower growth next year in line with the
economic slowdown envisaged in our major tourist markets. This in turn will lower
tourism earnings without any compensatory increases in per diem expenditure. If the
Asian destinations are affected, they may respond aggressively with discounts - if
Fiji were to compete accordingly with them, yields for the domestic industry could be
affected further.
Remittances may also be affected, given that the labour market conditions in the
advanced economies will be affected. Nevertheless, it is important to note the
remittance already started declining in before the financial crisis started in 2007.
Therefore, this financial crisis could exacerbate the decline in remittances flows.
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Impact on Foreign Direct Investment: Most of the foreign investments are
financed, in large part, through loans from external banks and other institutions. The
tight global liquidity conditions could restrain foreign borrowing to finance investment
in Fiji by non-residents, as well as residents. As a result, FDI into Fiji may be
affected negatively. On the other hand, non-residents could also withdraw their
existing investment and re-invested earnings to meet their offshore financial or
liquidity needs, especially by offloading, say real estate investments in Fiji.
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Impact on exchange rate and competitiveness: The US dollar is generally
perceived to be the safest of currencies and is in high demand in times of crisis. This
has been the case with the current financial crisis where exceptional demand for the
US dollar has strengthened the currency while weakening other currencies. In this
regard, the Fiji dollar is expected to weaken against the US dollar. The appreciation
of the USD will augur well for exports to the US or goods priced in USD. However,
this will be offset by the losses from the Australian and New Zealand dollars, both of
which have weakened against the Fiji dollar. While it is not clear where the trading
partner currencies are headed, there is a general agreement that the US dollar will
continue to strengthen against the major currencies.
In addition, our external competitiveness could be affected by competition from
Asian economies, as they normally keep an undervalued exchange rate to boost
their exports and services (e.g. tourism) sectors.
• Exchange rates: Compared to the beginning of the year, the Fiji dollar
strengthened against the Australian and NZ dollars by around 12 and 13 percent,
respectively. However, the Fiji dollar fell against the US dollar and Euro by 13 and 2
percent, respectively.
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Impact on economic growth: The risk to the Fiji economy from the financial crisis
is on the downside. This can be largely attributed to the expected negative effects
emanating from the trade and financial channel. That is, if exports of mineral water,
fish, garments, textiles & footwear and other domestic exports (like agro-based
produce) potentially decline then this will naturally feed into lower production in
these sectors. In addition, any slowdown in tourism would impact the wholesale &
retail trade, hotels and restaurants sectors, as well as, the air transport and services
allied to transport sectors adversely. Furthermore, a reduction in remittances flows
could suppress consumption expenditure. Similarly, lower financial flows (especially,
FDI) could lead to a decline in investment, especially in the building & construction
sector. Thus, domestic demand may be affected as a result of the global financial
crisis. It is likely that the financial crisis will erode Fiji's growth prospects somewhat.
• In terms of the monetary policy
Impact on Fiji's monetary policy objectives:
objectives, the global slowdown will ease inflationary pressures. Although there is
some appreciation in the US dollar, oil prices have dropped more sharply. On a net
basis, this is expected to ease inflationary pressures from oil.
In contrast, it is likely that pressures on foreign reserves (the underlying position of
the Balance of Payments (BoP)) may increase as a result of anticipated weaker
tourism earnings & remittances, lower FDI and export earnings from selected
commodities.
Consequently, the Reserve Bank of Fiji will maintain tight money and credit policies.
Summary
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The impact of the financial crisis on Fiji will be via the impact on its major trading
partner economies
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Financial sector assessment reinforces the soundness of the banking, insurance
and other financial institutions
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Macroeconomic threats are firmly on the downside