Jan 23, 2021 Last Updated 1:01 AM, Jan 23, 2021

2021: The diagnosis

  • Jan 23, 2021
  • Published in January

After an incredibly challenging 2020, what will this year bring? We take a look at the economic and political prognosis and a few key sectors.

Vaccinating for recovery

Timely vaccination campaigns will be key to the recovery of Pacific island economies. The Pacific Community says a handful of Pacific Islands have still recorded no cases of COVID-19 at all (at the time of going to print)—Cook Islands, Kiribati, American Samoa, Niue, Nauru, Tuvalu, Tonga, Tokelau and Palau.  Others such as the Federated States of Micronesia,  have only recorded cases at the border from returning citizens, while most other island nations have recorded no cases of community transmission for months. Those with more open borders—Guam, French Polynesia and Papua New Guinea—have ongoing community transmission.

The economic outlook

As a region, Pacific Island GDP growth was forecast to shrink to 0.5% in 2020, the lowest rate since 1967 according to the World Bank. While most are predicted to grow by small margins in 2021, the World Bank has outlined a number of risks to these projections. “The pandemic could last longer than expected, the long term damage from last year’s recessions could be deeper than anticipated, balance sheet stress could intensify, or the contraction in global trade could be sharper or longer lasting than envisioned. More countries in the region could experience difficulties with procurement and distribution of the vaccine than currently anticipated,” it writes in its Global Economic Prospects report for this year.

Other sectors

The continued reliance on tourism in many Pacific Island countries and uncertainty over the opening of borders and appetite for travel is one of key risks to economic recovery (see page 16).

For the island region’s largest economy, Papua New Guinea,  growth will depend on a strong resources sector, including new investments. There’s some optimism around the construction boom being driven by additional investment into the resource sector and its potential to generate jobs.

“The implementation of new resource projects (Papua Liquified Natural Gas (LNG) and Wafi-Golpu) combined with professional, administrative, and support services needed alongside these projects, could generate formal jobs. There are downside risks, however, such as ongoing disputes over the Porgera mine which could weaken investor confidence,” the World Bank has written.

Work in 2021

In its December 2020  report on COVID-19’s macroeconomic impacts and job prospects, the World Bank said that redeploying workers from hard-hit sectors like tourism to alternative occupations that draw on similar skillsets should be prioritised, and could be supported through re-training.

Globally there has been much hope placed in the digitalisation of work but how does this translate to the Pacific Islands? “Low numbers of ICT job vacancies indicate potential obstacles to the digitalisation of work seen in other regions. Mismatches between demand and supply of skilled labour, which have been exacerbated by the impacts of COVID-19 on labour demand, point to the continued importance of investment in skills development,” the World Bank states.

Political outlook

For Marshall Islands, the Federated States of Micronesia and Palau, critical negotiations over the Compacts of Free Associations with the United States will continue this year. Under each compact, the island nations receive development assistance and visa-free access for its citizens to the United States, and the US in return has a strategic monopoly on the Micronesian states. The compacts also allow the US to test missiles at Kwajalein atoll in Marshall Islands. Palau guarantees the United States the use of certain defence sites in the future under its compact agreement.

Telecommunications tussles

The geopolitical tussle for influence continues to play out in the region’s telecommunications sector.

Digicel has indicated it may sell its Pacific operations in Fiji, Samoa, Vanuatu, Nauru and Tonga after a difficult 2020, and says it has been approached by a number of buyers. The company was carrying approximate US$6.7 billion in debt at the end of last year.  Digicel won’t confirm if those buyers include Chinese telcos, but it is  a prospect that has created concerns in Washington and Canberra. This follows nervousness around reports that Huawei Marine has bid for the Kiribati Connectivity Project, a submarine Internet cable that would connect Kiribati, the Federated States of Micronesia and Nauru to the HANTRU-1 undersea cable which lands in Guam, home to important US military assets.

Climate negotiations

Many Pacific leaders spent 2020 working to push messages on climate change, even as the world’s attention was swallowed by the pandemic, Brexit and America’s political difficulties.

The damage wrought by Tropical Cyclone Harold in Vanuatu and TC Yasa in Fiji last year highlight the continued urgency of this message.

“This is not normal. This is a climate emergency,” Fiji Prime Minister Voreqe Bainimarama said in the wake of TC Yasa.

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Economic growth expectations for the Pacific have been downgraded to decline by 6.1% for 2020.

The Asian Development Bank had originally forecast a 4.3% decline in July of this year.

“Vaccine procurement and distribution, safe travel arrangements, and continuing to strengthen health and social protection systems will all be key to ensuring the region’s recovery is sustainable,” said ADB Director General for the Pacific Leah Gutierrez.

For now the ADB is projecting growth of 1.3% for the region next year, but its Pacific Economic Monitor released today states that depends on early lifting of trael and trade restrictions.

The ADB predicts Papua New Guinea’s economy will contract by 2.9% in Papua New Guinea, with low growth of 2.5% in 2021.

In Fiji, the economy is projected to contract by 19.8%, and recover by 1% next year, if the country opens up to tourists in the second half of 2021.

For the Cook Islands, the ADB expects GDP to contract by 15.4% next year, even with a resumption of tourism.

