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 www.asia-monitor.com

Asia Monitor
Australasia & South Pacific Vol 5 Issue 11 November 2016

BMI Research’s monthly regional report on political risk and macroeconomic prospects

AUSTRALIA This month's top stories

Strong Performance New Zealand: Strong Growth Likely

To Be Temporary
Unlikely To Persist
As a result of New Zealand's stronger-than-expected H116
performance, we are upgrading our 2016 real GDP growth
forecast to 3.0%, from 2.3% previously. Nevertheless, we
BMI View: The Australian economy expanded by 3.1% y-o-y in H116, maintain our 2017 real GDP growth forecast of 2.5% as con-
and we are upgrading our 2016 real GDP growth forecast to 2.8%, from struction activity is set to slow, which will weigh on overall
2.4% previously, to reflect this. We are also revising up our 2017 real GDP growth. However, investment in the dairy sector should
growth forecast to 2.5% (versus 2.2% previously), but highlight that we improve modestly along with milk prices while the economy
remain below-consensus. Weakness in the housing market, and a still- will still continue to be supported by the services sector.
page 5
poor private investment outlook, notably in the mining sector, will weigh on
growth despite public infrastructure investment providing some support. Fiji: Reconstruction Efforts Present
The Australia economy expanded by our bearish outlook on the Australian Upside To Inflation
3.3% y-o-y in real terms in Q216, from economy. Weakness in the overvalued We have upgraded our average 2016 inflation forecast for
Q116's 3.0% y-o-y, bringing H116's real property market and the unwinding Fiji to 3.5% from 2.1% previously, as we expect the recovery
GDP growth to 3.1% y-o-y, and we are investment boom in the mining sector in oil prices in H216 and ongoing reconstruction efforts fol-
upgrading our 2016 real GDP growth will weigh on growth, despite public lowing the destruction wrecked by Cyclones Winston and
forecast to 2.8% (versus 2.4% previously) infrastructure investment providing Zena in early 2016 to lead to a gradual rise in inflation while
due to the economy's continued outper- some support. Indeed, on a q-o-q sea- the favourable base effects from lower oil prices wear off.
formance. We are also revising up our sonally adjusted annualised (SAA) basis, page 7
2017 real GDP growth forecast slightly Australia's real GDP growth decelerated
to 2.5% (versus 2.2% previously). That to 2.1% in Q216, from the strong per- Timor-Leste: Tibar Port Development
said, our forecast is still below Bloomberg formance of 4.2% in Q116. Positive For Growth
consensus of 2.9%, and we maintain ...continued on page 2 The development of the container port at Tibar Bay as well
as related infrastructure will go some way in improving
Timor-Leste's infrastructure and longer-term economic
expansion. However, the country's poor business environ-
RISK INDEX TABLE ment presents downside risks to the successful completion
BMI's Country Risk Index scores countries on a 0-100 scale, evaluating short-term of the port.
and long-term political stability, short-term economic outlook, long-term economic page 8
potential and operational barriers to doing business. For a detailed methodology,
visit bmiresearch.com or contact us using the details below. Regional Indicators
Short Term Long Term Operational Country
2014 2015e 2016f 2017f
Political Economic Political Economic Risk Risk
Asia Pacific
New Zealand 84.0 67.5 86.0 72.0 76.8 77.1
Australia 75.6 64.8 88.0 71.0 72.1 74.1 Nominal GDP, USDbn 24,167 24,199 25,255 26,506
Kiribati 80.2 47.3 77.9 40.7 42.4 55.9 Population, mn 3,990 4,028 4,065 4,101
Vanuatu 76.0 53.5 70.8 51.9 39.5 55.6
Tonga 70.4 40.6 60.4 42.7 45.7 51.1
GDP per capita, USD 6,056 6,008 6,213 6,463
Samoa 67.9 36.0 76.9 39.1 47.8 53.2 Real GDP growth, % 4.9 4.8 4.5 4.4
Fiji 51.5 52.3 46.9 53.2 46.7 49.1 Inflation, % 2.9 1.8 1.9 2.5
Timor-Leste 54.6 59.0 49.8 41.8 32.6 45.6
Solomon Islands 61.0 44.8 53.5 47.1 36.9 47.0
Goods Exports, USDbn 6,417 5,864 5,949 6,255
Papua New Guinea 44.0 49.2 53.8 50.5 32.7 44.2 Goods Imports, USDbn 5,985 5,179 5,291 5,617
Regional Average 69.0 51.8 67.8 51.1 48.9 56.5 e/f = BMI estimate/forecast; Afghanistan, Australia, Bangladesh, Bhutan, Brunei, Cambodia, China, East
Timor, Fiji, Hong Kong, India, Indonesia, Japan, Kiribati, Laos, Macau, Malaysia, Maldives, Micronesia,
Global Average 64.0 50.8 61.3 52.0 49.8 54.7
Myanmar, Nepal, New Zealand, North Korea, Pakistan, Papua New Guinea, Philippines, Samoa, Singa-
Source: BMI pore, Solomon Islands, South Korea, Sri Lanka, Taiwan, Thailand, Tonga, Tuvalu, Vanuatu, Vietnam

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  AUSTRALIA
...continued from front page
Public Sector Prevents Sharper Deceleration
Strong growth in the public sector, notably in
the public gross fixed capital formation category,
prevented the Australian economy from deceler-
ating sharply in Q216. In our view, this is likely
to be a key source of growth in coming years.
Indeed, according to the Australian Bureau
of Statistics (ABS), public gross fixed capital
formation and total general government final
consumption expanded by seasonally adjusted
annualised rates of 62.0% q-o-q and 7.7% q-o-
q, respectively, in Q216. As seen from the Liber-
al National coalition government's FY2016/17
(July-June) budget announced in May 3, one of
the key areas of expenditure that it is focussing
over the coming years will be infrastructure
investments. The Turnbull administration has
allocated AUD50bn between FY2013/14 and
FY2019/20. Three of the largest new infra-
structure commitments include AUD2.0bn
for the National Water Infrastructure Loan
Facility, AUD1.5bn in funding for Victorian
infrastructure, and AUD594mn equity funding
for the Melbourne to Brisbane Inland Rail. In
addition, the government will also look to invest
in the defence industry, to which it has allocated
AUD29.9bn over the next decade.  regulators will be keen to see prices head lower
Weak Private Investment And Housing
Construction To Act As Significant Drag
The GDP release showed that gross fixed capital
formation did not contribute at all to headline
real GDP growth in Q216, and this was due to
the continued contraction in private investment
in the mining sector. Despite the government's
focus on public investment, we do not believe
this will be able to fully offset the slowdown in
private sector investment over coming quarters.
Indeed, total new capital expenditures (capex) in
the private sector showed no signs of improve-
ment in Q216, shrinking by 17.4% y-o-y, which
marked one of the deepest contractions since
1990. We continue to reiterate that Australia's
private investment outlook remains weak, with
ABS' estimates showing that overall and mining
sector planned capex will shrink by 9.1% y-o-y
and 24.2% y-o-y, respectively, in FY2016/17.
In addition, dwelling construction growth
appears to be slowing, despite posting a rela-
tively strong rate of 6.5% q-o-q SAA in Q216
(versus 8.5% q-o-q in Q116). We continue to
believe that a correction in Australia's residential
real estate market will weigh on new construc-
tion and real GDP growth over the coming
years. Data from Corelogic LP showed that
growth in home values such as Sydney cooled
to 9.4% y-o-y in August )much lower than the
18.4% y-o-y growth recorded in July 2015),
and we expect further weakness. In particular,
still-elevated valuations, waning investor de-
mand, subdued wage growth and an impending
increase in housing supply are all reasons to be
negative on the housing market. In addition,
in order to contain risks to the financial system.  time'. We continue to expect the central bank
Subdued Trade Terms To Weigh On Growth
Meanwhile, net exports subtracted 0.2 percent-
age points (pp) from Q216 headline real GDP
growth, versus a 1.1pp positive contribution
in Q116. The negative contribution from the
external sector in Q216 was partly due to slow-
ing export growth, which is likely to persist as
China's residential property market cools, result-
ing in weaker demand for Australia's exports.
While Australia's terms of trade index improved
slightly to 80.5 in Q216, from 78.6 in Q116, we
believe that they will still come under pressure as
our Commodities team expects iron ore prices to
retest their lows in 2017 due to an oversupplied
seaborne ore market. This suggests that export
revenues are likely to remain subdued, and this
will make acquiring overseas inputs for growth
difficult, which will undermine growth, particu-
larly as private investment in the mining sector
remains in contraction while new construction
in residential property comes under pressure.
RBA On Hold In 2016; To Be Cut In 2017
With respect to monetary policy, the Reserve
Bank of Australia (RBA)'s decision to keep its
cash rate unchanged at 1.50% at its September 6
monetary policy meeting was in line with our ex-
pectations. The monetary policy statement was
relatively neutral, stating that: 'Taking account
of the available information, and having eased
monetary policy at its May and August meet-
ings, the Board judged that holding the stance
of policy unchanged at this meeting would
be consistent with sustainable growth in the
economy and achieving the inflation target over
to keep its key policy rate steady at 1.50% for
the rest of 2016 as it looks to assess the impact
of its accommodative monetary policy stance.
That said, we also maintain our forecast for the
RBA to cut interest rates by 25 basis points (bps)
to 1.25% by H117 as the Australian economy
weakens while below-target inflation persists.

