Pacific Economic Monitor, December 2013

THE ECONOMIC SETTING 1 BUDGET ANALYSIS December 2013 www.adb.org/pacmonitor The Monitor provides an update of Highlights developments in Pacific economies and Weak global growth is impacting the Pacific largely through lower explores topical policy issues. commodity prices. Fiscal consolidation in the United States (US) and moderating growth in developing economies has slowed growth in the CONTENTS world economy in 2013. Subdued global demand is keeping international Highlights 1 commodity prices low—adversely affecting agriculture, mineral, and The economic setting 3 forestry export earnings of some Pacific economies. The moderation in growth in the People’s Republic of China (PRC) is expected to dampen the Country economic updates 5 outlook for Australia, with possible flow through effects on the Pacific. Policy briefs: Strong revenue performance in smaller Pacific economies has Economics of climate change 18 continued in 2013, while larger economies have struggled. For the second consecutive year, fishing license revenues are exceeding budget Economic indicators 32 targets in Kiribati, the Republic of the Marshall Islands (RMI), Nauru, and Tuvalu due to rising rates under a regional vessel day scheme. Tax How to reach us collections in the Cook Islands, Fiji, and Vanuatu are also higher than [email protected] expected. In contrast, revenue collections in the large resource exporters of the Pacific are weakening. Revenues from the mineral and petroleum Asian Development Bank sectors are below budgeted levels in Papua New Guinea (PNG), while Pacific Department declining production in major offshore fields is resulting in lower Apia Level 6 Central Bank of Samoa Bldg. petroleum revenue in Timor-Leste. In Solomon Islands, revenues from log Apia, Samoa duties are decreasing due to falling log exports. Implementation of Telephone: +685 34332 Dili capital expenditure plans in these larger economies has also fallen behind ADB Building schedule amid capacity and revenue constraints. Rua Alferes Duarte Arbiro, Farol, Fiscal pressures are expected to increase in 2014. Public investments Dili, Timor-Leste Telephone: +670 332 4801 to support postcyclone recovery are expected to drive up debt levels and Honiara slow Samoa’s progress toward fiscal consolidation in the near term. Fiscal Mud Alley consolidation efforts in Tonga hinge on the implementation of tight Honiara, Solomon Islands expenditure controls, particularly on the wage bill. As in 2013, PNG is Telephone: +677 21444 Manila planning to run another large fiscal deficit aimed at countering the 6 ADB Avenue, Mandaluyong City effects of a slowdown in economic growth. In Timor-Leste, previous 1550 Metro Manila, Philippines years’ large annual fiscal surpluses are seen to diminish in the medium Telephone: +63 2 632 4444 Nuku'alofa term due to declining petroleum revenues and continued high levels of Fatafehi Street government expenditure. Fiji may face challenges to keep its fiscal deficit Tonga Development Bank Building in check amid plans to maintain high levels of capital expenditure and Nuku’alofa, Tonga possible pressures from election-year related spending in 2014. Telephone: +676 28290 Port Moresby Strengthening of public financial management systems, along with Level 13 Deloitte Tower broader based structural reforms to stimulate private sector activity, Port Moresby, Papua New Guinea would help ease fiscal pressures in the Pacific over the medium term. Telephone: +675 321 0400/0408 Port Vila Climate change economic impacts and adaptation efforts in the Level 5 Reserve Bank of Vanuatu Bldg. Port Vila, Vanuatu Pacific. This issue’s policy briefs address the economics of climate change Telephone: +678 23610 and climate change financing challenges in the Pacific. The first brief Suva summarizes projected costs of climate change in the Pacific, based on a 5th Floor, Ra Marama Building 91 Gordon Street, Suva, Fiji recently released Asian Development Bank (ADB) study. The second brief Telephone: +679 331 8101 focuses on the expected impact of climate change on agriculture, Sydney estimating potential changes in yields of major crops cultivated in the Level 18, One Margaret Street Pacific. The third brief is an external contribution from the World Bank’s Sydney, NSW 2000, Australia Telephone: +612 8270 9444 Pacific Catastrophe Risk Assessment and Financing Initiative, which Tarawa outlines how risk pooling and insurance can enhance Pacific economies’ Kiribati Adaptation Project-Phase III Office financial resilience to natural disasters and climate change. The final brief PO Box 68, Bairiki Tarawa, Kiribati considers mainstreaming of climate change into public financial Telephone: +686 22040/22041 management systems in the Pacific to facilitate increased development partner support and coordination. 