The ADB says fiscal pressures seem to be mounting in Vanuatu, and that expanding seasonal worker schemes would “substantially allevaiate economic pressures” for Samoa and Tonga.

It states targeted efforts are needed to improve fiscal buffers and collected revenue in Solomon Islands, and that the Federated States of Micronesia and the Marshall Islands have been more affected by the socioeconomic impacts of the pandemic than initial estimates. “Measures to safeguard public health, provide training and education, and protect the vulnerable will help those countries avoid the spread of the disease and lay the foundations for a strong and sustainable economic recovery.”

For Kiribati and Tuvalu, the ADB says more information on vulnerable groups would help better targeting of social assistance measures.

The full report can be viewed at https://www.adb.org/publications/series/pacific-economic-monitor

A prominent Australian economist says it is “scary” to see COVID-19 put at risk so many of the gains Pacific island countries have made over the last decade.

Dr Jenny Gordon, the Chief Economist at the Australia Department of Foreign Affairs and Trade, says the Asian financial crisis “taught us in South East Asia that setting up good social protection infrastructure” is important so resources can get to the most needy when there is an emergency.

Gordon anticipates Pacific nations’ economic recovery will rely on the regaining of export markets, local stability and access to finance, and that post COVID economies may have a much greater focus on local production, subsistence agriculture and movement back to rural areas, and a strong investment in human capacity.  She describes a “recovery sequence” that starts with resource prices recovering first, “although it might be some time before we see a considerable rise in energy prices”, potential in agriculture and export of high-value agricultural products, continued return of  the Pacific labour market (including labour schemes in Australia) and then, the return of tourism.

“I suspect the recovery of international tourism is going to be very slow,” Gordon says. “We’ve got to think about the next four years. So in terms of the financing gap there’s not much point in just financing this year’s deficit for governments, we’ve got to actually got to think about how they are going to finance those deficit in [following] years and what the size of those deficits will be.”

Gordon says Australia—the largest development partner for many Pacific island nations— is asking questions about governments’ fiscal situation, what is essential expenditure, borrowing capacity from multilateral banks, other donors and domestic sources, social protection and how to maintain basic services.

“A lot of governments as part of their COVID-19 packages are going to forgive power bills and other types of bills but unfortunately that doesn’t help SOEs [State Owned Enterprises]  or private sector providers who are already struggling to pay the return on the capital that they have invested. So that’s quite challenging, how those SOEs will come out of this.” Gordon says there may be an opportunity to improve infrastructure quality and “put into pace some more robust user-pays systems.”

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Papua New Guinea’s Treasurer, Ian Ling-Stuckey says his country has not had “an economic crisis of such complexity or magnitude since World War 2.” Samoa’s finance minister Sili Epa Tuioti calls it a “social and economic tsunami.” The language being employed by institutions and governments in responding to the economic impact of COVID-19 stresses the historic moment we are living through.

The response of international organisations and donor partners to assist Pacific island economies has been swift, although details are still to be ironed out given the pace with which the pandemic is developing and morphing, and the pervasiveness of its impacts across the globe.

Central to that detail will be the form of that assistance; and whether it’s concessional loans, grants, debt forgiveness or a complex combination of all three and more.

What does the crisis mean for tourism, remittances, digital transformation and more? Get your copy of Islands Business to find out more.

 

Growth forecasts

 

2019

2020

2021

Dependencies

Stimulus package

           

ADB Pacific member countries

 

0.3

2.7

Fiscal stimulus measures across the region of at least 10% of GDP

 

Cook Islands

5.3

-2.2

1

Fiscal stimulus measures of approx. 50% of GDP

US$34.7m

Federated States of Micronesia

3

1.6

-3 (WB)

3

0.5 (WB)

Pension fund reform

New capital projects

US$15m

Fiji

 

-4.9

-4.3 (WB)

3 (ADB)

1.9 (WB)

Improved business and investment climate

Limit debt exposure

Climate resilient infrastructure

US$500 million

French Polynesia

       

US$280m

Kiribati

2.4

1.6

1.8

Well managed, sustainable trust funds

 

Marshall Islands

3.8

2.5

-3 (WB)

3.7

1 (WB)

Pension fund reform

Easing of restrictions on travel and transport

 

Nauru

1

0.4

1.1

Well managed, sustainable trust funds

 

Palau

-3

-4.5

-6 (WB)

1.2

0 (WB)

Pension fund reform

Tourism recovery

 

PNG

4.8

0.8

0.2 (WB)

2.8

3.3 (WB)

Good management of public debt

US$1.6billion

Samoa

3.5

-3

-5 (WB)

0.8

0 (WB)

 

US$23.6milloon

Solomon Islands

2.6

1.5

-6.7 (WB)

2.7

-0.3 (WB)

Large infrastructure projects provide some buffer

Reform of tax system

 

Tonga

3

0

0.5 (WB)

2.5

3.2 (WB)

Tourism recovery

Accelerated rehabilitation and recovery post TC Gita

US$25m

Tuvalu

4.1

2.7

3.2

Well managed, sustainable trust funds

 

Vanuatu

2.8

-1

-8 (WB)

2.5

6 (WB)

Benefits of labour mobility schemes are widespread, sustainable

 

Source: ADB Outlook 2020, World Bank, national governments

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