DATA & FORECASTS

2012 2013 2014 2015 2016f 2017f 2018f

Nominal GDP, USDbn 1,556 1,500 1,449 1,219 1,246 1,287 1,255
Real GDP growth, % y-o-y 3.5 2.0 2.6 2.5 2.8 2.5 2.3
GDP per capita, USD 66,687 61,680 62,996 52,517 53,162 54,358 52,491
Industrial production, % y-o-y, ave 3.3 2.2 3.9 1.6 2.1 2.0 2.0
Population, mn 22.9 23.3 23.6 24.0 24.3 24.6 25.0
Consumer price inflation, % y-o-y, eop 2.2 2.7 1.7 1.7 1.0 2.0 2.5
Consumer price inflation, % y-o-y, ave 1.7 2.4 2.5 1.5 1.0 1.5 2.3
Central bank policy rate, % eop 3.00 2.50 2.50 2.00 1.50 1.25 1.50
Exchange rate AUD/USD, ave 0.97 1.04 1.11 1.33 1.35 1.36 1.46
Exchange rate AUD/USD, eop 0.96 1.12 1.22 1.37 1.33 1.39 1.54
Budget balance, AUDbn -44.8 -23.5 -43.8 -39.9 -40.5 -43.2 -43.3
Budget balance, % of GDP -3.0 -1.5 -2.8 -2.5 -2.5 -2.5 -2.4
Goods and services exports, USDbn 313.6 284.3 267.3 230.4 242.0 238.2 226.2
Goods and services imports, USDbn 336.6 293.7 275.3 257.1 264.2 254.5 235.7
Current account balance, USDbn -66.2 -51.4 -44.0 -59.2 -52.2 -46.1 -37.1
Current account balance, % of GDP -4.3 -3.4 -3.0 -4.9 -4.2 -3.6 -3.0
Foreign reserves ex gold, USDbn 44.9 50.1 50.8 46.6 49.3 52.1 54.9
Import cover, months 1.6 2.1 2.2 2.2 2.2 2.5 2.8
Total external debt stock, USDbn 1,216 1,185 1,211 1,053 1,079 1,116 1,088
Total external debt stock, % of GDP 78.2 79.0 83.6 86.3 86.6 86.7 86.7
Crude, NGPL & other liquids prod, 000b/d 484.5 391.5 424.2 446.9 458.6 464.2 471.9
Total net oil exports (crude & products), 000b/d -555.7 -715.7 -621.8 -611.5 -609.5 -613.8 -616.1
f = BMI forecast. Source: National sources, BMI

2 2 AUSTRALASIA & SOUTH PACIFIC – NOVEMBER 2016 www.asia-monitor.com

INDUSTRY OUTLOOK
Pharmaceutical Industry To
Face Continued Austerity
BMI View : The pharmaceutical industry will continue to be the target of austerity
measures in Australia. Underscored by the latest round of medicine price cuts,
medicines that have been long-listed on the Pharmaceutical Benefit Scheme will
see their prices erode steadily over the coming years. While the government's
cost containment measures are focused on treatments for chronic diseases,
we expect this to shift towards biologic products. This is in part driven by the
rising prominence of this class of medicines and their growing contribution
towards total pharmaceutical spending.
Pharmaceutical prices in Australia will remain
under pressure as the government seeks to con-
trol healthcare spending. In line with our long-
held view, Minister for Health and Aged Care
Sussan Ley announced in September 2016
that the government will deliver the largest
reduction in medicine prices to the Pharma-
ceutical Benefit Scheme (PBS) from October
1 2016. Targeting treatments for chronic
conditions, Ley notes that this will generate
savings of AUD900mn (USD673mn) over the
next four years, with patients seeing a direct
benefit when purchasing medicine from any
of approximately 1,600 brands.
Sales Growth Weighed Down By
Austerity Measures
Australia – Pharmaceutical Market (AUDbn)
f = BMI forecast. Source: PBS Information Management Section (Depart-
ment of Health and Ageing), Australia Self-Medication Industry,The
Association of the European Self Medication Society (AESGP), local
news sources, BMI
The latest round of cuts is part of a PBS
Sustainability package that passed parlia-
ment in 2015, which includes the Sixth
Pharmacy Community Agreement. Intro-
ducing a slew of austerity measures, this
package underpins our decision to down-
grade Australia's pharmaceutical forecast
[1] as the industry shoulders the majority
of the burden. As a result of such measures,
medicine sales growth is expected to be weak,
rising from AUD13.9bn (USD10.4bn)
in 2015 to AUD17.3bn (USD11.3bn) by
2025, with a compound annual growth rate
www.asia-monitor.com
of 2.2% in local currency terms and 0.7% in
US dollar terms. Risks to our pharmaceutical
sales forecasts are largely to the downside as
the Australian government faces significant
political resistance to reform other parts
of the healthcare sector, despite medicine
expenditure accounting for only 8.6% of
total healthcare spending in 2015. This is
lower than other developed markets such as
Japan (22.6%) and Germany (13.7%) for
the same time period.
Price Disclosure Cycle With
Substantial Impact
Australia – Selected Pharmaceuticals Facing Pricing
Cuts In % Terms
Methotrexate, 5 mg in 2 mL vial
Flucloxacillin, powder for injection 1 g
(as sodium)
Anastrozole, tablet 1 mg
Donepezil, tablet containing donepezil
hydrochloride 5 mg
Temozolomide, capsule 100 mg
Irbesartan, tablet 150 mg
Telmisartan, tablet 80 mg
Clopidogrel, tablet 75mg
Average non-EFC reduction
Simvastatin, tablet 40mg
0% 10% 20% 30% 40% 50% 60% 70%
Source: Pharmaceutical Benefit Scheme
Price Cuts Are Substantial
Pharmaceuticals that have been listed on the
PBS for a long time will face substantial cuts
in their prices. According to data from the
PBS on the October 2016 price disclosure
cycle, methorexate (58%), flucloxacilin
(56%) and anastrozole (49%) will see the
largest reductions in percentage terms,
higher than the average non-effective fund-
ing for chemotherapy drugs (EFC), whose
prices will be cut by 18%. In absolute terms,
an injection of 480 micrograms in 1.6 mL
of filgrastim will see the largest fall in price
from AUD1,323 (USD988) to AUD929
(USD694). This will be followed by temo-
zolomide with an AUD193 (USD144) cut,
and a 300mg injection of filgrastim that will
NOVEMBER 2016 – AUSTRALASIA & SOUTH PACIFIC
be cut by AUD123 (USD91).
Focus To Shift From Simple Chemical
Compounds To Biologics
Cost-containment measures in Australia will
evolve, shifting their broad focus from treat-
ments for chronic diseases, towards biologic
medicines in particular. Aside from filgrastim,
there were no biologics affected in October
2016's price disclosure – a feature we expect
will change. Spending on this class of drugs
has risen significantly, with Ley noting that the
share of PBS spending on biologics has grown
from 4% in 2005 to 25% by 2015. Compari-
sons between simple chemical compounds and
biologic treatments further accentuate the
rising cost burden of these products. Despite
there being 38 times more scripts issued for
esomeprazole than for adalimumab, spending
on the biologic treatment was AUD100mn
(USD74mn) more in 2015. According to
PBS data, combined government expenditure
on ustekinumab, golimumab, denosumab,
insulin glargine, etanercept and adalimumab
accounted for 9% of Australian authorities'
spending on medicines in FY2014/15.  
Long-Listed Products Face Pricing Pressure
Australia – Medicines With Largest Reduction In Price In
Absolute Terms (AUD)
September 2016
1,400
1,200
October 2016
1,000
800
600
400
200
0
Capecitabine, tablet 500 mg
Temozolomide, 250mg
Filgrastim, injection 480
Riluzole, tablet 50mg
Sildenafil, tablet 20 mg (as
micrograms in 1.6 mL
capsule
citrate)
Source: Pharmaceutical Benefit Scheme
Beyond pricing, multinational pharma-
ceutical firms will face a significant commer-
cial threat from Australia's position on bio-
similars. Marking a distinct departure from
other regulators, substitution of biosimilar
medicines at the pharmacy level based on the
clinical recommendations of Pharmaceutical
Benefit Advisory Committee (PBAC) will be
allowed in Australia as of 2015. This has been
further exacerbated by the 301 Special Re-
port from the Pharmaceutical Research and
Manufacturers of America (PhRMA), which
states that the Therapeutic Goods Adminis-
tration may pull back from its policy of hav-
ing a unique naming system for biosimilars.
[1]: Industry Trend Analysis – Pharmaceutical
Market Forecast Downgrade – July 8 2015
3
  AUSTRALIA
ECONOMIC OUTLOOK