2 HIGHLIGHTS © 2013 Asian Development Bank All rights reserved. Published in 2013. Printed in the Philippines. Asian Development Bank Projections ISBN 978-92-9254-326-6 (Print), 978-92-9254-327-3 (PDF) GDP growth Publication Stock No: RPS136133-2 Cataloging-In-Publication Data 8.2 Timor-Leste 9.0 Asian Development Bank. 5.5 Pacific Economic Monitor, December 2013. Papua New Guinea 6.0 Mandaluyong City, Philippines: Asian 4.5 Nauru 6.0 Development Bank, 2013. Vanuatu 3.2 This edition of the Monitor was prepared by 3.4 2013 3.2 Aaron Batten, Robert Boumphrey, Caroline Cook Islands 3.5 2014 Currie, Christopher Edmonds (editor-in-chief), 3.0 Palau 3.0 Isabel Ferino, Joy Ferre, Joel Hernandez, Malie Lototele, Milovan Lucich, Rommel Fiji 2.8 2.4 Rabanal, Cara Tinio, Laisiasa Tora, and Emma 2.5 10 Solomon Islands 4.0 Veve of the Pacific Department. Desktop publishing assistance was provided by Cecil Marshall Islands 2.3 1.5 5 Caparas. 2.0 Kiribati 2.3 The views expressed in this publication are 1.3 0 Tuvalu 1.5 those of the authors and do not necessarily Pacific region 1.0 reflect the views and policies of the Asian FSM 1.5 Pacific islands -5 Development Bank (ADB) or its Board of 0.9 2009 10 11 12e 13p 14p Governors or the governments they represent. Samoa 2.0 0.5 ADB does not guarantee the accuracy of the Tonga 0.3 data included in this publication and accepts 0246810 no responsibility for any consequence of their use. Change in real GDP (%) By making any designation of or reference to a particular territory or geographic area, or Inflation by using the term “country” in this document, ADB does not intend to make any Timor-Leste 12.5 judgments as to the legal or other status of 10.0 6.0 any territory or area. Papua New… 7.5 2013 ADB encourages printing or copying Solomon Islands 5.5 information exclusively for personal and 4.0 2014 Palau 5.5 noncommercial use with proper 5.5 acknowledgement of ADB. Users are FSM 4.5 restricted from reselling, redistributing, or 3.5 Marshall Islands 4.5 creating derivative works for commercial 3.5 2.7 purposes without the express, written Fiji 9 consent of ADB. 2.5 Cook Islands 2.6 3.0 2.0 6 Vanuatu Abbreviations 2.0 $ US dollar, unless otherwise stated Tuvalu 2.0 2.0 3 A$ Australian dollar 1.5 Pacific region Kiribati ADB Asian Development Bank 3.0 Pacific islands 0.7 0 F$ Fiji dollar Tonga 2.7 2009 10 11 12e 13p 14p fob free on board 0.5 FSM Federated States of Micronesia Nauru 2.5 -0.2 FY fiscal year Samoa 3.0 GCM general circulation model GDP gross domestic product -3 0 3 6 9 12 15 IFPRI International Food Policy Change in consumer price index (%, annual average) Research Institute lhs left-hand scale e = estimate, FSM = Federated States of Micronesia, GDP = gross domestic product, LNG liquefied natural gas p = projection m.a. moving average Note: Projections are as of November 2013 and refer to fiscal years. Regional averages of gross NZ$ New Zealand dollar domestic product (GDP) growth and inflation are computed using weights derived from levels PNG Papua New Guinea of gross national income in current US dollars following the World Bank Atlas method. PRC People’s Republic of China Averages for the Pacific islands exclude Papua New Guinea and Timor-Leste. Timor-Leste GDP is PCRAFI Pacific Catastrophe Risk exclusive of the offshore petroleum industry and the contribution of the United Nations. Assessment and Financing Source: ADB estimates. Initiative RERF Revenue Equalization Reserve Fund rhs right-hand scale RMI Republic of the Marshall Islands US United States Notes VAT value-added tax This Monitor uses year-on-year (y-o-y) percentage changes to reduce the y-o-y year-on-year impact of seasonality, and 3-month moving averages (m.a.) to reduce the impact of volatility in monthly data. Fiscal years end on 30 June for the Cook Islands, Nauru, Samoa, and Tonga; 30 September in the Marshall Islands, the Federated States of Micronesia, and Palau; and 31 December elsewhere. THE ECONOMIC SETTING 3 International and regional developments Heightened risks to global growth GDP growth Global growth is projected to decelerate to 2.9% in 2013 (from (%, annual) 3.2% in 2012) before recovering to 3.6% in 2014, according to 02468 the International Monetary Fund's 2013 World Economic Outlook World Update (October 2013). The revised projections, which assume that the immediate fiscal challenges in the US will be addressed Pacific DMCs in a timely manner, are significantly lower than those made at the start of the year. Much of the downward revision is due to a Developing Asia marked slowdown in major developing economies and its Australia spillover impacts. A few developing economies in Asia are facing challenges related to management of capital outflows, due to Japan 2014p uncertainty about the timing of the US Federal Reserve's gradual 2013p New Zealand exit from monetary stimulus measures. 2012e The outlook for Developing Asia has weakened, largely due to United States moderating growth in the People’s Republic of China (PRC), DMC = developing member country, e = estimate, p = subdued economic activity in India, and unexpectedly sluggish projection performances of the three largest Association of Southeast Asian Sources: International Monetary Fund.

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