LONGREAD: how the pacific six punch above their weight

The Pacific region should catch some of the positive spillover of a transforming and prosperous Asia.

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A richer Asia will support visitor arrivals and the region’s large and under-tapped agriculture and fishing industries. This, combined with higher remittance inflows, should put a floor under Pacific gross-domestic-product growth over the short- to medium-term.

"With a little help from the international community the Pacific economies can reach their growth potential faster.”

It’s a good time to focus on the positive outlook: the Asia-Pacific Economic Cooperation (APEC) leaders meeting will be held in Port Moresby later in 2018 and the 2019 Asian Development Bank annual meeting in the Pacific (this time in Nadi, Fiji), providing the perfect opportunity for the region to showcase itself as an attractive investment destination.

The regions prospects are encouraging despite six Pacific Island countries - Cook Islands, Kiribati, Samoa, Solomon Islands, Tonga and Vanuatu, plus the small Timor Sea nation of Timor-Leste - having struggled recently due to multiple natural disasters.

With a little help from the international community the Pacific economies can reach their growth potential faster. This, in turn, will help the region to overcome some of its critical developmental challenges and be on a path to shared prosperity and inclusive growth.


Real GDP growth in the region has been close to trend over the past five years and ANZ Research is optimistic about the economic outlook. Tourism is the key for a number of regional economies.

Although global GDP has probably peaked, economic conditions in the Pacific’s key tourism markets including Australia, New Zealand, the United States and Europe remain robust.

Accordingly, ANZ Research expects inbound-visitor numbers to the region to stay on an upward curve and drive activity across a range of industry sectors.

This will be aided by ongoing work on government infrastructure projects (some of which are supported by donor funding) agricultural exports as well as remittance flows.

Donor funding for infrastructure projects is critical for the Pacific region. The narrow-based economies provide limited resources for governments who have to juggle competing priorities and infrastructure investment is often the casualty.

Hence, aid forms an integral part of budget support and the region’s overall push towards realising its potential growth rates. Scaling back donor funding will pull the rug from under the region’s aspirational development strategies.

For a range of reasons a significant chunk of the Pacific population has over time emigrated to richer countries such as Australia, New Zealand, the United States and Canada. This diaspora regularly sends money to families and friends back home which in turn supports demand, especially private consumption expenditure.

Cook Islands’ next phase

Despite its small island status the Cook Islands has registered impressive economic growth over the past five years. Real GDP, driven by strong inbound tourism, has increased by an average of nearly 4 per cent a year since fiscal 2013.

ANZ Research believes the Cook Islands will need to start thinking about increasing tourism capacity from early next decade.

Initially, the investment will come from upgrades and refurbishment of existing facilities and related infrastructure but later on it will be the construction of new hotels that will drive the next investment phase.

In addition, new renewable energy and infrastructure efficiency projects such as new photovoltaic power plants on islands in the southern group and construction of a new submarine cable to improve the speed and affordability of internet access will aid growth.

ANZ Research is forecasting GDP growth of 3 per cent in the Cook Islands during FY 2019 and 3.5 per cent in FY 2020.


Samoa on show

Samoa, as host of regional meetings in 2018, has recently had to undertake several public infrastructure projects. ANZ Research believes this will somewhat offset the negative contributions from Cyclone Gita and manufacturing to keep the economy stable.

Although real GDP fell by 0.3 per cent in the first quarter on 2018 ANZ Research estimates growth picked up in Q2 due to higher remittances especially for church and non-government schools.

Samoa will host the Pacific Games in July 2019, which will ramp up public infrastructure works including road extensions, new bridges and a new terminal at the international airport. On the back of this pre-games work, ANZ Research expects real GDP to increase around 2 per cent in FY 2019.

In FY 2020, GDP will receive a one-off boost from tourism-related sectors during the Pacific Games. Accommodation and food services, transport, retail and wholesale trade are likely to be the biggest beneficiaries.

ANZ Research is forecasting GDP to spike by 5.5 per cent in FY 2020, although this may turn out to be a conservative estimate.

Longer-term, growth is expected to return to trend at just above 2 per cent a year.

That said, the anticipated start of the Apia Waterfront project early next decade could keep GDP growth slightly higher than the long-run average during the first half of the 2020s.



After solid growth over FY 2015 and 2017 real GDP in Tonga is estimated to have contracted in FY2018 due to the shock from Gita.

February’s cyclone was one of the most powerful to ever hit Tonga, causing severe damage to residential and non-dwelling buildings including government offices, utilities and transport infrastructure.

The damage bill, at $US150 million, is equivalent to nearly 20 per cent of the nation’s GDP. ANZ Research estimates growth fell 0.2 per cent last financial year as the positive contribution from the immediate post-cyclone rehabilitation works was more than offset by the negative contributions from agriculture, fishing and tourism.