Poor Outlook For Commodity generation to decline over 2016 (-2.5%) and
2017 (-2.6%). Overall power consumption is

Exports To Persist
likely to be muted as the Chinese economy
shifts away from power-intensive manufac-
turing (see 'Evolving Power Sector: Coal Slowly
BMI View: Australia's goods export growth has been negative for the first Edging Out', February 15). Australian coal
seven months of 2016, coming in at around -5.0% y-o-y, as the country's exports will thus suffer from China's weak
key commodity exports such as iron ore and coal have performed poorly. consumption growth. Furthermore, our
We expect iron ore and coal exports to suffer from weak Chinese demand, Commodities team forecast thermal coal
and strong LNG exports will not be able to offset this. Therefore, we have prices to average USD57.0/tonne in 2017,
downgraded our 2016 and 2017 export growth forecasts to -5.0% and -4.0%, which suggests that coal price will decline
respectively (from -1.0% and 0.0% previously). Accordingly, Australia's eco- from USD70/tonne (as of September 16),
nomic growth will be undermined as subdued export revenues will make and will be negative for Australia's coal
export earnings.
acquiring overseas inputs difficult.
Australia's goods export performance has proximately half of overall production, and Positive LNG Growth Story
been weak so far in 2016, with total ship- excess supply will likely weigh on Chinese While we are negative on Australia's iron ore
ments contracting by approximately 5.0% steel production. and coal exports, we are positive on the coun-
for the first seven months of the year, and we try's liquefied natural gas (LNG) production
expect exports to remain subdued going into Suffering From Poor Chinese Demand over the coming years. Indeed, our Oil & Gas
Australia – Iron Ore & Coal Export Volume (Trailing
2017. We have therefore downgraded our 12-Months), % Chg y-o-y
team forecast LNG net exports (in volume
2016 and 2017 export growth forecasts to 30
terms) to grow by an average of 44% over
Iron Ore Coal
-5.0% and -4.0%, respectively (from -1.0% 25 the next two years. This will be driven by the
and 0.0% previously). Australia's export per- 20 start-up of several megaprojects in Queensland
formance has been weak due to the non-rural 15 and Western Australia.
category, particularly commodities. Indeed, 10

iron ore and coal exports (which together Surging To New Highs
5
Australia – LNG Net Exports, USDbn
account for around 33% of the total) shrank 0
by 4.3% y-o-y and 14.4% y-o-y, respectively, -5
over this period.
-10
2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

In Contraction
Source: BMI, Bloomberg, ABS
Australia – Overall, Iron Ore & Coal Exports,
% Chg y-o-y (3mma)
120
We are downbeat on the outlook for
Overall Coal Iron Ore
100
China crude steel production growth as
80
overall fixed asset investment growth is likely
to slow further over the course of the coming
60

40
years, particularly as the overvalued residen-
20 e/f = BMI estimate/ forecast. Source: BMI, EIA
0
tial property market undergoes a correction.
-20
We expect Australian iron ore exports to Indeed, the Ichthys, Prelude, and Wheat-
-40
suffer as around 80% of the country's iron stone LNG projects are scheduled to come
-60 ore is bought by China. In addition, our online by the end of 2017, which will boost
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Commodities team also expects iron ore Australia's total LNG export capacity by
Source: BMI, ABS
prices to retest their lows in 2017 due to an around 25.0% (see 'Largest LNG Exporter
oversupplied seaborne ore market (see 'Iron By 2019', February 15).
Downbeat Outlook For Chinese Steel Ore: Prices To Retest Lows In 2017', August 2
Production Weighing On Iron Ore Exports 2016), which will also weigh on overall iron Growth To Be Undermined
We believe that Australia's iron ore export ore export revenues. However, strong LNG export earnings are
growth is likely to remain lacklustre, and the unlikely to outweigh the negative impact
main challenge for the country continues to Coal Exports To Remain Weak from weak iron ore and coal exports. With
be the oversupply in the global steel market. In addition, Australia's coal export (on a export revenues remaining subdued, this
Indeed, Australia's iron ore export volume trailing 12-month basis) volume growth will make acquiring overseas inputs difficult,
(on a trailing 12-month basis) growth has has been in negative territory since the end which will undermine growth, particularly as
been decelerating since reaching a peak of of 2015, and we expect Australia's coal new construction in the residential property
around 25% y-o-y in the middle of 2014, exports (in value terms) to remain in con- comes under pressure. Therefore, we main-
and we believe that it is set to decline fur- traction over the course of coming months tain our below-consensus 2017 real GDP
ther. China remains the driving force behind along with slowing production growth. Our growth forecast of 2.5% (versus Bloomberg
global steel production, accounting for ap- Commodities team expects coal-fired power consensus of 2.9%).

4 4 AUSTRALASIA & SOUTH PACIFIC – NOVEMBER 2016 www.asia-monitor.com

 NEW ZEALAND 
ECONOMIC OUTLOOK

Strong Growth Performance have benefitted from the construction boom.  

Dairy Sector Investment To Improve

Likely To Be Temporary New Zealand's economy remains dependent on
agriculture, notably dairy, and milk prices ap-
BMI View: As a result of New Zealand's stronger-than-expected H116 perfor- pear to have bottomed out, and look set to pick
mance, we are upgrading our 2016 real GDP growth forecast to 3.0%, from up in 2017. Indeed, this resulted in agricultural
2.3% previously. Nevertheless, we maintain our 2017 real GDP growth forecast production expanding by 5.5% q-o-q in SAA
of 2.5% as construction activity is set to slow, which will weigh on overall growth. terms in Q216 (versus 2.8% q-o-q in Q16),
while export growth also benefitted, coming
However, investment in the dairy sector should improve modestly along with milk
in at 15.7% q-o-q in SAA terms in Q216. It
prices while the economy will still continue to be supported by the services sector.
is likely that investment in the dairy sector will
New Zealand's real GDP growth (in expendi- coming years. Firstly, reconstruction activity in improve modestly along with milk prices. While
ture terms) accelerated to 3.8% y-o-y in Q216, the Canterbury region is already in its advanced the total available cash payout by New Zealand's
from Q116's 3.2% y-o-y, bringing H116's stages and this will continue to wind down and largest dairy co-operative, Fonterra, for the
figure to 3.5% y-o-y, and we are upgrading act as a drag to overall construction growth. 2016/17 season is still below production cost
our 2016 real GDP growth forecast to 3.0% Secondly, we believe the continued increase of NZD5.50/kg of milk solid (MS), it has been
(from 2.3% previously) due to the significant in New Zealand's residential house prices is raised to NZD5.35/kgMS on August 25. That
outperformance. Meanwhile, growth picked up unsustainable, and property prices are set to said, we highlight that a slowdown in China's
to 4.7% q-o-q in seasonally adjusted annualised weaken, weighing on construction activity. economy still poses risks to New Zealand's
terms (SAA) in Q216, from 2.8% q-o-q SAA Indeed, the market is significantly overvalued, agricultural products.
in Q116, mainly due to the country's booming and faces downside risks from stricter regula-
construction sector, as well as improvements tions, subdued wage growth, and an impend- Services Sector To Remain Resilient
in the dairy sector. Nevertheless, we are main- ing population slowdown. The Reserve Bank New Zealand's services sector remains resilient,
taining our 2017 real GDP growth forecast of of New Zealand (RBNZ) is looking to cool expanding by 2.9% q-o-q in SAA terms in
2.5% (versus Bloomberg consensus of 2.7%). the country's real estate market by tightening Q216 (versus 3.4% q-o-q in Q116), and we
New Zealand's construction growth will slow macro-prudential measures. New loan-to- expect it to continue providing support to
in coming years, which will weigh on overall value (LVR) restrictions, applied nationwide, headline real GDP growth in coming quarters.
growth. That said, investment in the dairy sec- took effect on September 1, and more policies Growth in externally focussed sectors, notably
tor should improve modestly along with milk will likely be announced over coming months. tourism, will continue to benefit from the gov-
prices while the services sector will continue to While building consents growth (measured by ernment's attempts to develop them. Indeed,
provide support to the economy. floor area; on a three-month moving average despite an appreciation in the New Zealand
basis) in Auckland was still high at 17.2% y-o-y dollar in trade-weighted terms since the start
Construction Boom Unlikely To Last in July, it appears to be slowing, and this should of 2016, the total number of visitor arrivals to
New Zealand's economy continues to be sup- begin to spread to other areas of New Zealand. New Zealand and international guest nights
ported by strong construction activity, with the We also note that this will have negative spill- continues to head higher, increasing by 12.3%
sector expanding by 20.0% q-o-q in SAA terms over effect on the manufacturing sector, par- y-o-y and 10.9% y-o-y, respectively, in July (on
in Q216, but we expect growth to wane over ticularly cement and concrete segments, which a six-month moving average basis).

