RESERVE BANK OF FIJI JUNE 2018 ECONOMIC REVIEW
Global growth for 2018 remains on track as investment and trade have picked up, particularly for emerging market economies.
However, risks for the current global outlook remain including trade protectionist measures by the United States (US) on China, Canada, Mexico and the Euro zone and the associated retaliatory measures by these countries along with the rising price of some commodities such as crude oil.
In June, mixed movements was observed for global commodity prices as gold and sugar prices fell while price of crude oil rose.
The upward pressure on oil prices is underpinned by the supply shortages from Venezuela, Libya and Iran–the latter, following the US imposed sanctions.
The fall in sugar prices is attributed to the increase in production from India to an already oversupplied global market, while the decline in gold prices was mainly due to easing political tensions in Italy and the stronger Euro.
Domestic market
Domestically, sectoral performances remained broadly positive. Cumulative to May, visitor arrivals grew by 2.1 per cent backed by higher arrivals from New Zealand (NZ), US, China, India, Hong Kong and the rest of Asia.
Similarly, gold and timber productions continued to improve.
Electricity production however declined by 0.3 per cent, with 68.2 per cent of total generation sourced from renewable energy.
Moreover, fish production fell in the year to April by 12.3 per cent but is anticipated to pick up as favourable weather conditions are expected in the coming months.
Nonetheless, firm consumption activity continued to support aggregate demand while investment activity portrayed mixed outcomes.
Cumulative to May, partial indicators for consumption revealed positive results as commercial banks’ new lending for consumption rose by 25.0 per cent due to increases in lending to the wholesale, retail, hotels & restaurant (30.4 per cent) and private individuals (10.3 per cent ) sectors.
In addition, new (54.6 per cent) & second hand (9.1 per cent) vehicle registrations and net VAT collections (9.7 per cent) also rose in the same period. In the months ahead, consumer spending is expected to remain strong largely supported by accommodative monetary policy and Government’s expansionary fiscal policy.
Investment outcomes were mixed in the review period as per partial indicators. Cumulative to February, import of investment goods grew by 25.5 per cent.
In contrast, domestic cement production and sales declined by 27.2 per cent and 25.4 per cent, respectively in the year to May.
In the same period, new commercial banks’ lending to the building & construction sector declined by 43.7 per cent while new lending to the real estate sector (11.5 per cent) rose.
Despite the slowdown, construction and investment related activities are expected to pick up in the coming months underpinned by post disaster rehabilitation works and ongoing private and public sector projects.
Investment as a percent of GDP is projected to be around 28.0 percent this year.
Labour market conditions remained favourable.
The RBF’s Job Advertisements Survey reveals a 4.7 per cent growth in the total number of vacant jobs advertised in both the Fiji Sun and the Fiji Times in the year to May.
Higher recruitment intentions were noted in the manufacturing; community, social and personal services; electricity & water; mining & quarrying and the transport, storage & communication sectors. In the near term, employment prospects are generally positive. Monetary conditions remained supportive of growth. Private sector credit growth slowed to 7.8 per cent in May, compared to a 14.3 per cent growth in the same period last year driven largely by lower growth in commercial banks’ lending to the private sector. Interest rate movements were mixed in May.
The commercial banks’ weighted average outstanding lending rate declined over the month to 5.66 percent but remained low compared to 5.78 per cent in May last year. The commercial banks’ weighted average new lending rate rose over the month to 5.94 per cent (from 5.90 per cent ) as well as over the year (from 5.80 per cent). Moreover, commercial banks’ existing time deposit rate rose over the month to 3.37 per cent (from 3.34per cent in April) while the new time deposit rate fell over the month to 3.13 per cent (from 3.44% in April).
Liquidity in the banking system (measured by commercial banks’ demand deposits) fell by 9.9 per cent (to $470.2m) in June led by a decline in foreign reserves (-$33.2m) coupled with an increase in currency in circulation ($7.9m) and statutory reserves deposits ($4.7m).
Over the month of June, the Fijian dollar strengthened against the Australian (1.5 per cent) and the NZ dollar (1.1 per cent) but weakened against the US dollar (-1.7 per cent), Euro (-0.8 per cent) and the Japanese Yen (-0.5 per cent).
The Nominal Effective Exchange Rate (NEER) fell over the month (-0.2 per cent) and year (-1.4 per cent) reflecting a general weakening of the Fiji dollar against its major trading partner currencies in May.
The Real Effective Exchange Rate (REER) fell over the month by 0.1 per cent and rose over the year by 1.8 per cent on account of high domestic inflation recorded in May. 1
The NEER is the sum of the indices of each trading partner country’s currency against the Fijian dollar, adjusted by their respective weights in the basket.
This index measures the overall movement of the Fijian dollar against the
In the months ahead, consumer spending is expected to remain strong largely supported by accommodative monetary policy and Government’s expansionary fiscal policy.
basket of currencies.
An increase in this index indicates a slight appreciation of the Fijian dollar against the basket of currencies and vice versa.
The REER index is the sum of each component of the NEER index, adjusted by the relative price differential between Fiji and each of Fiji’s major trading partners.
The index measures the competitiveness of the Fijian dollar against the basket of currencies.
A decline in the REER index indicates an improvement in Fiji’s international competitiveness.
Inflation rose further to 5.1 per cent in May from 4.0 per cent in April and 2.5 per cent in May last year.
This was due to higher prices of kava, alcohol, vegetables and fuel items. However, over the month of May, prices for vegetables fell showing signs of normalisation in prices of market items. Both domestic and external factors continue to drive inflation in the first five months of this year while the year-end inflation forecast of around 3.0 per cent is upward biased.
Higher global food and oil prices and adverse weather conditions remain key risks to the inflation outlook; hence price developments will be closely monitored in the coming months.
Foreign reserves (RBF Holdings) fell over the month of May to $2,162.8 million, though sufficient to cover 5.0 months of retained imports of goods and non-factor services (MORI).
As at June 28, foreign reserves were $2,129.5 million, sufficient to cover 4.9 MORI and are forecast to remain at comfortable levels throughout the year. Taking into account the recent global and domestic economic developments and the stable outlook for inflation and foreign reserves, the Reserve Bank Board kept the Overnight Policy Rate at 0.5 per cent in June.