Economic Analysis - Outlook For Sugar Industry Remains Positive - MAY 2018

BMI View: We expect Fiji's sugar industry to benefit from overseas aid from India and continued government investment in the sector. Ongoing repairs to the machinery ahead of the crushing season will also be positive for yields and raise production. With sugar being one of Fiji's key crops, this will be supportive of growth and we forecast real GDP to expand by 3.2% in 2018.

In our view, Fiji's sugar industry will likely benefit from increased Indian aid and continued government investment in the sector as part of the FY2017/18 (July-August) expansionary budget. The industry will also likely see an improvement in production as a result of ongoing repairs to crucial machinery ahead of the beginning of the crushing season in June. In addition, the sugar industry supports a considerable proportion of the nation's population, suggesting that it is also a politically important sector in an election year. As such, the government will continue extending support to the sector, benefiting yields, and we forecast real GDP growth to expand by 3.2% in 2018.

A Economically And Politically Important Crop

Sugar is one of Fiji's key economic sectors, making it both a politically and economically crucial crop. In 2016, sugar exports accounted for 6.8% of total exports and were valued at USD49.3mn, second only to water. The sugar industry is the country's largest employer, hiring approximately 40,000 people, with up to 28% of the country's population relying on it when including dependents and extended families. In addition, sugar cane is the country's main crop, with almost 75% of Fiji's total arable land being planted with sugar cane.

The large number of people that the sector supports has resulted in it being politically important as the government prepares for parliamentary elections that must be held by September. Indeed, the government took pains to reiterate its commitment to the sector during a meeting with sugarcane farmers in March. During the meeting, Prime Minister Frank Bainimarama assured farmers of the government's commitment to developing the sector. He noted that the government had established the Committee for Better Utilisation of Land (CBUL) programme to revitalise the sugar industry through assisting farmers in renewing their agricultural leases while providing incentives to landowners. We believe that these measures will bode well for the sustainable development of the sector, with farmers being more likely to invest in the productivity of their land if they are assured of their leases.

Productivity Raising Efforts To Support Higher Production

An influx of funds from the Indian government are likely to benefit ongoing efforts to improve the productivity of the sector. Following the formal transfer of a grant from New Delhi to Suva, the Fiji Sugar Corporation (FSC) signed an agreement which enabled the FSC to receive a FJD2.1mn (USD 1.0mn) grant from the Fijian government. The funding obtained is to be used to purchase farm equipment to aid ongoing initiatives aimed at increasing the amount of mechanisation on farms. According to the Permanent Secretary of the Office of the Prime Minster and Ministry of the Sugar Industry, Yogesh Karan, the grant 'will be invested back into the industry in areas such as cane planting and harvesting that is crucial for increasing cane yields and growth in the sugarcane production'.

We expect the grant to complement existing government measures that are aimed at raising productivity through the increased use of mechanical aids. According to Karan, the government allocated an additional FJD1mn for farm mechanisation aid in 2018 and that the government 'will be providing tractors with implements to cooperatives to assist farmers in reducing their production costs'. He added that the FSC has obtained 30 tractors with implements that will then be rented to growers at a lower rate.

Furthermore, the ongoing maintenance and upgrading of the country's three sugar mills (Lautoka, Labase, and Rarawai) in Ba (Fiji's largest island) will be supportive of production and ensure the maximisation of yields. The FSC has announced that it has embarked on a FJD30mn overhaul of the mills in preparation for the 2018 crushing season (June-November). Rehabilitation and repair works include upgrades to the mill's diffuser to enable the more efficient extraction of sucrose from the cane as well as repairs to the turbo-alternator to ensure a smooth extraction process.

Macroeconomic Forecasts (Fiji 2014-2020)
Indicator 2014 2015 2016e 2017e 2018f 2019f 2020f
e/f = BMI estimate/forecast. Source: National sources, BMI
Population, mn 0.89 0.89 0.90 0.91 0.91 0.92 0.92
Nominal GDP, USDbn 4.5 4.4 4.7 4.7 5.1 5.5 5.8
GDP per capita, USD 5,213 5,016 5,332 5,299 5,783 6,130 6,463
Real GDP growth, % y-o-y 4.5 4.0 2.5 3.5 3.2 3.0 2.7
Industrial production, % y-o-y, ave 2.4 2.0 3.0 2.0 2.0 2.0 2.0
Consumer price inflation, % y-o-y, ave 0.5 1.4 3.9 3.4 3.4 3.4 4.0
Consumer price inflation, % y-o-y, eop 0.1 1.6 3.9 2.8 2.8 4.0 4.0
Central bank policy rate, % eop 0.50 0.50 0.50 0.50 0.50 1.00 1.50
Exchange rate FJD/USD, ave 1.93 2.07 2.13 2.06 2.00 2.00 2.02
Exchange rate FJD/USD, eop 1.99 2.15 2.12 2.00 2.00 2.00 2.04
Budget balance, FJDbn 0.0 -0.7 -0.5 -0.5 -0.5 -0.5 -0.5
Budget balance, % of GDP 0.0 -8.1 -5.3 -5.0 -4.8 -4.8 -4.6
Goods and services exports, USDbn 2.5 2.5 2.7 2.9 3.2 3.4 3.7
Goods and services imports, USDbn 3.1 2.9 3.2 3.4 3.7 3.9 4.2
Current account balance, USDbn -0.3 -0.2 -0.2 -0.2 -0.3 -0.3 -0.3
Current account balance, % of GDP -7.4 -3.6 -5.0 -5.3 -5.2 -5.2 -5.2
Foreign reserves ex gold, USDbn 1.8 2.0 1.9 2.3 2.3 2.3 2.4
Import cover, months 7.1 8.2 7.3 8.0 7.6 7.2 6.7
Total external debt stock, USDbn 0.9 0.9 0.9 0.9 0.9 0.9 1.0
Total external debt stock, % of GDP 19.3 20.0 18.6 19.4 18.0 17.2 16.6