PRESENTATION TO THE FIJI AUSTRALIA BUSINESS COUNCIL THE FIJI ECONOMY: FACING THE GLOBAL CRISIS Mr Savenaca Narube Governor, Reserve Bank of Fiji 2 December 2008 Reserve Bank of Fiji

OUTLINE GLOBAL CRISIS EXPOSURE TO TRADE IN GOODS & SERVICES GROWTH OUTLOOK KEY CHALLENGES AND POLICY RESPONSES SUMMARY Reserve Bank of Fiji

SNAPSHOT OF THE FIJI ECONOMY Economy declined heavily in 2007 Recovery to begin this year but low growth The trade deficit is widening and exerting pressure on foreign reserves Inflation has risen to a 20-year high but to decline to a moderate level in 2009 Investment has fallen Unemployment is rising Poverty is worsening NOW COMES THE GLOBAL FINANCIAL CRISIS ….. Reserve Bank of Fiji

% WORLD GDP GROWTH Source: IMF World Economic Outlook – Nov 08 Reserve Bank of Fiji

% TRADING PARTNERS’ OUTLOOK Source: World Economic Outlook – Oct 08 & Nov Reserve Bank of Fiji

EXCHANGE RATES OF SELECTED CURRENCIES AGAINST FJD NZD/AUD/EUR/USD NZD 11% AUD 16% USD -14% EURO -4% Reserve Bank of Fiji YEN -26% YEN

NEER REER Index Reserve Bank of Fiji REER/NEER (Monthly Average)

EXPOSURE TO TRADE IN GOODS & SERVICES Reserve Bank of Fiji

Source: FIBOS *Refers to 2007 FIJI’S COMMODITY EXPORT* DESTINATIONS

$M MAJOR EXPORTS* TO US Reserve Bank of Fiji Source: FIBOS *Represents 84% of total commodity exports to the US in 2007 Demand Will Slow Down

$M Reserve Bank of Fiji Source: FIBOS MAJOR EXPORTS* TO EUROPE *Represents 83% of total commodity exports to the UK, Germany, France & Italy in 2007 Sugar Exports Unaffected

$M MAJOR EXPORTS* TO JAPAN Reserve Bank of Fiji Source: FIBOS *Represents 88% of total commodity exports to Japan in 2007 Demand Will Slow Down

$M MAJOR EXPORTS* TO AUS Reserve Bank of Fiji Source: FIBOS *Represents 73% of total commodity exports to Australia in 2007 Garments May Be Affected

$M MAJOR EXPORTS* TO NZ Reserve Bank of Fiji Source: FIBOS *Represents 48% of total commodity exports to New Zealand in 2007 Demand Will Slow Down

IMPACT ON EXPORTS Slowdown in exports which are demand driven –Tourism –Water –Garments Supply driven exports – structural constraints binding Slowdown in growth of total exports Reserve Bank of Fiji

VISITOR ARRIVALS* BY COUNTRY Source: FIBOS *Refers to 2007

‘000s VISITOR ARRIVALS Reserve Bank of Fiji Source: FIBOS & Macroeconomic Committee % 8% 3% Growth Under Threat

‘000s Reserve Bank of Fiji VISITOR ARRIVALS - USA Source: FIBOS Already Declining

‘000s Reserve Bank of Fiji VISITOR ARRIVALS - EUROPE Source: FIBOS Already Declining

‘000s Reserve Bank of Fiji VISITOR ARRIVALS - JAPAN Source: FIBOS Already Declining

‘000s Reserve Bank of Fiji VISITOR ARRIVALS - NZ Source: FIBOS Already Flat

‘000s Reserve Bank of Fiji VISITOR ARRIVALS - AUSTRALIA Source: FIBOS Key Source of Growth

Reserve Bank of Fiji REMITTANCES* BY CURRENCY Source: RBF *Cumulative for the period Sep-07 to Jun-08, excluding remittances received in FJD

$M PERSONAL REMITTANCES Reserve Bank of Fiji -10% -22% Source: RBF & Macroeconomic Committee Already Declining

IMPACT ON SERVICES Reduce tourist arrivals –Japan, Europe and US was already declining –NZ tourists were also flat – Australia was the growth industry – Exchange rate will further dampen demand Remittances will decline further Reserve Bank of Fiji