DATA & FORECASTS

2012 2013 2014 2015 2016f 2017f 2018f

Nominal GDP, USDbn 173.1 184.6 197.3 171.7 169.9 169.7 162.9
Real GDP growth, % y-o-y 2.8 1.7 3.0 3.0 3.0 2.5 2.4
GDP per capita, USD 39,024 41,350 43,892 37,909 37,209 36,858 35,052
Population, mn 4.4 4.5 4.5 4.5 4.6 4.6 4.7
Consumer price inflation, % y-o-y, eop 1.0 1.6 0.8 0.1 0.0 1.0 2.0
Consumer price inflation, % y-o-y, ave 1.1 1.1 1.2 0.3 0.0 0.5 1.5
Central bank policy rate, % eop 2.50 2.50 3.50 2.50 2.00 1.75 2.25
Exchange rate NZD/USD, ave 1.23 1.22 1.21 1.43 1.49 1.54 1.67
Exchange rate NZD/USD, eop 1.21 1.22 1.28 1.46 1.49 1.59 1.67
Budget balance, NZDbn -9.2 -4.4 -2.6 0.7 2.6 2.2 2.1
Budget balance, % of GDP -4.3 -1.9 -1.1 0.3 1.0 0.8 0.8
Goods and services exports, USDbn 50.4 53.1 56.3 48.4 47.6 48.3 47.0
Goods and services imports, USDbn 49.7 51.1 54.2 47.5 46.7 46.9 45.2
Current account balance, USDbn -7.4 -6.2 -6.2 -5.4 -5.1 -4.6 -3.8
Current account balance, % of GDP -4.3 -3.4 -3.1 -3.1 -3.0 -2.7 -2.3
Foreign reserves ex gold, USDbn 17.6 16.3 14.7 15.4 16.6 18.7 21.0
Import cover, months 4.2 3.8 3.3 3.9 4.3 4.8 5.6
Total external debt stock, USDbn 150.1 153.5 153.6 138.9 143.4 149.5 148.1
Total external debt stock, % of GDP 86.7 83.1 77.9 80.9 84.4 88.1 90.9
f = BMI forecast. Source: National sources, BMI

www.asia-monitor.com NOVEMBER 2016 – AUSTRALASIA & SOUTH PACIFIC 5

  NEW ZEALAND
ECONOMIC OUTLOOK
NZD: Medium-Term Outlook
Still Not Bright
BMI View: Although the New Zealand dollar is likely to range trade against
the US dollar in the short term, we maintain our negative view on the currency
over the medium term. New Zealand's high level of external indebtedness
leaves the currency exposed to capital outflows as the dairy sector remains
weak while the overvalued property market is looking increasingly precarious.
Short-Term Outlook (three-to-six months)
The New Zealand dollar is the second-best
performing G10 currency against the US
dollar in 2016 (just behind the yen), benefit-
ting from broad-based USD weakness and
its higher real yield differential. However, we
expect the NZD to range trade against the
USD in the short-term as both appreciatory
and depreciatory forces are likely to be evenly
balanced. Therefore, we maintain our 2016
average forecast of USD0.6700/NZD. On the
depreciatory side, the kiwi dollar could still
be under pressure amid expectations that the
Reserve Bank of New Zealand (RBNZ) will
cut its official cash rate (OCR) further over
the coming months as it seeks to support the
economy while aiming to lift inflation towards
its medium-term target of 2.0%. On the ap-
preciatory side, our expectations are for the
US Federal Reserve to hold off from hiking
interest rates in 2016, and any new signs that
the US economy is deteriorating could result
in further dollar weakness across the board.
Long-Term Outlook (six-to-24 months)
Over the medium-term, we maintain our nega-
tive view on the New Zealand dollar as the coun-
try's wide international investment deficit as a
share of GDP, which is in excess of 60%, sug-
gests that the NZD is still significantly vulner-
able to capital outflows. This risk is heightened
as the property market is still precarious while
the dairy sector remains weak. We forecast the
kiwi dollar to average lower than 2016, coming
in at USD0.6500/NZD in 2017.
Our calculations show that the New Zea-
land dollar is approximately 10% overvalued
(as of August 24), following a depreciation of
its real effective exchange rate by around 7.8%
BMI NEW ZEALAND CURRENCY FORECAST
 
USD/NZD, ave
EUR/NZD, ave
Policy Rate, % eop
Source: BMI, Bloomberg. Last updated: August 26 2016
6 6 AUSTRALASIA & SOUTH PACIFIC – NOVEMBER 2016
higher than the same peak. We note that the
RBNZ's additional macroprudential meas-
ures should help to cool the property market
and reduce financial instability risks over the
coming quarters. Nevertheless, New Zealand
banks will face mounting headwinds due to
these measures, and therefore foreign investors
may becoming unwilling to fund the country's
banks, which will weigh on the NZD.
Although dairy prices have already formed
a bottom, and look set to pick up moderately
since its peak in mid-2014. While this fall has towards the end of 2016 and into 2017, ac-
reflected New Zealand's deteriorating terms of cording to our Commodities team's forecasts,
trade due to the decline in milk prices, we still we believe that New Zealand's terms of trade
expect the currency to trade below fair value are unlikely to improve significantly as oil
over the medium term. Indeed, the RBNZ prices are also likely to head higher over the
is still concerned about NZD strength, with coming months. Given that dairy prices are
governor Wheeler highlighting in a speech still unlikely to return to the highs seen in early
on August 23 that: 'our exchange rate is too 2014, export earnings are likely to be muted,
high and affecting the competitiveness of our and therefore, a weaker New Zealand dollar
export and import substitution industries'. due to a lack of inflows should help to reduce
imports, allowing for the narrowing and
Surging To New Highs
New Zealand – Exchange Rate, USD/NZD
rebalancing of its external accounts. Indeed,
0.90 total capital and intermediate goods imports
0.85
(on a 12 month moving average basis) shrank
by 0.3% y-o-y and 2.8 y-o-y, respectively, in
0.80
July, and are likely to remain muted amid
0.75 weak investment in the agricultural sector
and a potential property market correction.
0.70
Meanwhile, the strong growth in consump-
0.65 tion goods will also likely lose steam over
0.60
the coming quarters as the household sector
deleverages due to weak wage growth.
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
e/f = BMI estimate/forecast. Source: BMI, Bloomberg
Risks To Outlook
A high proportion of New Zealand's ex- Risks to our New Zealand dollar forecasts are
ternal liabilities lie within the banking system, equally weighted. Upside risk to our NZD
which is heavily exposed to the overvalued forecast could come about from the potential
residential property market. We highlight that for a US recession (which is something we
New Zealand's property market continues to have highlighted since June 2015), and this
rise further into bubble territory, and there is could result in the US Federal Reserve poten-
a growing risk of a deep correction over the tially reducing interest rates or embarking on
coming quarters. Indeed, according to the a new round of quantitative easing. As such,
New Zealand's government property appraiser this could send the NZD stronger against the
Quotable Value (QV), nationwide residential USD as investors seek higher yield assets. On
property values and home prices in Auckland the downside, New Zealand's property market
increased by 14.1% y-o-y and 16.0% y-o-y in is still extremely overvalued. A disorderly cor-
July, respectively. At the national level, values rection to fair value could force the RBNZ to
were 45.4% above the previous market peak in undergo an aggressive easing cycle, leading to
2007, while in Auckland, prices were 81.6% a significant decline in the NZD.
Spot 2016 2017 
0.7310 0.6700 0.6500
0.6475 0.6262 0.6190
2.00 2.00 1.75
www.asia-monitor.com
 FIJI 
ECONOMIC OUTLOOK

