debt management in fiji
DESCRIPTION
Isikeli VoceduaduaTRANSCRIPT
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16 March 2011
Debt Management in Fiji 2nd ADB Regional Debt Management Forum
PRIVATE AND CONFIDENTIAL
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Republic of Fiji Representatives
David Kolitagane
Deputy Secretary, Finance & Administration,Ministry of Finance
Isikeli Voceduadua
Manager Debt & Cashflow Management Unit, Ministry of Finance
PRIVATE AND CONFIDENTIAL
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Agenda
Country Overview
Fiscal Policy Overview
Economic Review
Debt Management in Fiji
Conclusion
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Country Overview: A Key Hub in the Pacific
OverviewOverview LocationLocation
Fiji has a well-educated and mobile population of approximately 837,000 largely concentrated in two main cities of Suva and Lautoka (literacy rates in excess of 90%)
The main sources of foreign exchange revenue for the Fiji economy are tourism, agriculture, and mining
Given Fiji’s location and relative size, it serves as an important hub amongst its South Pacific neighbors, its positioning consolidated with the recent redrawing of the major international shipping channel from Asia to Australasia via Fiji 3
Fiji’s main trading partners are Australia, New Zealand, the US, the Eurozone, Japan and increasingly China
Fiji has a Sovereign Rating of B1 and B- from Moody’s and S&P respectively Fiji is an archipelago of approximately 330 islands in the South Pacific approximately 2,700 km’s east of Australia
Key Economic IndicatorsKey Economic Indicators
1 Converted to USD using an exchange rate of USD1.00 to FJD1.66, FJD1.55, FJD1.76, FJD1.98 and FJD1.55 for 2006 to 2010 respectively2 As at June 20103 Source: National Planning Office4 Source: Fiji Bureau Statistics & Macroeconomic Committee5 Source: Reserve Bank of Fiji6 Source: National Budget, Fiji Economic & Fiscal Update: Supplement to the Budget Address
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The Key Drivers of Fiji’s Economic Growth
Removing inefficiency from recurring government expenditure and re-weighting spending toward key capital projects that will have a lasting social and economic impact on the country
Broadening the tax base while removing industry subsidies and concessions that have created economic distortion An open policy toward foreign investment combined with a pragmatic approach to providing incentives to attracting investment into key strategic
industries A significant review of land usage with a view to creating an available stock of land for commercial use within key industry sectors as well as creating
substantial scale efficiencies within the agriculture and forestry sectors An independent Reserve Bank that has met its objectives of rebuilding and maintaining foreign currency reserves as well as reducing domestic
inflationary pressure and maintaining financial stability throughout the financial crisis (as noted in a recent IMF report) Improving trend in the balance of payments coming from increased foreign exchange income from tourism and export industries as well as increased
foreign investment Strong rebound in tourism supported by a significant expansion in Fiji’s geographic tourist catchments, particularly from Asia, diversifying from a
traditional reliance on Australia and New Zealand Significant increase in exploration activity by major international mining companies with substantial projects currently at a post-feasibility or final
approval stage in gold, copper and bauxite with untapped opportunities in natural gas, oil and mineral sands2
20 to 30 year revenue generating opportunities that have been untapped within the forestry sector3
Key Highlights
GDP Growth Rate (%)1
1.9
(0.9)
0.2
(3.0)
0.1
1.30.8
1.2
(1.3)
(4.0)
(2.0)
0.0
2.0
4.0
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F
PRIVATE AND CONFIDENTIAL
1 Source: Fiji Bureau of Statistics, Macroeconomic Committee2 Source: Mineral Resources Department, National Planning Office3 Source: Department of Forestry, National Planning Office
Revised / Provisional
Forecast
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18%
18%
19%
15%
13%
12%
5%
Key Economic Sectors generate flow of FX revenue
Composition of GDP 2010 (f)2Composition of GDP 2010 (f)2Estimated Growth by GDP Sector (2010f-2013f)3Estimated Growth by GDP Sector (2010f-2013f)3
Key HighlightsKey Highlights
Financial, Real Estate & Business
Services
Manufacturing
Wholesale & Retail
Social Infrastructure
Agri, Forestry, Fishing & Mining
General Services
Sector 2010-2013 p.a.