FIJI’S ORIGIN OF IMPORTS Source: FIBOS *Refers to 2007 Total Imports = $2,890m

$M IMPORTS* FROM UNITED STATES Reserve Bank of Fiji Source: FIBOS *Represents 47% of total commodity imports from the US in 2007

$M IMPORTS* FROM JAPAN Reserve Bank of Fiji Source: FIBOS *Represents 21% of total commodity imports from Japan in 2007 Cement & Car Prices Will Rise

$M IMPORTS* FROM AUSTRALIA Reserve Bank of Fiji Source: FIBOS *Represents 28% of total commodity imports from Australia in 2007 Food Prices Will Drop…

$M IMPORTS* FROM NEW ZEALAND Reserve Bank of Fiji Source: FIBOS *Represents 14% of total commodity imports from New Zealand in 2007 Food Prices Will Drop…

IMPACT ON IMPORTS Imports will rise –Price of cars and auto parts will rise – demand will drop –Oil price in Fiji dollar will rise – will partly offset the lower global price –Prices of food and manufactured items will drop – demand may be inelastic – Cement price will rise Reserve Bank of Fiji

F$M *C.I.F Accrual data excluding aircraft SourceSource: FIBOS and Macroeconomic Committee 5%1% 1% TRADE BALANCE Reserve Bank of Fiji 29% 25%

INVESTMENT % of GDP Private Government Statutory Bodies & Public Enterprises Source: FIBOS Reserve Bank of Fiji

GROWTH OUTLOOK Reserve Bank of Fiji

% GDP GROWTH: Source: FIBOS & Macroeconomic Committee

MAJOR DRIVERS Tourism Agriculture –fishing, forestry Manufacturing, except garments Mining – gold Water Reserve Bank of Fiji MAJOR DRAG Community & social services – Government expenditure (2010 & 2011)

Reserve Bank of Fiji GROWTH IN SELECTED PACIFIC ISLAND ECONOMIES % Average Growth Source: IMF World Economic Outlook (Oct & Nov 2008) & FIBOS Growth Is Too Low

Reserve Bank of Fiji % Average Growth Source: IMF World Economic Outlook (Oct & Nov 2008) & FIBOS GROWTH IN SELECTED SMALL ISLAND DEVELOPING STATES Growth Is Too Low

KEY CHALLENGES AND POLICY MIX Reserve Bank of Fiji

KEY CHALLENGES Safeguarding Fiji’s external position Raising exports Raising investment Raising and sustaining growth Reserve Bank of Fiji

BUDGETARY MEASURES PRO GROWTH –3% of GDP deficit –Support for priority sectors  Tourism  Agriculture  ICT Reserve Bank of Fiji

BUDGETARY MEASURES BALANCE OF PAYMENTS SUPPORT – Bio Fuel – Import Substitution – Fiji Diaspora – Increase in tariffs INVESTMENT –Infrastructure development –Incentives Reserve Bank of Fiji

MONETARY MEASURES BALANCE OF PAYMENTS –Credit Ceiling –Exchange Controls INVESTMENT –Interest rates –Special approvals Reserve Bank of Fiji

GOVERNMENT UNDERLYING BALANCE Reserve Bank of Fiji $M Source: Ministry of Finance % of GDP Expansionary Stance

GOVERNMENT REVENUE Reserve Bank of Fiji $M Source: Ministry of Finance % of GDP

$M GOVERNMENT OPERATING EXPENDITURE Reserve Bank of Fiji Source: Ministry of Finance % of GDP Too High as % of GDP

GOVERNMENT CAPITAL EXPENDITURE $M Reserve Bank of Fiji Source: Ministry of Finance % of GDP Good Increase…

GOVERNMENT DEBT Reserve Bank of Fiji % of GDP Deficit is Sustainable

COMMERCIAL BANK’S LENDING RATE 8% % Reserve Bank of Fiji Declining …

% 2006 Source: International Financial Statistics 2007 Reserve Bank of Fiji LENDING RATES: FIJI & SELECTED COUNTRIES 2008 Lowest In Region