Reconstruction Efforts Present Rebuilding Efforts Place Upside Pressures

On Inflation
The country has undertaken construction
Upside To Inflation efforts following the devastation wrecked by
Cyclones Winston and Zena in early 2016.
BMI View: We have upgraded our average 2016 inflation forecast for Fiji to According to Suva, Winston was the strongest
3.5% from 2.1% previously, as we expect the recovery in oil prices in H216 cyclone to strike the island-nation and caused
'enormous devastation' to the agricultural
and ongoing reconstruction efforts following the destruction wrecked by
sector as well as the country's infrastructure.
Cyclones Winston and Zena in early 2016 to lead to a gradual rise in inflation
The government has also implemented a
while the favourable base effects from lower oil prices wear off. new expansionary budget aimed at rebuilding
We have upgraded our average 2016 inflation The lack of food security means Fiji imports the country, with over USD207mn allocated
forecast to 3.5% from 2.1% previously, as we a considerable amount of food, and will likely in the FY2016/17 budget to finance recon-
expect the base effects from lower oil prices continue to do so in coming months due to struction and recovery works. Considering
to wear off gradually in H216. Our Oil and shortages as a result of the tropical cyclones the cost of the reconstruction, with damages
Gas team forecast oil prices to recover slightly, and floods earlier in the year Food also accounts from Cyclone Winston alone estimated to
although Brent will continue to trade signifi- for 36% of the inflation basket, underscoring exceed USD650mn, we expect reconstruction
cantly below 2014 highs. Also, our Agribusiness the strong influence that food prices have on efforts to continue to place upside pressure on
team forecast a slight recovery in food prices, inflation. With our Agribusiness team expect- inflation due to an increase in the import of
which will likely place some upside pressure on ing food prices to trend slightly higher in 2016 capital goods. The expansionary budget will
inflation. Lastly, we expect ongoing reconstruc- than in 2015, we believe the impact on food also lead to a continued rise in money supply,
tion efforts following the destruction wrecked inflation will be modest, with lower transport further stoking inflationary pressures.
by Cyclones Winston and Zena in early 2016 to costs helping to keep prices low.
continue to place upside pressures on inflation Furthermore, we expect the favourable Disaster-Prone Location Poses Upside Risks
due to an increase in imports of capital goods base effects from lower oil prices to wear off Natural disasters like droughts, floods, and
and the government's expansionary budget, slightly in H216 as oil prices recover. Being strong winds are recurrent in most parts of
which will lead to an increase in money supply. a net importer of oil, Fiji has benefitted from the country, having a negative impact on
the lower oil prices, due to a significant fall in food security and thus posing upside risks to
CPI To Remain Fairly Stable imported inflation. Lower oil prices have also our forecast. The country is also vulnerable
Headline inflation continues to edge higher, had positive spillover effects on inflation by to changes in global weather patterns, like El
with inflation coming in at 5.5% y-o-y in July lowering transportation and electricity costs, Nino. For instance, El Nino in 2003 resulted in
(from 5.3% y-o-y in June). The uptick was due which account for approximately 25.0% of the drought and crop failures throughout Fiji amid
to shortages in market-related items, higher inflation basket. With our Oil and Gas team erratic and delayed rainfall. Low-lying areas of
excise duty on alcoholic beverages and tobacco, forecasting Brent crude oil to average USD45.5 the country are prone to flooding, while Fiij is
and the increase in fuel prices in July, but we per barrel (/bbl) in 2016 (from USD53.6/bbl also vulnerable to earthquakes. Another unex-
expect inflationary pressures in the country to in 2015), any rise in imported inflation is likely pected disaster in the near-term could disrupt
remain fairly constant over coming months. to be gradual, capping inflationary pressures. the domestic supply chain, stoking inflation.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Nominal GDP, USDbn 4.1 4.3 4.7 4.6 5.0 5.6 6.0
Real GDP growth, % y-o-y 2.2 12.1 4.5 4.0 2.5 3.5 3.2
GDP per capita, USD 4,680 4,920 5,419 5,340 5,750 6,413 6,778
Industrial production, % y-o-y, ave -0.6 2.5 2.4 2.0 2.0 2.0 2.0
Population, mn 0.9 0.9 0.9 0.9 0.9 0.9 0.9
Consumer price inflation, % y-o-y, eop 2.5 3.4 0.1 1.6 5.4 4.0 4.0
Consumer price inflation, % y-o-y, ave 4.4 2.9 0.5 1.4 3.5 4.7 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 1.78 1.83 1.88 2.09 2.05 1.98 2.00
Exchange rate FJD/USD, eop 1.77 1.88 1.99 2.15 1.96 2.00 2.00
Budget balance, FJDbn -0.1 -0.2 0.0 0.1 -0.5 -0.5 -0.5
Budget balance, % of GDP -1.1 -2.8 0.0 0.9 -4.9 -4.7 -4.5
Goods and services exports, USDbn 2.3 2.4 2.6 2.8 3.0 3.2 3.5
Goods and services imports, USDbn -1.3 -1.5 -1.4 -1.4 -1.4 -1.4 -1.4
Current account balance, USDbn -0.1 -0.4 -0.3 -0.2 -0.2 -0.1 -0.1
Current account balance, % of GDP -1.7 -9.6 -7.0 -3.3 -3.0 -2.4 -2.1
Foreign reserves ex gold, USDbn 0.9 1.8 1.8 2.0 2.0 2.1 2.1
Import cover, months -8.6 -13.9 -16.1 -17.2 -17.1 -17.5 -18.0
Total external debt stock, USDbn 0.7 0.8 0.9 0.9 1.0 1.0 1.0
Total external debt stock, % of GDP 17.9 18.4 18.5 19.9 19.0 17.6 16.6
e/f = BMI estimate/forecast. Source: National sources, BMI

