A step up in engagement by the Australian and New Zealand governments, combined with regional and international economic support over the past year, has cushioned the initial blow of Covid-19.
Moving forward, labour mobility, a fast vaccine rollout and safe travel corridors in the region, combined with the faster release of infrastructure support will be critical to its ongoing recovery.
Closed borders have hit the Pacific island economies hard. The idyllic, Covid-free beaches of the Pacific islands are empty of visitors, and the countries that rely on tourism are experiencing a disproportionate impact of the pandemic on their economies, despite not having a health emergency.
While overseas economic conditions are set to improve this year, the Pacific will require international support to see an uplift in economic conditions. Unlike many of the developed Western countries, the relatively poor Pacific island countries were not able to put a floor under demand and shelter their economies from a more severe recession.
A more severe economic downturn, pressures on payments and elevated currency and country risks are probable in 2021.
Fortunately, the Pacific has long benefitted from support provided by some of its nearest neighbours. Australia and New Zealand have been the region’s key development partners, and more recently, their step up has been encouraging when combined with international donor assistance.
In the last year alone, the World Bank and IFC announced AU$1bn investment into Fiji and the AU$2bn Australian Infrastructure Financing Facility for the Pacific (AIFFP) has become operational. Recent Australian and New Zealand government assistance to the islands in the wake of Tropical Cyclone Yasa has been welcomed.
In the wake of COVID-19, the Pacific will continue to require international support. The most beneficial types if support are likely to include:
Steps to ensure a:
Tourism key to a jobs recovery
Prior to the pandemic, the Pacific’s inbound tourism was strong, helped by solid economic conditions, particularly income growth in key source markets including Australia and New Zealand. Growth in overseas arrivals averaged about 5% a year. So much so, that that in the past decade tourism became the main driver of growth for many of the Pacific island economies including Fiji, Vanuatu, Samoa, Cook Islands and Tonga.
Tourism revenue flowed directly into sectors such as accommodation and food services, retail and transport, but then also fed through to other supporting industries yielding secondary benefits to the economy.
Once you add the stimulus from employment and taxes collected, the tourism sector’s total contribution to GDP is several multiples of its direct contribution to GDP and equates to about 40 - to 60% of the region’s output. For the Cook Islands, the contribution to GDP is closer to 80%.
However, since the Covid-induced border shutdown, visitor arrivals have collapsed to virtually zero since April 2020.
Tourism-dependent businesses are experiencing negative cash flows and are struggling to meet commitments. This has resulted in the loss of many thousands of jobs. Fiji lost nearly 70,000 formal sector jobs in 2020 (21% of total employment) which saw the unemployment rate shoot up to 27% from 7% in 2019. Taking into account the informal sector of the economy, which comprise the majority of total employment in the Pacific islands, then the jobs impact is a lot higher.
The solution: A tourism-led jobs recovery.
Many Pacific island countries have not had any community transmission of the virus with some countries having gone several hundred days without a local case. In the absence of international tourism, the economic hardships will get worse.
Recreating the strong growth in inbound tourism seen in the period leading up to the pandemic will be a challenge but it is through the support of its international allies where we might see a turnaround.
GDP and jobs is not the only problem – national debt is mounting
Most Pacific island countries experienced solid growth before the pandemic. But the flipside of this is a rising trade deficit, fuelled by imports of both consumer and capital goods. Over-consumption and narrow growth raises the risk of a return to larger deficits if tourism does not recover.
The need to finance the current account deficit requires a continued inflow of funds, either debt or equity. With the latter requiring favourable economic conditions, debt is the only viable alternative for now.
However, debt has limited wriggle room given the substantial uplift in government borrowings to finance budget deficits in 2020. If the current account deficit comes to a head, then pressures on foreign reserves will emerge and currency risks could rise.
Yes, migrant remittances are holding but that is not enough because consumption does not provide for a jobs recovery.
More budget support can contain credit and country risks
Pacific island governments had to take out large loans and issue debt to offset the decline in revenues brought about by a collapse of the tourism industry. Larger budget deficits have pushed debt higher and has left limited room to borrow more.
Further, Pacific island countries are B-rated credit nations and this prevents them from accessing cheap funds from the international capital markets. The need to fund budget deficits with more expensive domestic debt will heighten credit and country risks. To contain these risks, other countries may consider providing cheaper budget support loans while the Pacific awaits a recovery in tourism and jobs.
Ramping up Pacific labour schemes can help
The Australian Government has restarted its Seasonal Worker Program (SWP) to help fill acute labour shortages in rural and regional Australia. New Zealand has also received seasonal workers. In the 2018-19 financial year, 12,200 Pacific people worked in Australia under the SWP and remitted an aggregate nearly AUD110m back to Pacific. There are further opportunities here due to the current pool of displaced Pacific workers.