Agri, Forestry, Fishing & Mining 6.3%
Hotels & Accommodation 2.8%
Manufacturing 2.6%
Financial, Real Estate & Business Services 1.0%
Wholesale & Retail 0.6%
General Services -0.4%
Social Infrastructure -2.5%
Fiji has a well balanced economy with key segments generating a steady supply of FX revenues, supporting reserves Agri, Forestry, Fishing, Mining and Tourism make up a significant proportion of GDP and are the first and second fastest growth
sectors Within other sectors of the economy further FX generating activities exist, with the opportunity for this to increase significantly
Export Garment sector and Fiji Water are two current examples of manufacturing activities generating FX reserves Southern Cross fibre optic cable runs through Fiji connecting Australasia to the US and provides service industry-related FX
generating opportunities1
Furthermore, Fiji has the potential to become a key assembly hub in the Pacific/Australasia for finished goods1
Further analysis of the Tourism, Agriculture and Mining opportunities follow
Notes:
Blue denotes key sources of foreign exchange revenue
Social Infrastructure includes administration & defence, health & social work, education and other community services
General Services include electricity, water, transport, storage, communications & construction
Tourism
31%
Hotel & Restaurants
PRIVATE AND CONFIDENTIAL
1 Source: Ministry of Industry & Trade, National Planning Office2Source: Reserve Bank of Fiji, Bureau of Statistics, Macroeconomic Committee3Source: Fiji Economic & Fiscal Update: Supplement to the 2011 Budget Address
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Fiscal Discipline with a Focus on Key Economic & Social Infrastructure
Widening of the Fijian tax base with increases to VAT and the introduction of a capital gains tax, while industry subsidies and concessions have been removed to reduce economic distortions in the economy
Significant enhancements in the efficiency of government spending via an active reduction in the size of the civil service with a lowering of the retirement age to 55 from 60 as well as an increasing focus on the privatisation of state assets that will benefit from the introduction of private sector expertise
The government is committed to achieving a balanced budget by 20151
A major refocusing of government expenditure toward the development of key social and economic infrastructure which will have a lasting impact on future generations (representing 28% of total spending in the 2011 Budget), many of these projects will receive bilateral support from foreign government and multilateral agencies including ADB and China EXIM
Fiscal Balance (% of GDP)1
Select key infrastructure Projects1
Project Estimated Cost Exp Completion Date Economic Impact
Nadarivatu Dam USD 120mn Aug 2011 Will provide 80% of Viti Levu’s energy requirements
Queens Road Highway USD 40mn Dec 2012 Key transportation route for tourists and export goods
Rural Roads USD 95mn Dec 2015 Key transportation route for tourists and export goods
Fiji Sugar Restructure USD 55mn Dec 2012 Key export sector which will impact 100,000 households
E-Government USD 20mn Dec 2011 Enhanced revenue collection and reduced government expenditure
Low Cost Housing USD 35mn Dec 2015 Up to 15,000 new homes positioned in strategic urban growth areas
-3.4 -2.9 -2.1
0.5
-6.6-3.5 -3.5 -3 -2.5
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F
PRIVATE AND CONFIDENTIAL
1 Source: Ministry of Finance
Revised / Provisional
Forecast
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Agenda
Monetary Policy Overview
Country Overview
Fiscal Policy Overview
Economic Review
Debt Management in Fiji
Conclusion
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68 o Government’s medium term debt policy is based on five (5) key objectives:
1. reduce net deficit.
2. increase operating savings.
3. ensure that the net deficit is wholly devoted to capital expenditures.
4. control contingencies and the rate of defaults.
5. implement appropriate debt and risk management strategies.
o Macroeconomic policy indicator
1. Is to reduce debt to GDP ratio to 40% in the medium term
Government Fiscal Debt Policy
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68
DOMESTIC
1. Bulk of Borrowing is sourced Domestically – this is through issuance of Bonds and Treasury Bills
2. Active Primary Market – commercial banks, NBFIs and Superannuation Industry actively participate in Government Auction program (Fortnightly basis)
3. Secondary Market Trading is also encouraged but most bondholders hold stock till maturity
4. Primary Market is currently dominated by our sole Superannuation Industry
EXTERNAL
1. External Loans are mostly for capital & Infrastructure Projects
ALL BORROWINGS ARE APPROVED BY PARLIAMENT DURING THE NATIONAL BUDGET ADDRESS THAT NORMALLY TAKES PLACE IN NOVEMBER. BY JANUARY, THE DEBT UNIT NORMALLY PREPARE AN FINANCING PLAN WHICH IS FORWARDED TO ALL MARKET PARTICIPANTS AND LOADED ON GOVERNMENT/RESERVE BANK WEBSITE. THE FINANCING PLAN SUPPORTS MARKET PARTICIPANTS INVESTMENT PLANNING
Major Sources of Government Borrowing
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Low Levels of External Debt
Total Government Debt (FJD mn)1
Government Debt ( % of GDP)1
Fiji has an unblemished debt repayment history since its creation as an independent Sovereign nation in October 1970
The government’s estimated outstanding debt for 2010 is FJD 3,448mn, equivalent to 58.9% of GDP
Relatively low proportion of external debt with in excess of 80% of the government’s debt denominated in FJD, placed into domestic portfolios in tenors of up to 30 years, limiting the country’s exposure to foreign exchange risk and aiding in the development of a more vibrant capital market1
The government’s international bond issue of USD 150mn matures in September 2011.