www.asia-monitor.com NOVEMBER 2016 – AUSTRALASIA & SOUTH PACIFIC 7

  TIMOR-LESTE
ECONOMIC OUTLOOK

Tibar Bay Port Development The government also hopes to establish

Timor-Leste as a regional transit point for
international shipping. To achieve this, the au-
Positive For Growth thorities plan to create a 100 hectare Tiber Bay
Investment Zone 10km west of the port, which
BMI View: The development of the container port at Tibar Bay as well as re- will include an agricultural market and other
lated infrastructure will go some way in improving Timor-Leste's infrastructure commercial facilities. The port is also expected
to become a destination point for cruise ships,
and longer-term economic expansion. However, the country's poor business
which will lend some support for Timor-Leste's
environment presents downside risks to the successful completion of the port.
efforts to develop its tourism industry.
In our view, the development of the container provides Timor-Leste with a viable financing
port at Tiber Bay as well as the construction of method for some of the projects in its National Infrastructure Investment Good For Growth
the related infrastructure such as roads will be Strategic Development Plan. Being a develop- We believe the emphasis on infrastructure will
positive for the development of Timor-Leste's ing country, Timor-Leste lacks both financial bode well for the country's future growth pros-
infrastructure and support longer-term econom- resources and expertise to undertake such large- pects, with the government noting that the bulk
ic development. However, the country's poor scale projects. As such, the PPP model, where of investment will be in major projects for roads,
investment environment presents downside a private company will invest some of its own ports, airports, and sanitation. Considering that
risks to the successful completion of the port. money to build the port and then operate it for Timor-Leste has one of the worst scores among
The Timor-Leste government signed a con- their own profit will enable the government to the Pacific islands in the Logistics Risk subcom-
cession contract for constructing and operating overcome domestic limitations as it seeks to lay ponent of our Operational Risk Index (ranking
a major new container port at Tiber bay with the foundation for longer-term growth. second-to-last with a score of 33.4/100), any
Bolloré Consortium in June 2016. The project The National Strategic Development Plan investment aimed at improving the country's
is being implemented as a public-private part- 2011-2030 has outlined plans to develop transport network is likely to benefit growth.
nership (PPP) and will be built around 15km Timor-Leste's maritime transport infrastruc-
west of Dili, covering a large area of the bay itself ture to facilitate increased traffic in goods Poor Business Environment Still An Issue
as well as the land around its western edges. and passengers. However, the government However, we note that the country's poor
The project includes a 630m long, 15m deep has stated that the new port is necessary as business environment continues to present
wharf, as well as a port platform for container the current Dili port does not have sufficient downside risks to the successful completion
and general cargo handling, covering an area of capacity to deal with current or future levels of the port and the government's ongoing
24 hectares. In addition, the project will involve of container traffic. With the current port at efforts to encourage greater private sector
building warehouses, administration offices, Dili expected to reach critical congestion levels investment. High incidences of corruption
and a four-land dual carriageway between Tiber by 2018, the new port is likely to be positive and poor infrastructure in the country remain
and Dili. This deal is the first PPP undertaken in for the country's fledging trade industry. The a major hurdle for foreign firms, with the
the post-conflict country as well as the largest- greenfield project at Tiber will replace the ex- country being ranked 123 out of 168 on the
ever investment with a private partner. isting capacity strained and congestion ridden 2015 Transparency International Corruption
port of Dili, with the modern container port Perceptions Index. This could potentially
PPPs A Way To Overcome Local Deficiencies at Tiber having the capacity to handled up to undermine the government's efforts to attract
In our view, the utilisation of the PPP model 350,000 twenty-foot equivalent units annually. foreign direct investment.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Nominal GDP, USDbn 6.6 5.6 5.0 5.3 5.7 6.1 6.7
Real GDP growth, % y-o-y 5.2 -38.0 4.8 6.6 5.0 5.8 8.0
GDP per capita, USD 5,949 4,954 4,294 4,441 4,664 4,927 5,317
Population, mn 1.1 1.1 1.2 1.2 1.2 1.2 1.3
Consumer price inflation, % y-o-y, eop 11.7 4.0 -0.1 -0.7 2.3 2.0 2.0
Consumer price inflation, % y-o-y, ave 11.9 11.2 0.5 0.5 0.8 2.2 2.0
Exchange rate USD/USD, ave 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate USD/USD, eop 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Budget balance, USDbn 2.7 2.4 2.0 1.8 1.6 1.4 1.1
Budget balance, % of GDP 40.9 42.2 40.8 34.2 27.9 22.2 16.9
Goods and services exports, USDbn 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Goods and services imports, USDbn 1.7 1.2 1.2 1.1 1.1 1.1 1.1
Current account balance, USDbn 2.8 2.4 1.1 1.3 1.4 1.5 1.6
Current account balance, % of GDP 41.9 42.7 22.1 24.8 25.5 25.0 23.7
Foreign reserves ex gold, USDbn 0.9 0.7 0.3 0.3 0.4 0.4 0.5
Import cover, months 6.3 6.9 3.1 3.7 4.3 4.8 5.1
Crude, NGPL & other liquids prod, 000b/d 79.5 79.3 76.0 73.7 71.5 69.4 67.3
Total net oil exports (crude & products), 000b/d 78.2 78.0 74.9 72.6 70.3 68.1 65.9
e/f = BMI estimate/forecast. Source: National sources, BMI

8 8 AUSTRALASIA & SOUTH PACIFIC – NOVEMBER 2016 www.asia-monitor.com

 PAPUA NEW GUINEA 
ECONOMIC OUTLOOK

Fiscal, Economic Adjustments Shrinking Reserves, Declining Revenue,

Poor Funding Conditions Warrant Caution
We also highlight that PNG's sovereign
To Weigh On Growth risk outlook has deteriorated considerably
and warrants caution. PNG's gross foreign
BMI View: We have downgraded our real GDP growth forecast for PNG to 2.5% in currency reserves have declined sharply to
2016 and 2.7% in 2017, as depressed commodity prices and resulting fiscal and USD1.6bn in June 2016, from a high of
economic corrections will weigh on growth. Moreover, sovereign risk is rising as USD4.3bn in January 2012. This is a reflec-
balance of payments pressure continue to mount, while limited funding options tion of the continuous downward pressure on
the country's balance of payments.
and contracting revenue streams weigh on the government's financial position.
While PNG has consistently maintained a
We remain optimistic about Papua New also lowered its 2016 growth projection to 2.2% huge trade surplus, and more recently a cur-
Guinea's (PNG) long-term economic growth and expects non-mining expansion to slow to rent account surplus in 2014 due to its massive
prospects (due to its competitive advantage 2.6% from 3.2% previously. energy export sector, these mining and petro-
in the extractive industries), but note that de- According to the supplementary proposal, leum companies have been allowed and have
pressed commodity prices and resulting fiscal the government would cut spending by PG- chosen to hold these export earnings overseas
and economic adjustments will continue to K928mn (USD377mn) and raise a further to meet overseas liabilities under various de-
weigh on real GDP growth in the near term. PGK958mn, possibly by extracting more velopment agreements. This has led to a dete-
Accordingly, we have downgraded our real GDP dividends from state-owned enterprises (SOEs). rioration in PNG's external payments position
growth forecast for PNG to 2.5% in 2016 and The expenditure cuts include PGK649mn as external debt servicing and other demands
2.7% in 2017, from 4.0% and 5.9% previously. from development spending and withholding for foreign currency have overwhelmed the
In addition, we highlight that sovereign risk in funds to government agencies by as much as supply of physical foreign currency available
the country is rising as pressures on the govern- PGK279mn. While these measures are positive to the central bank. PNG's gross external
ment's financial position continue to mount, in averting a possible fiscal crisis over the near- debt position stood at USD20.7bn in Q415
while strains on foreign currency reserves due term, we believe such moves are not sustainable (according to the World Bank) which was
to heightened balance of payments pressure is as there is a limit to how much the government approximately 125% of GDP.
likely to persist in coming quarters. can cut non-recurrent expenditure. The reduc- Meanwhile, due to declining fiscal rev-
tion in public spending and services has already enue and limited domestic funding options,
Growth To Weaken With Contractionary exacerbated civil unrest and strikes in the coun- we note that the government's liquidity posi-
Fiscal Adjustments try with the public calling for Prime Minister tion have weakened considerably. We forecast
The PNG government released its 2016 sup- Peter O'Neill to step down and face prosecution PNG's government revenue as a share of
plementary budget in August and signalled for corruption and economic mismanagement GDP to decline to around 21% of GDP in
further cuts to spending in response to a collapse allegations. At the same time, SOEs are already 2016, down from 28% in 2014, while fis-
in resource revenue. We expect this to weigh on being squeezed by the low energy price environ- cal deficit is likely to remain wide at 6.6%
fixed capital formation and aggregate demand in ment. These SOEs will likely be forced to cut of GDP in 2016. The government has also
the country over the coming quarters, informing capital expenditure further, which will lead to curtailed spending aggressively, despite rising
our growth forecast downgrade. Along with the slower headline growth in the near-term, and cases of protest, suggesting tight liquidity and
supplementary budget, the PNG government lower resource production down the road. limited options of funding.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Population, mn 7.2 7.3 7.5 7.6 7.8 7.9 8.1
Nominal GDP, USDbn 15.3 15.1 16.1 16.6 15.8 17.3 20.0
GDP per capita, USD 2,129 2,059 2,146 2,165 2,027 2,165 2,458
Real GDP growth, % y-o-y 7.7 4.9 8.4 10.1 2.5 2.7 3.8
Consumer price inflation, % y-o-y, ave 4.5 4.8 5.0 5.0 4.8 4.5 4.5
Consumer price inflation, % y-o-y, eop 4.6 5.0 5.2 5.0 4.5 4.5 4.5
Exchange rate PGK/USD, ave 2.11 2.27 2.54 2.85 3.20 3.15 2.95
Exchange rate PGK/USD, eop 2.07 2.48 2.60 3.10 3.30 3.00 2.90
Budget balance, PGKbn -1.4 -2.7 -3.0 -3.4 -3.3 -3.6 -3.8
Budget balance, % of GDP -4.3 -7.8 -5.9 -9.1 -6.6 -6.7 -6.5
Goods and services exports, USDbn 6.9 6.4 9.1 11.7 12.2 12.6 13.0
Goods and services imports, USDbn 9.3 10.0 6.4 6.9 7.2 7.5 7.8
Current account balance, USDbn -2.3 -3.5 2.9 4.9 5.1 5.2 5.3
Current account balance, % of GDP -15.1 -22.9 17.9 29.9 32.1 30.4 26.7
Foreign reserves ex gold, USDbn 4.0 4.2 4.5 4.8 5.1 5.4 5.7
Import cover, months 5.2 5.1 8.5 8.3 8.5 8.6 8.8
Total external debt stock, USDbn 15.0 21.6 20.9 15.0 10.8 7.6 5.5
Total external debt stock, % of GDP 97.9 143.2 130.2 90.4 68.3 43.9 27.5
e/f = BMI estimate/forecast. Source: National sources, BMI

