Economic Analysis - RBF To Remain On Hold Through 2018 - APR 2018

BMI View: The RBF's decision to keep its Overnight Policy Rate at 0.5% during its monetary policy meeting on January 25 was in line with our expectations. With growth facing uncertainties and inflation likely to remain manageable, we maintain our forecast for the central bank to keep interest rates on hold throughout 2018 as it seeks to provide stability.

With Fiji's growth remaining vulnerable to external headwinds, and inflation likely to remain manageable, we maintain our forecast for the Reserve Bank of Fiji (RBF) to keep interest rates on hold throughout 2018 as it seeks to provide stability. The central bank kept its Overnight Policy Rate (OPR) on hold at 0.5% during its monetary policy meeting on January 25, and in its monetary policy statement, it adopted a neutral tone. It noted that while global and domestic economic growth remains strong, 'downside risks in the form of higher inflationary pressures, build-up of financial vulnerabilities and tightening of global financing terms may potentially derail this year's global outlook'.

Holding To Support Growth

We maintain our positive outlook on Fiji's economy, and expect real GDP to expand by 3.2% in 2018, supported by strong tourism growth, post-cyclone rebuilding, and the government's expansionary budget. However, we note that Fiji's dependence on tourism and commodity prices makes the country vulnerable to changes in the external environment. With tourists from Australia and New Zealand accounting for the majority of visitor arrivals (70% of total), our expectations for growth to slow in both countries in 2018 could potentially present headwinds. In addition, the gradual slowdown in the Chinese economy could also weigh on tourist arrivals. In light of these uncertainties, we expect the RBF to keep rates on hold as it seeks to provide support to the economy. Lower rates would also benefit the government's ongoing infrastructure development plans and improve the island-nation's connectivity (scoring 47.1 (out of 100) in the logistics risk index compared to that of regional leaders Australia and New Zealand at 71.1 and 73.8, respectively).

Inflation To Tick Higher

Headline consumer price inflation (CPI) came in at 1.5% y-o-y in January, slowing from 2.8% y-o-y recorded in December 2017. We expect inflation to tick higher over the coming months amid higher food and fuel prices and forecast inflation to average 3.4% in 2018 (the same as 2017). This has been echoed by the central bank, which stated that 'higher yaqona and tobacco prices persisted throughout the year and are likely to continue in the months ahead'. Considering that Fiji imports a considerable amount of food (food and food-related products accounted for approximately 16% of total imports in 2016), we believe that inflation will rise. With food and drinks accounting for 36.0% of the CPI basket, we believe that food-related inflation will slowly tick higher in the country over the coming months. Indeed our Agribusiness team expects food prices to trend slightly higher in 2018 compared to 2017.

Our expectations for higher Brent prices will also present upside pressures on inflation. Our Oil and Gas team expects Brent to average USD65.0/bbl in 2018, up from USD54.8/bbl in 2017. Refined crude products accounted for approximately 14% of the country's total imports in 2016. Furthermore, higher oil prices will have a negative spillover effect on inflation by increasing transportation costs (accounting for 14.5% of the inflation basket). Accordingly, we expect transportation costs to rise gradually in line with the uptick in fuel prices.

However, the central bank has historically shown itself to be quite tolerant of higher inflation stemming from food prices, with the RBF keeping rates on hold when inflation spiked to 6.8% y-o-y in January 2017 as a result of higher food prices. As such, we believe that the slight uptick in inflation is unlikely to see the RBF hike rates amid a still-uncertain global economic backdrop.

Disaster-Prone Location Poses Downside Risks To Interest Rate View

Natural disasters like droughts, floods, and strong winds are recurrent in most parts of the country. 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, presenting downside risks to our interest rate forecast.

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 2.0 2.0 2.0 2.0
Import cover, months 7.1 8.2 7.3 6.9 6.5 6.1 5.8
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