Additional external debt is provided in the form of concessionary lending from a range of bilateral and multilateral institutions including the ADB and JBIC to name a few
The government’s medium-term debt target is 40% of GDP1
The government is committed to achieving a medium-term improvement in the international credit ratings
Key Highlights
2,446 2,338 2,411 2,605
417 397 476 5282,4232,863 2,735 2,887 3,132
3,594
2,7492,8352,258
613
164
845
3,448
2005 2006 2007 2008 2009 2010(F) 2011(F)
Domestic External
7.8 7.2 8.49.5
48.2 47.753.3 49.9 50.8
56.6 58.2
44.4 45.5 42.6 42.4 47.1 48.4 44.544.7
10.53.5 3.2 13.7
58.9
2004 2005 2006 2007 2008 2009 2010(F) 2011(F)
Domestic External
PRIVATE AND CONFIDENTIAL
1 Source: Ministry of Finance, Reserve Bank of Fiji, Macroeconomic Committee, 2011 National Budget Estimates
Forecast
Forecast
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Domestic: Bonds $2.75 billion, T-Bills - $95 million. The Bond maturities range from 3 years to 30 years.
External: sourced from Multilateral & Bilateral Agencies and through the International Financial markets. ADB held bulk of External Loans.
Composition of Debt Portfolio
ADB Loans Loan Amount
Fiji Road Upgrading Project III US$47m
Fiji Road Upgrading Project III (Supplementary)
US$27m
Suva-Nausori Water & Sewerage Project
US$47m
Suva-Nausori Water & Sewerage Project (Supplementary)
US$27m
Emergency Flood Recovery Project US$20m
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13 September 2006 – For the first time, in September 2006 the Fiji Government successfully raise US$150m in the International Market. Tenor 5 years, Coupon 6.875%
15 March 2011 – In ensuring successful rollover of the1st Global Bond, the Fiji Government successfully raise US$250m in the global markets a week ago. Tenor 5 years, coupon was 9.00%. The 2nd Global bond issuance will support the funding of the budget deficit, capital projects and assist in the repayment of the global bond maturing in September 2011.
Special Issuance - Fiji Global Bond
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F($M) 2007 2008 2009 2010
Domestic $2,337.8 $2,411.0 $2,605.0 $2,834.7
External $397.0 $476.8 $527.5 $548.5
TOTAL $2,734.8 $2,887.0 $3,132.5 $3,383.2
DEBT/GDP RATIO 49.9% 50.7% 53.0% 57.7%
TOTAL DEBT STOCK
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68 Policy
Government can only on-lend and provide guarantees to Entities in which it has major shareholders(51% shares )
On-Lending:
Total on-lending by Government amounts to US$45 million as at December 2010. Bulk of on-lending relates to Government borrowing offshore and on-lend to State Owned Entities;
Contingent Liabilities
Total contingent liabilities outstanding Dec 2010 is $1.9b (US$940m), 33% of GDP. While the rate of default has been minimal, Government is concerned that most of these entities are operating at a loss for the last few years.
MAJOR CHALLENGES
On-Lending & Contingent Liabilities
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68 Interest Rate Risk – borrowing costs is at high end of the yield curve. For 2010, average borrowing
costs was 9.10%
Rollover Risk – heavy reliance on a dominant player, the risks of rollover of maturing securities is likely to occur if main player is absent from market for so long
Liquidity Risks – apart from Government, other corporate entities also raise funds in the domestic market. The Reserve Bank normally ensures all stakeholders interest are accomodated in the local capital market.
Operational Risks – inadequate internal process, systems & external factors.
Exchange rate risks – movement in exchange rates, especially in US Dollar, Japanese Yen and Euro.
MAJOR CHALLENGES
Risk Factors
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Major Challengers to Debt Management in Fiji
Increased Fiscal Discipline
High Operating Costs especially in Salaries & Wages
Net Deficit wholly committed to Capital Expenditure
Reform of Public Enterprises to bring about efficiency to reduce burden on Budget
PRIVATE AND CONFIDENTIAL
Heavy Reliance on Superannuation Industry
Rising contingent liabilities and defaults
Availability of Economic & Financial Data for comprehensive analysis
Coordination between Fiscal & Monetary Policy
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Thank you
PRIVATE AND CONFIDENTIAL