Economic Analysis - Fiscal Sustainability Still An Issue Despite Huge Surplus - JAN 2018

BMI View: Kiribati ran huge fiscal surplus es over the last three years, averaging in excess of 50% of GDP, supported by strong fishing license fees and global financial market improvements. However, we believe that fiscal sustainability remains an issue as a single natural disaster could easily wipe out years of savings, while government revenue continues to be highly volatile.

Kiribati's fiscal position has improved in recent years, underpinned by robust fisheries sector revenue and an upturn in global financial markets which helped buoy the Revenue Equalization Reserve Fund (RERF) and the Kiribati Provident Fund (FPF). According to our estimate, Kiribati's fiscal surplus came in at an average of 62% of GDP between 2014 and 2016. However, we believe that the archipelago remains at moderate to high risk of debt distress due to adverse weather conditions which could result in a spike in expenditure and relief aid as well as uncertainties over fishing revenue. The current low interest rate environment globally has also resulted in many national saving vehicles (Kiribati is unlikely to be an exception) turning to riskier asset classes to earn a decent return, and this strategy could turn sour quickly in the event of turmoil in the global financial markets.

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