The Tongan government has said it will start paying down its $US160 million debt, which is two years overdue, to the EXIM Bank of China from September 2018.

A $US14 million repayment is earmarked for 2018. This means the government will take a 6 per cent hit to revenue which, in turn, will put a significant dent in its ability to undertake the necessary post-cyclone reconstruction and rehabilitation work.

Unlike other Pacific Island countries which experience almost an immediate recovery from natural disasters due to a rebound in construction, Tonga’s recovery will be subdued.

Headwinds from enforced austerity will weigh on growth over the rest of this year and into 2019. The government has steadfastly refused to undertake any new borrowing that is not concessional.

Various other factors though are likely to see real GDP increase by 1.1 per cent in 2019.

Feeding Kiribati’s growth

Kiribati can be forgiven for contentedness given its recent economic performance and can take comfort from prudent management of its finances.

However, ANZ Research believes Kiribati could set some ambitious targets, transition from a perceived remote isolationist reputation and aim for a thriving economy.

The IMF expects fishing revenue in Kiribati to hold at around $A130 million over the medium term. Under a baseline scenario, where fishing revenue remains unchanged and government policy does not deviate, the IMF forecasts the I-Kiribati sovereign wealth fund to grow to $A1.2 billion in 2032 from $A900 million in 2017.

These funds should secure Kiribati’s longer-term growth prospects. ANZ Research is forecasting real GDP growth to average around 2.5 per cent in 2018 and 2019.

In the near-term, a ramp-up of several donor-funded infrastructure projects will support growth.


Key driver in the Solomon Islands

ANZ Research expects real GDP in the Solomon Islands to be sustained at around 3 per cent over 2018 and 2019, driven by agriculture, fishing, construction, manufacturing plus tourism-related sectors.

Service exports rose by nearly 20 per cent in 2017 on the back of higher visitor arrivals.

Encouragingly, air arrivals – which have a high domestic multiplier impact – rose by 10 per cent last year, boosted somewhat by the 75th anniversary of the Guadalcanal landing in World War II.

That said, ANZ Research expects visitor arrivals to increase in 2018 supported by a depreciating currency, in particular against the $A.

Although coming off a lower base, visitor arrivals for the first quarter in 2018 were already up 27.9 per cent from Q1 2017.


Vanuatu’s growth to ease

Vanuatu’s economy grew by nearly 4 per cent in 2017 driven by the ramp-up of work on several large infrastructure projects.

ANZ Research expects growth to soften in 2018 as the large projects underway reach completion and are not replaced by similarly sized projects.

ANZ Research forecasts growth to slow to 3.7 per cent in 2018 and to ease further to around 3 per cent next year with falling public investment offset somewhat by increases in services exports (mostly from higher visitor arrivals) as well as goods exports.

The latter will be boosted by kava, copra, coconut oil and, potentially, beef exports.

Public expenditure related to relocation of the Ambae community following eruption of Manaro volcano will add to growth.


Timor-Leste on firmer footing

Timor-Leste is essentially an oil and gas economy.

The oil industry generates nearly all government revenue and underwrites the government expenditure programs that make up 75 per cent of GDP.

Given its size and importance as a financier of government expenditure, the oil and gas economy dictates the magnitude of overall real GDP growth in Timor-Leste.

With a new majority government elected in May 2018, ANZ Research expects expenditure to be supportive of growth and push GDP higher.

 The key is the performance of the Petroleum Fund (PF), a sovereign wealth fund which receives all petroleum sector receipts (including taxes, royalties and profits) and provides funding for the government budget.

Longer term Timor-Leste needs to prepare for the transition to a broader-based economy, so it can consistently and sustainably achieve higher growth rates and overcome some of its critical developmental challenges such as eliminating malnutrition.

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Untapped potential

The Pacific Six are young, democratic nations having acquired independence only a handful of decades ago. There are challenges around governance, law and order and proper institutional structures which are continually addressed.

As emerging market economies with small populations, opportunities to organically grow the economies to address the development challenges have been limited. Hence there are large sections of the populations that are below national poverty lines.

Leadership in the Pacific understands the need for proper governance structures and has worked hard to undertake legislative reforms that provide frameworks for stable democratic governments.

In addition, the leaders are cognisant of the need to make the transition to a broader-based economy and one that provides more job opportunities. They have resources to tap into, not least of which is a young and willing population.

The best defence against economic hardship is to provide employment to anyone who is willing to work. That will be the challenge for these economies in the next decade.

Dr Kishti Sen is an International Economist & Tom Kenny is a Senior International Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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