www.asia-monitor.com NOVEMBER 2016 – AUSTRALASIA & SOUTH PACIFIC 9

  TONGA

ECONOMIC OUTLOOK

Real GDP Growth Outlook To National Infrastructure Investment Plan (NIIP),

which was updated in 2013, and is expected
to be executed through 2023. In addition,
Remain Positive Tonga is also hosting the South Pacific Games
for the first time in 2019, and the country will
BMI View: Real GDP in Tonga will expand at a moderate pace over the next be constructing and upgrading its venues and
few years, and we maintain our average forecast of 2.4% from FY2016/17 (July- facilities in preparation for the event over the
coming years. Furthermore, Tonga's relatively
June) to FY2018/19. Increased tourism activity and projects to improve the
good business environment is a positive for the
Pacific Island-nation's infrastructure will continue to provide support to growth.
country's infrastructure sector. According to
We believe that Tonga's economy will grow on August 19, and this is set to attract more the World Bank's Ease of Doing Business 2016
at a moderate rate over the coming years, and Chinese tourists to the country. According to Report, Tonga ranked 78 out of 189 countries.
we maintain our forecast for real GDP growth the China National Tourism Administration, Notably, under the 'dealing with construction
to come in at an average annual rate of 2.4% Chinese and Tongan holders of ordinary pass- permits' category, the Pacific Island-nation
from FY2016/17 (July-June) to FY2018/19. ports can enter or transit through each other's performed well, scoring 22 out of 189 countries.
The Pacific Island-nation's economy will countries without a visa, with a maximum stay Furthermore, the NRBT's accommodative
continue to be supported by rising tourism of 30 days. Furthermore, we continue to reiter- monetary policy stance has also helped to sup-
activity and ongoing infrastructure projects. ate that the ongoing renovation and refurbish- port business activity in Tonga, and we believe
ing of the International Dateline Hotel, and that it will continue to do so. According to the
Tourism Sector To Remain Strong its subsequent re-opening in 2017 should also central bank, total bank lending to businesses
Tonga's tourism sector has performed well over help to provide a boost to the tourism sector. remains robust, rising by 8.1% y-o-y in June
the course of FY2015/16, and we believe that A strong tourism sector will also have (versus 8.2% y-o-y in the previous month),
this is set to continue over the coming quarters positive spill-over effects into other parts of and this was partly due to increased lending to
as it is a key area that the government is look- the economy such as hotels and restaurants as the tourism and construction sectors.
ing to develop. Indeed, data from the National well as transportation. While our Oil & Gas
Reserve Bank of Tonga (NRBT) showed that team expects oil prices to rise over the com- Still Vulnerable To The Volatile Climate
the total number of international arrivals to the ing months, they are likely to stay below their Conditions
Pacific Island-nation rose by around 14.2% in 2014 peak. This suggests that costs for tour Economic growth in many Pacific Islands
FY2015/16, and this was driven by both an operators are likely to be relatively contained. has been negatively affected due to volatile
increase in air arrivals (11.9%) and cruise ships weather conditions, and Tonga is one of them.
(28.4%). The introduction of the Air New Infrastructure Projects Positive For Growth While the authorities in these countries have
Zealand Boeing 777 flights and the commence- Other than tourism, we believe that Tonga's expended some effort to improve their existing
ment of Fiji Airways' direct flight from Fiji to economic activity will be supported by the gov- infrastructure such that they are more resilient
Vava'u was one of the factors contributing to ernment's emphasis in infrastructure projects. to climate change, they remain highly vulner-
the strong tourism figures, and we expect it to The major infrastructure projects will likely be able as these improvements take time to be
provide continued support. In addition, we in areas including energy and transport such fully executed. In the event of an unexpected
highlight that a mutual visa exemption agree- as roads, airports, and sea ports. Indeed, these natural disaster such as a cyclone, Tonga's
ment between China and Tonga took effect initiatives were highlighted in the government's economic activity will be severely disrupted.

DATA & FORECASTS

2012 2013 2014 2015e 2016f 2017f 2018f

Nominal GDP, USDbn 0.5 0.5 0.5 0.4 0.4 0.4 0.5
Real GDP growth, % y-o-y 0.8 -3.1 2.0 2.8 2.8 2.7 2.3
GDP per capita, USD 4,442 4,313 4,279 3,931 3,974 4,051 4,145
Population, mn 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Consumer price inflation, % y-o-y, eop 2.5 0.8 0.2 2.5 4.0 5.0 5.5
Consumer price inflation, % y-o-y, ave 1.2 0.7 2.3 2.8 4.0 5.0 5.5
Exchange rate TOP/USD, ave 1.72 1.77 1.83 2.05 2.09 2.13 2.18
Exchange rate TOP/USD, eop 1.74 1.84 1.88 2.20 2.25 2.30 2.35
Budget balance, TOPbn 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1
Budget balance, % of GDP -1.4 -5.1 -6.0 -6.5 -6.2 -5.8 -5.3
Goods and services exports, USDbn 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Goods and services imports, USDbn 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Current account balance, USDbn -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
Current account balance, % of GDP -21.9 -22.7 -23.1 -25.3 -25.2 -24.8 -24.3
Foreign reserves ex gold, USDbn 0.2 0.2 0.2 0.1 0.1 0.1 0.1
Import cover, months 20.0 19.0 18.0 17.0 16.0 15.0 14.0
Total external debt stock, USDbn 0.2 0.2 0.2 0.2 0.3 0.3 0.3
Total external debt stock, % of GDP 42.4 43.9 43.3 52.6 58.6 64.9 71.9
e/f = BMI estimate/ forecast. Source: National sources, BMI

