Economic Analysis - RBF To Remain Accommodative To Support Fiscal Initiatives - SEPT 2017


BMI View: The RBF held its Overnight Policy Rate at 0.5% during its June monetary policy meeting amid a stable economic outlook. With inflation likely to remain manageable and the central bank likely to seek to support the government's expansionary budget, it is unlikely that the RBF will hike rates in 2017. As such, we have pared back our forecasts and now expect the central bank to remain on hold through 2017 and 2018 as it seeks to support the government's fiscal initiatives amid a stable inflation outlook.

The Reserve Bank of Fiji (RBF) held its Overnight Policy Rate at 0.5% during its most recent monetary policy meeting in June. In its monetary policy statement, the RBF adopted a rather neutral stance, stating that 'the dual monetary policy objectives of the Bank remain intact'. With inflation having fallen considerably from the highs in January as the base effects from Cyclones Winston and Zena wear off, we believe that the 6.8% y-o-y figure seen in the beginning of the year is likely to be a thing of the past and expect inflation to remain manageable. With reconstruction efforts continuing to take place and the government embarking on an expansionary budget aimed at economic development in FY2017/2018 (August-July), we believe that the central bank will seek to support these initiatives. As such, we have pared back our expectations for two rate hikes of 25 basis points (bps) to 1.00% and now forecast the Overnight Policy Rate to remain on hold at 0.50% throughout 2017 and 2018.

Inflation To Remain Stable

Inflation has been on a downtrend having fallen to 2.0% y-o-y in June from 4.1% y-o-y in April. However, we believe that inflation is unlikely to fall significantly further as shortages in certain market items (particularly yaqona) are likely to present upside inflationary pressures. Indeed, yaqona prices remain elevated despite the normalisation of the prices of most agricultural products. With food and fuel prices likely to trend higher in 2017 as compared to 2016, we maintain our forecast for inflation to average 4.7% in 2017. In addition, the steady level of reserves is likely to lead to continued currency stability. According to the central bank, foreign reserves were approximately USD2.2bn, which was sufficient to cover 5.6 months of retained imports. Given that the RBF has a mandate to ensure reserve and price stability, we believe that the stable reserves and falling inflation have removed the need for the central bank to hike rates.

RBF To Seek To Support Expansionary Budget

The RBF is also likely to continue standing pat on rates as it seeks to provide support to the government's proposed budget. In its monetary policy statement, the central bank stated that it would 'continue to closely monitor international and domestic developments, in particular the impact of the 2017/2018 National Budget which will be announced on 29 June, and align monetary policy accordingly'. Given that the government's budget is aimed at improving the country's roads, rail, energy, and education infrastructure, all of which are growth positive, it is likely that the RBF will be supportive of the planned initiatives by keeping borrowing costs low.

Growth Concerns Remain

Lastly, the central bank is likely to refrain from hiking rates in the near future amid growth concerns. The RBF noted that 'domestically, real sector outcomes have been mixed to date, however, aggregate demand conditions remain positive, largely underpinned by buoyant consumption and improving investment activity'. We expect growth to be mainly driven by ongoing reconstruction efforts, but note that fluctuations in international commodity prices could present downside risks to Fiji's growth outlook.

Disaster-Prone Location Poses Downside Risks

Natural disasters like droughts, floods, and strong winds are recurrent in most parts of the country, and these have a negative impact on growth and pose downside risks to our forecast. The country is also vulnerable to changes in global weather patterns, like El Nino. For instance, El Nino in 2003 resulted in drought and crop failures throughout Fiji due to erratic and delayed rainfall. Low lying areas of the country are prone to flooding, while the country is also vulnerable to earthquakes. Another unexpected disaster in the near-term could disrupt the domestic supply chain and weaken growth, prompting the RBF to cut rates to support growth.

Macroeconomic Forecasts (Fiji 2013-2019)
Indicator 2013 2014 2015e 2016e 2017f 2018f 2019f
e/f = BMI estimate/forecast. Source: National sources, BMI
Population, mn 0.9 0.9 0.9 0.9 0.9 0.9 0.9
Nominal GDP, USDbn 4.2 4.2 4.4 4.6 5.2 5.7 6.2
GDP per capita, USD 4,757 4,831 5,027 5,265 5,884 6,452 6,873
Real GDP growth, % y-o-y 8.4 4.5 4.0 2.5 3.5 3.2 3.0
Industrial production, % y-o-y, ave 2.5 2.4 2.0 2.0 2.0 2.0 2.0
Consumer price inflation, % y-o-y, ave 2.9 0.5 1.4 3.9 4.7 4.0 4.0
Consumer price inflation, % y-o-y, eop 3.4 0.1 1.6 3.9 4.0 4.0 4.0
Central bank policy rate, % eop 0.50 0.50 0.50 0.50 0.50 0.50 1.00
Exchange rate FJD/USD, ave 1.83 1.93 2.07 2.13 2.06 2.00 2.00
Exchange rate FJD/USD, eop 1.88 1.99 2.15 2.12 2.00 2.00 2.00
Budget balance, FJDbn -0.2 0.0 0.1 -0.5 -0.5 -0.5 -0.6
Budget balance, % of GDP -2.9 0.0 1.0 -5.2 -4.9 -4.7 -4.5
Goods and services exports, USDbn 2.4 2.5 2.4 2.6 2.8 3.1 3.3
Goods and services imports, USDbn 3.1 3.1 2.7 3.0 3.2 3.5 3.7
Current account balance, USDbn -0.4 -0.3 -0.1 -0.2 -0.2 -0.2 -0.2
Current account balance, % of GDP -9.9 -7.7 -1.5 -3.5 -3.3 -3.2 -3.2
Foreign reserves ex gold, USDbn 1.8 1.8 2.0 1.9 2.0 2.0 2.0
Import cover, months 6.8 7.1 8.7 7.7 7.3 6.9 6.5
Total external debt stock, USDbn 0.8 0.9 0.9 0.9 0.9 1.0 1.0
Total external debt stock, % of GDP 18.9 20.8 19.9 19.5 18.1 16.6 15.7