13.01.2011
Source: Islands Business
Cover Report: Fragile islands economies in for a tough ride
by Dr Satish Chand
Forecasting the shape of the economies in 2012 is tough and particularly so given the volatile global markets.
Stock markets in the major markets have bounced around like a yoyo for the past several months. The Australian dollar, one of the anchors for several Pacific Islands currencies, has swayed like a coconut palm caught in a violent tropical cyclone. It has been above parity with the US dollar one day and down the other.
The volatility in the financial markets are likely to last for more than just one year given that the indigestion from the large debt problems faced by several rich nations will take a long time to work its way through the system.
Here, I look at how the developments in the international economy are likely to affect someone from the islands.
Pensioners beware!
It is time to be prepared and not to panic. If you are formally retired or likely to do so in the next few years, then some caution with your finances are warranted.
Pension funds have historically delivered dividends upwards of six percent. These returns are unlikely to be delivered in 2012. Consequently, the payouts from your pension fund could be trimmed back. Particularly worrying are the cases of pension funds already in financial strife.
The case of the Fiji National Provident Fund (FNPF) is instructive on this count. FNPF is slipping into insolvency (i.e. where the value of current liabilities exceeds the value of assets).
It needs an injection of around half a billion Fijian dollars to make it solvent. Finding this sum in the current uncertain environment will be costly.
FNPF is in the process of trimming down pension payments from the prevailing 15 percent of equity to 8.7 percent which is to take effect from March 1, 2012. This amounts to a drop in income of a retiree dependent on FNPF of 42 percent. It will hurt, particularly in a climate of high inflation and in a situation where there are no other sources of income.
The capacity to replenish income falls with age and when medical expenses are likely to rise. So pensioners, beware!
Watch PNG, politics, and public debt
Politics in PNG has been volatile the past month. Elections mid-year are likely to only make matters worse. Credit to several large resource projects, the economy remains buoyant and resilient. ExxonMobil is leading the way with an investment of $15.7 billion in a liquefied natural gas (LNG) project which is due to commence production in 2014.
++++Rio Tinto has commenced discussions on the reopening of its mammoth (and mothballed) copper and gold ´´´´´´´´Panguna mine on Bougainville.
Construction is planned to commence in 2016 and production to start three years later. Should these plans materialise, PNG will get a lot of wind in its sails to carry the nation through the rough waters of the global financial storm.+++++
PNG will need a lot of workers in the construction phase of its many mines. As the largest Pacific islands economy, PNG is in a position to provide jobs for many Pacific Islanders.
Some fine-tuning of visa laws may be necessary to help ease the flow of workers from the region. The Melanesian Spearhead Group (MSG) provides for visa-free entry into PNG from Fiji, the Solomon Islands and Vanuatu. Why not extend this to other Pacific islanders and for their skilled people particularly?
PNG provides room for optimism but not the reason for complacency. Demand for exports from the region can slump due to problems in Europe and North America.
The Chinese economy continues to power ahead. This is a major reason for the healthy prices for commodities exported from both Australia and PNG.
What if China falters? The above is possible given that a significant proportion of the demand for Chinese manufactures originates from Europe and America.
A slowdown in the global economy will ripple through to the Pacific through dampened demand for commodities and a slowdown in the inflows of remittances and tourists.
Budget deficits and rising public debt in a number of the Pacific islands will force expenditure cuts. The case of Cook Islands is instructive on this count. Standard and Poor’s, an international ratings agency, downgraded Cook Islands’ bonds to B+ last month, placing it well below investment grade. Such downgrades will raise costs of borrowing.
The budgets of FSM, Kiribati, Nauru, Marshalls and Tuvalu will feel the pinch as dividends from their trust funds fall. The Asian Development Bank reports that: “Fiji, Samoa, and Tonga are targeting smaller budget deficits in 2012, stepping back from higher deficits incurred due to fiscal stimulus or disaster recovery efforts”. Others may have to tighten their fiscal belts too!
Final advice to rich world
The economic headwinds faced by much of the world originate from financial problems in the rich capitals. The best that the rich world can do is to sort out their financial mess. Doing it so quickly will help their own poor and the poor residing beyond their borders too.
In the meantime, the islanders would have to be prepared for the worst whilst hoping for the best. |
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