Agriculture technical expertise can reduce imports and help in economic diversification
No doubt after the pandemic we will see a shift away from the Pacific islands being so heavily dependent on tourism as a source of growth. The Pacific has great potential in agriculture with kava exports coming in leaps in bounds in recent years.
Despite this potential, the Pacific remains a net importer of fruits and vegetables when it comes to meeting tourism demand. With abundant land, the Pacific should be looking to reduce these imports and become an exporter of fruit and vegetables. There is also great potential in other areas such as fisheries and niche products like coffee, cocoa and turmeric.
The region would benefit from help with training, technical support and equipment, which could see the Pacific islands, produce high-quality produce at a scale to feed themselves and for the export market.
Release infrastructure funding quickly and get work started
Inadequate infrastructure remains a key constraint to Pacific prosperity. Without question, the Pacific needs better roads and ports to get produce to market, electricity to drive rural development and industry and more reliable and sophisticated telecommunications. It also needs to safeguard against climate risks by reducing reliance on fossil fuels. The Asia Development Bank estimates that over US$30bn needs to be invested in Pacific infrastructure by 2030.
But the Pacific islands alone lack the resources to meet the ADB’s targets. The narrow-based economies provide limited resources for governments who have to juggle competing priorities, and infrastructure investment is often the casualty. Donor funding is critical.
The AU$2bn Australian Infrastructure Financing Facility for the Pacific (AIFFP) has built a project pipeline of about AU$300m for year ending 30 June 2021. This is exactly what the region needs, more urgently than ever. Fast roll out of this funding, along with the release of fast disbursing funds for infrastructure maintenance works, would mean projects can begin immediately, creating much-needed jobs.
Tessa Price is ANZ's Regional Executive Pacific. Kishti Sen is ANZ's Pacific Economist
Pacific island countries should not expect international travel to resume in earnest until late 2021, travel and aviation experts have warned.
‘You should forget the US market for 2021, as well as Europe and the United Kingdom,” Peter Harbison told a recent meeting of Pacific airline executives.
“Nearly 550,000 Americans are projected to have died by 1 April 2021 (from COVID-19), which is more than double the mid-November 2020 level.
“The vaccine rollout is projected to have little impact by April 2021.
“For Europe, over a million Europeans are projected to die by 1 April 2021, representing a trebling of mid-November 2020 numbers.
“For the United Kingdom, nearly 120,000 residents are projected to die by April 2021, doubling its mid-November 2020 level.”
Harbison is the chairman emeritus of CAPA – Centre for Aviation, an Australian based aviation and travel market intelligence firm.
He was among a number of experts invited to address a virtual seminar for members of ASPA – the Association of South Pacific Airlines recently.
With the exception of Fiji Airways, all Pacific airlines, including Air New Zealand and QANTAS, are Association members.
Even the performance in 2021 of the region’s largest tourist source market, Australia, is in doubt, Harbison told the ASPA seminar.
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Fiji’s central bank is projecting the country’s economic growth to climb back into positive territory next year, after revising this year’s historic contraction to negative 19 percent from an earlier estimate of negative 21.5 percent.
“Domestically, the magnitude of this year’s economic contraction is expected to be smaller than initially anticipated, whereas next year’s projected recovery largely hinges on the opening of international borders and the resumption of travel,” the Reserve Bank of Fiji said in its November Economic Review released this week.
“In 2021, economic growth is expected to range between 1.6 percent and 8.0 percent given the substantial uncertainties around the reopening of borders for quarantine-free travel and appetite for tourism activity.”
Performances across major sectors of the economy – some already poor before global lockdown early this year – have plunged further and remain dismal as the coronavirus pandemic enters its ninth consecutive month since it was declared a pandemic by the World Health Organisation in March this year.
“Sectoral performances continued to be well below 2019 levels in the first ten months of the year,” RBF noted.
Partial indicators for consumption, a major economic driver, returned gloomy signals.
Net VAT collections, new consumption lending, new vehicle registration, second hand vehicle registration and electricity consumption were all significantly reduced over most of the year, indicating a prevailing weakness in consumer spending.
Tourism, another major GDP component and still in hiatus internationally, declined by 80.7 percent cumulative to October.
In the investment area, two major indicators – domestic cement sales and new investment lending – both declined by 11.6 percent and 16.6 percent respectively in October, compared to the previous month.
“Cumulative to October, commercial banks’ new lending for building & construction purposes declined by 24.9 percent. In the same period, domestic cement sales declined (-11.6%), mainly underpinned by weak demand,” RBF said.
Increased caution by the banks and other credit institutions, who now prefer less risky lending, has not only led to a general reduction in lending to both private business entities and individuals, it has also created a liquidity glut in the market.
In August and September, excess liquidity as denoted by the banks’ demand deposits (BDD) stood at over F$1billion (US$0.48b) each month, gradually easing in October to $912.9m (US$440m) and $860.5m (US$414m) at the end of November, mostly attributed to money moving out of the country.