COMMERCIAL BANKS’ INVESTMENT & CONSUMPTION LENDING % % % Reserve Bank of Fiji Rising Credit

INFLATION % Forecast Reserve Bank of Fiji Source: FIBOS and Reserve Bank of Fiji Will Moderate

$M Months of Imports Reserve Bank of Fiji OFFICIAL FOREIGN RESERVES Still Under Pressure

SUMMARY Weak Fundamentals Financial Crisis will Reduce Potential Four Key Challenges Policy Mix Growth is too Low Agenda to Lift Growth Rests on Exports Reserve Bank of Fiji

THANK YOU Reserve Bank of Fiji

HOW DO WE COMPARE WITH THE ASIAN CRISIS? Reserve Bank of Fiji

INDONESIAN RUPIAH AGAINST USD: Reserve Bank of Fiji Rupiah weakened by 130% in 1997 RUPIAH

INDONESIAN RUPIAH AGAINST USD: 2008 Reserve Bank of Fiji Rupiah weakened by 20% so far in 2008 RUPIAH

KOREAN WON AGAINST USD: Reserve Bank of Fiji Won weakened by 102% in 1997 WON

KOREAN WON AGAINST USD: 2008 Reserve Bank of Fiji WON Won weakened by 38% so far in 2008

THAI BAHT AGAINST USD: Reserve Bank of Fiji Baht weakened by 82% in 1997 BAHT

THAI BAHT AGAINST USD: 2008 Reserve Bank of Fiji BAHT Baht weakened by 18% so far in 2008

SINGAPORE DOLLAR AGAINST USD: Reserve Bank of Fiji Singapore Dollar weakened by 20% in 1997 SGD

SINGAPORE DOLLAR AGAINST USD: 2008 Reserve Bank of Fiji SGD Singapore Dollar weakened by 3% so far in 2008

MAJOR POLICY RESPONSE 20% DEVALUATION Why devaluation was necessary? –Currencies of our major trading partners fell against the US dollar so Fiji goods became expensive –Competitor Asian currencies also fell drastically against the US dollar so Fiji lost competitiveness/business Needed to compete on price –Very important to make what we sold cheaper Reserve Bank of Fiji

IMPACT ON INFLATION % Reserve Bank of Fiji Source: FIBOS Oct-98: 9.1% Inflation Rose

% Reserve Bank of Fiji IMPACT ON EXPORTS Accrual data excluding aircraft Source: FIBOS Exports Growth Rebounded

% Source: FIBOS & Macroeconomic Committee IMPACT ON GROWTH Reserve Bank of Fiji Economy Recovered Gradually

COMMERCIAL BANKS’ SPECIAL LOAN APPROVALS BY PURPOSE (As At 21/11/08) TOTAL APPROVALS - $356m Reserve Bank of Fiji

BALANCE OF TRADE Source: FIBOS Reserve Bank of Fiji $M Trade Surplus Trade Deficit *UK, Germany, France, Italy

EXPORTS DRIVEN BY SUPPLY FACTORS Reserve Bank of Fiji

F$M SUGAR EXPORTS Reserve Bank of Fiji % -29% Source: FIBOS & Macroeconomic Committee 38%

TIMBER EXPORTS $M Reserve Bank of Fiji 10% Source: FIBOS & Macroeconomic Committee 18% 29%

$M FISH EXPORTS Reserve Bank of Fiji 5% Source: FIBOS & Macroeconomic Committee 15% 29%

$M GOLD EXPORTS Reserve Bank of Fiji 54% Source: FIBOS & Macroeconomic Committee 926% 300%

EXPORTS DRIVEN BY DEMAND FACTORS Reserve Bank of Fiji

TOURISM EARNINGS Reserve Bank of Fiji $M Source: FIBOS & Macroeconomic Committee 10% 5%

$M MINERAL WATER EXPORTS Reserve Bank of Fiji 10% Source: FIBOS & Macroeconomic Committee 16% 5%

$M TEXTILES, CLOTHING & FOOTWEAR* EXPORTS Reserve Bank of Fiji Source: FIBOS & Macroeconomic Committee *Includes Garments, Textiles and Footwear 4% 1%

COMMERCIAL BANKS’ PRIVATE SECTOR LENDING $M %