10 10 AUSTRALASIA & SOUTH PACIFIC – NOVEMBER 2016 www.asia-monitor.com

 FRENCH POLYNESIA 
POLITICAL OUTLOOK

Admission Into PIF Likely To on contentious issues including reparations

from Western powers for nuclear testing in the
Pacific, as well as the decolonisation of French
Dilute The Power Of P-SIDS Polynesia and New Caledonia. However, with
these new inclusions, we anticipate that dis-
BMI View: French Polynesia's (and by proxy the French Republic's) admission cussion of such controversial issues will likely
into the PIF will likely serve to dilute the power of the independent Pacific Small be increasingly complicated going forward.
Island States (P-SIDS) grouping within the organisation as the forum now has
French Admission Is Driven By Security
three dominant players. While economic considerations were at play, we be-
Interests And Rising Chinese Influence
lieve that the decision was also motivated by security interest and the Western
Aside from the fact that the South Pacific region
powers' efforts to counterbalance rising Chinese influence in the Pacific region. contains vast and untapped natural resources as
The admission of French Polynesia and New international and regional issues, thereby am- well as a massive share of the world's tuna supply,
Caledonia into the Pacific Islands Forum (PIF) plifying their impact and presence. It has been we believe that the reason for Paris and Wel-
as fully fledged members during the 47th PIF through the PIF that many issues such as nuclear lington's continual push for French territories
meeting in September will have significant testing, climate change, trade, and other security in the Pacific to become part of the PIF is also
geopolitical implications for the South Pacific and environmental issues have been raised and heavily driven by defence and security interests.
region as it is likely to dilute the political power articulated in the international arena. Importantly, the French has a non-negligible
of the Independent Pacific Small Island States The 18 member countries of the PIF now military presence in the Pacific with over 1,400
(P-SIDS) grouping within the wider organisa- include: Australia, Cook Islands, Federated troops based in New Caledonia and 900 more in
tion. Moreover, we believe it could pave the way States of Micronesia, Fiji, Kiribati, Nauru, French Polynesia, and considers itself a regional
for other territories in the region (which are New Zealand, Niue, Palau, Papua New Guin- Pacific power. The two outposts also host the
not independent) such as Tokelau, American ea, Republic of the Marshall Islands, Samoa, French Navy in the Pacific Ocean Maritime
Samoa, Guam etc, to make a bid to become Solomon Islands, Tonga, Tuvalu, Vanuatu, Zone. By joining the PIF, the French will be
part of the forum. This contradicts the original French Polynesia, and New Caledonia. While able to navigate and shape agendas regarding
rationale for the establishment of the PIF, which Australia and New Zealand are members of the maritime security in the region more effectively.
was to give the sovereign P-SIDS a greater col- PIF, they are neither part of the P-SIDS, nor This could act as an effective counterbalance
lective voice in the international arena. the Pacific Island Countries Trade Agreement. against rising Chinese influence in the region.
The decision to enlarge the bloc was made In recent years, China has moved into
despite multiple objections by Pacific Island Small Pacific Islands Likely To See Further Australia and New Zealand's traditional
leaders to French influence (French Polynesia Dilution Of Power spheres of influence by offering aid, invest-
and New Caledonia are colonies of France) in We believe the inclusion of French Polynesia and ments, and scholarships to the Pacific Islands.
the region, and was heavily championed by New Caledonia into PIF will likely make it more This was most evident in the case of Fiji,
New Zealand Prime Minister John Key. In difficult for Pacific Island leaders to discuss and where Beijing acted swiftly to woo Suva after
our view, Paris and Wellington's push for the agree on controversial issues, and could serve to the PIF suspended the former's membership
inclusion of France into PIF through its Pacific further dilute their political power in the forum. in 2009 for its failure to return to democracy
territories is not only economically motivated, Importantly, the membership of the French following a coup led by Fijian General Frank
but also to counter rising Chinese influence in colonies into the PIF is on behalf of the French Bainimarama in 2006. Fiji is one of the more
the South Pacific. Republic, which brings another dominant voice advanced economies in the South Pacific
to the table. Even before France joined, it was region and has sought to establish itself as
Background On The Pacific Islands Forum already difficult for these small island states to the leader of the Pacific Islands. It is therefore
The PIF was set up in 1971 to counter the in- voice their opinions as New Zealand and Aus- plausible that Australia and New Zealand
fluence of major colonial powers in the region, tralia are the major financiers and big players in would view France as a possible ally as they
and has been a avenue for small island-states in the region, and typically have overriding powers. become increasingly wary of China's growing
Oceania to assert a collective voice on major In the past, the Forum had taken a stand political clout in the region.

DATA & FORECASTS

2012e 2013e 2014e 2015e 2016f 2017f 2018f

Population, mn 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Nominal GDP, USDbn 6.2 6.4 6.5 5.6 5.5 5.6 5.7
GDP per capita, USD 22,725 23,231 23,141 19,659 19,339 19,480 19,450
Real GDP growth, % y-o-y 0.3 -0.2 1.0 1.5 2.3 2.9 3.0
Consumer price inflation, % y-o-y, ave 1.2 1.5 0.3 1.5 1.3 1.3 1.3
Exchange rate XPF/USD, ave 92.82 89.83 89.90 107.54 111.47 113.59 116.93
Goods and services exports, USDbn 1.3 1.2 1.2 1.1 1.1 1.1 1.1
Goods and services imports, USDbn 2.3 2.0 2.1 1.8 1.8 1.9 1.9
Current account balance, USDbn 0.3 0.8 0.8 0.7 0.7 0.7 0.7
Current account balance, % of GDP 4.6 11.8 12.9 12.7 11.8 12.1 12.2
e/f = BMI estimate/forecast. Source: National sources, BMI

www.asia-monitor.com NOVEMBER 2016 – AUSTRALASIA & SOUTH PACIFIC 11

  REGIONAL
BMI's risk indices aim to provide a numerical snapshot of the political, economic, and business environment in a given state. Our politi-
cal index assesses political stability, both in the short term (such as the government's ability to implement and enforce legislation) and
long term (assessing the characteristics of the political and governance system). Our economic index assesses the degree to which
the country approximates the ideal of non-inflationary growth with contained fiscal and external deficits, as well as structural factors
such as central bank independence. Our operational risk index evaluates the ease of conducting business within a country, bringing
together 72 different indicators in a structured matrix to assess infrastructure, institutions and market orientation.

DATA & FORECASTS

Real GDP Growth, % GDP Per Capita, USD Current Account, % GDP
2014 2015f 2016f 2014 2015f 2016f 2014 2015f 2016f
Australia 2.6 2.5 2.8 62,996 52,517 53,162 -3.0 -4.9 -4.2
New Zealand 3.0 3.0 3.0 43,893 37,909 37,209 -3.1 -3.1 -3.0
Fiji 4.5 4.0 2.5 5,420 5,340 5,750 -7.0 -3.3 -3.0
Timor-Leste 4.8 6.6 5.0 4,294 4,441 4,664 22.0 24.8 25.5
Samoa 1.9 2.8 2.2 4,296 4,041 4,531 -9.5 -9.7 -9.8
Vanuatu 3.6 -1.5 3.6 3,332 3,289 3,399 2.1 2.1 2.0
Tuvalu 2.2 2.0 2.8 3,855 3,247 3,171 -17.7 -22.6 -24.9
Papua New Guinea 8.4 10.1 2.5 2,146 2,165 2,027 6.4 17.0 18.2
Solomon Islands 2.0 2.9 3.3 1,871 1,867 1,966 -13.7 -20.9 -34.1
Kiribati 3.1 2.5 1.2 1,562 1,342 1,347 11.3 15.9 19.6
f = BMI forecast. Source: BMI

Exchange Rate, LCY/USD Ave Inflation, Ave % Population, '000

2014 2015f 2016f 2014 2015f 2016f 2014 2015f 2016f
Australia 1.11 1.33 1.35 2.5 1.5 1.0 23,622 23,969 24,309
New Zealand 1.21 1.43 1.49 1.2 0.3 0.0 4,495 4,529 4,565
Fiji 1.88 2.09 2.05 0.5 1.4 3.5 886 892 898
Timor-Leste 1.00 1.00 1.00 0.5 0.5 0.8 1,157 1,185 1,211
Samoa 2.33 2.54 2.41 0.1 2.3 5.0 192 193 195
Vanuatu 91.7 91.7 91.7 0.8 2.5 2.0 259 265 270
Tuvalu 1.11 1.33 1.43 1.8 2.1 2.3 10 10 10
Papua New Guinea 2.54 2.85 3.20 5.0 5.0 4.8 7,464 7,619 7,776
Solomon Islands 7.30 7.35 7.35 4.9 -0.5 4.0 572 584 595
Kiribati 1.11 1.33 1.35 2.5 1.8 2.2 110 112 114
f = BMI forecast. Source: BMI

Australia New Zealand Fiji Timor-Leste Papua New Guinea

Short-Term Political Risk Index 75.6 84.0 51.5 54.6 44.0
Long-Term Political Risk Index 88.0 86.0 46.9 49.8 53.8
Short-Term Economic Risk Index 64.8 67.5 52.3 59.0 49.2
Long-Term Economic Risk Index 71.0 72.0 53.2 41.8 50.5
Operational Risk Index 72.7 76.6 45.3 34.3 33.7
Country Risk Index 74.1 77.1 49.1 45.6 44.1
Source: BMI

Benchmarking Regional Growth Inflation Rates In The Pacific

Real GDP Growth, % Inflation, Ave %
12 6
2014 2014
10
2015f 5
8 2015f
2016f
2016f 4
6
3
4
2 2
0 1
-2 0
-4 -1
Tuvalu
Australia

Papua New Guinea

Timor-Leste
Fiji
New Zealand

Kiribati
Samoa

Vanuatu

Solomon Islands

Tuvalu
Fiji

Papua New Guinea

Australia

Kiribati
Timor-Leste
New Zealand

Samoa

Vanuatu

Solomon Islands

f = BMI forecast. Source: BMI f = BMI forecast. Source: BMI

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