Interest rates, according to RBF, were generally lower compared to 2019.
“However, risks to the financial sector remain as the ending of moratoriums offered by financial institutions to COVID-19 affected customers could raise the existing levels of non-performing loans,” it warned.
In the job market, supply remained weak and according to the RBF Job Advertisement Survey, there was a 64.3 percent decline in vacancies in the year to October, compared to a decline of 1.4 percent in the same period in 2019.
“This was underpinned by reduced recruitment intentions across all major sectors of the economy,” it said.
Amid the bleak scenario, personal remittances have been pivotal in buoying both the deflating economy and consumer confidence.
“Personal remittances rose by 7.3 percent to F$521.0 million (US$251m) in the first ten months of the year. For the month of October alone, personal remittances totalled a record F$69.0 million (US$33.2m), an increase of 29.5 percent over the previous month and an increase of 58.7 percent over October last year. Overall, remittances have performed well above expectations and contributed positively to foreign reserves,” RBF said.
While the numbers look good in terms of the central bank’s two key roles of keeping foreign reserves adequate and inflation low, it has been on the back of lower exports and lower imports, reflecting lower production and consumption demand from within a weak domestic economy.
Foreign reserves stood at F$2.2 billion (US$1.06b), sufficient for 7.7 months of retained imports, while annual inflation rate was at -2.9 percent in October.
When World's Toughest Race: Eco-Challenge Fiji first screened earlier this year, international audiences vicariously took a road less travelled. The competition, which pitted 66 teams across 671 kilometres, saw participants use a compass and map to sail, hike, climb, paddleboard and bike through Fiji’s interior and maritime regions.
Amazon Prime, which aired the series, has approximately 150 million viewers in 200 countries and Fiji’s Minister for Industry, Trade and Tourism, Faiyaz Koya, said the production injected F$30.6 million (US$14.4 million) into the country. More than 200 locals were directly employed, with many others also involved.
The event saw participating villages and communities paid filming levies. Supplies and equipment such as water tanks and water purification technology, plus books for students, were also passed on to communities.
Fiji offers massive rebates to international companies that film in the country. Production companies are eligible for a 75% tax rebate calculated on total Fiji expenditure. The rebate is capped at F$15 (US$7) million. The sector generated F$134.1 million (US$63million) from 84 productions in 2019. The generous financial incentives are the reason the US Survivor franchise returns year after year.
But there are concerns that the Eco Challenge Fiji opportunity has not been leveraged as much as it could have. Timing and the pandemic has played a part; while the series was filmed in September 2019 it was aired almost a year later, as Fiji’s borders remain closed and international tourism ground to a complete standstill. However there also appears to have been a lack of coordination and strategic thinking about how to market the opportunity across a range of sectors.
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Unscripted and unplanned, Fijians have returned quietly to the land and the sea over the past months as the impacts of job losses brought about by the COVID19 pandemic began to bite.
In the tourism belts of Nadi and nearby Sigatoka, former hotel and resort workers – in their hundreds – are turning to farming and fishing virtually overnight.
Necessity is driving them, and no one knows when, how, or indeed if, this quiet revolution will end.
“With many in the village losing their work, we no longer have a steady income to buy food so we’re planting our own,” says Epeli Ganilau.
He is Turaganikoro, village administrator of Sanasana, the traditional owners of the land which hosts the multi-million dollar InterContinental Fiji Golf Resort & Spa and the Natadola Bay Championship Golf Course.
With almost all the men and women in the village laid off work from the resort and its neighbouring golf course, Sanasana has revived their youth and women clubs to spearhead the return to subsistence farming and fishing.
Other villages in Fiji’s tourism belt on Viti Levu’s west coast and Vanua Levu’s south coast around Savusavu town have done the same; closure of hotels and supporting businesses has driven jobless men, women and youths back to subsistence farming, or fishing.
Figures are daunting, and likely to worsen
A survey of tourism businesses by the International Finance Corporation and Fiji’s Ministry of Commerce, Trade, Tourism and Transport found that if the current situation doesn’t change by this November (a likely scenario given recent increases in COVID diagnoses in the Australian and New Zealand source markets), over 500 of the 3,569 businesses surveyed anticipate bankruptcy. If international travel does not resume within six months, 60.5% of those surveyed will close or move away from the tourism sector.
The study further found that 20% of tourism businesses are currently unable to service their debt, and a further 16% expect to default on their debt within one to four months, and have called for loan repayment moratoria, further tax reductions/holidays, and financial support for recovery and rent deferral.
Meanwhile a study by the International Labour Organisation on the impact of COVID-19 on employment also released at the end of last month found half of the workers surveyed had lost their jobs, and most of those still in employment were on reduced hours. More than half of redundant workers said they could not find jobs and needed financial support, and 46% had ventured into subsistence living and operating a microbusiness. Almost all (99%) said the government should do more to protect their jobs and rights, “instead of depleting their retirement fund.”
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