«MONETARY POLICY STATEMENT FOR THE FINANCIAL YEAR 2009/2010 APIA October 2009 CONTENTS Page 1. INTRODUCTION.. 1 2. EXECUTIVE SUMMARY. 3 3. WORLD ...»
CENTRAL BANK OF SAMOA
MONETARY POLICY STATEMENT
FOR THE FINANCIAL YEAR 2009/2010
1. INTRODUCTION………………………………………... 1
2. EXECUTIVE SUMMARY………………………………. 3
3. WORLD ECONOMY……………………………………. 7
4. DOMESTIC ECONOMY IN 2008/2009………………… 12
4.1 Policy Developments
4.2 Macro Economic Performance 4.2.1 Real Sector 4.2.2 Balance of Payments 4.2.3 Prices
5. DOMESTIC ECONOMIC OUTLOOK FOR 2009/2010..... 28
5.1 Government Budget
5.2 Real Sector
5.3 Balance of Payments
5.4 Prices 5.4.1 Headline Inflation Import Component Local Component Headline Inflation Rate 5.4.2 Underlying inflation Import Component Local Component Underlying Inflation Rate
6. MONETARY POLICY STANCE FOR 2009/2010……… 39 MPS 2009/2010
1. INTRODUCTION In line with Government’s emphasis on transparency and accountability, Monetary Policy Statements (MPS) serve as the main vehicle to communicate and promote public awareness of the main objectives of monetary policy and the targets that would be pursued by the Central Bank in the year ahead. As well, these Statements are issued in accordance with the Government’s Strategy for The Development of Samoa. The main objective of the Central Bank’s monetary policy is to promote sustainable real economic growth by maintaining price stability and international reserves viability. In order to achieve these objectives, monetary policy decisions are conducted via open market operations through the issuance and trading of Central Bank Securities.
In pursuing the goal of price stability, the Central Bank relates Samoa’s inflation rate to those of its major trading partners. The annual inflation rates for Samoa’s main trading partners usually average around 3.0 percent and this is the target that the Central Bank normally aims to achieve and maintain each year. However, there are times that the changes in prices are beyond the realms of monetary policy and the control of the Central Bank. The experience of recent years bared witness to this situation when the persistently sharp rise of international prices for crude oil and food exerted significant pressures on the domestic prices of petroleum and food items. In addition, the rise in inflation in a particular year reflect the revised prices of public goods and services that are subject to review every three to five years such as bus, taxi and boat fares, water, electricity and port tariffs. During such periods, both the headline and the underlying or core inflation rates rise substantially as seen in the 2008/09 financial year.
Samoa is a small open economy with total merchandise trade alone representing around 60 percent of nominal GDP. It is crucial therefore that Samoa maintains a sufficient level of international reserves to withstand unforeseeable economic shocks. Under present circumstances, the Central Bank considers a level of gross official MPS 2009/2010 international reserves, equivalent to no less than 4.0 months of imports of goods, as adequate for maintaining the country’s long term international viability. On the exchange rate, the main objective of the Central Bank’s policy is to ensure that export-oriented industries remain competitive in overseas markets whilst at the same time minimizing imported inflation. While there is no specific target level for the nominal effective exchange rate (NEER) of the Tala, the Central Bank aims to avoid a substantial real appreciation of the Tala since it can adversely affect the international competitiveness of the export sector.
2. EXECUTIVE SUMMARYAfter growth of around 5.0 percent in previous years, the world economy only grew by 0.9 percent in the 2008/09 financial year.
Inflation dropped to 1.8 percent and 7.3 percent for the Advanced economies and Emerging and Developing economies respectively.
Much of the downturn in 2008/09 was due to a sharp decline in the Advanced economies led by the US, Euro-area and Japan with negative growth rates of -0.8 percent, -2 percent and -3.4 percent respectively. Leaders of the Emerging and Developing economies such as China and India, on the other hand, registered lower but positive growth rates of 8.3 percent and 6.4 percent respectively compared to 2007/08.
For 2008/09, monetary policy was highly expansionary with concerted quantitative easing focused on stimulating growth. By the end of the period under review, the US Federal funds rate was aggressively cut to reach 0.0-0.25 percent at end June 2009. The European Central Bank (ECB) also cut its policy rate to 1.0 percent while Japan lowered its policy rate to 0.1 percent.
As the financial crisis intensified and evolved into a more disturbing form by September 2008, the US dollar was swiftly bought on its safe haven appeal despite a beleaguered US economy and poor interest rate differentials. Towards the end of the period in review, the US dollar’s fortunes stabilized as traders and markets risk appetite recovered a little.
In Samoa, the Central Bank’s (CBS) response to the global recession was to further ease its monetary policy stance in order to prop up flagging demand and business confidence. One of the first initiatives by the CBS was to drive down the cost of borrowing by reducing its lending rate to the commercial banks from 7.85 percent to 5.0 percent in February 2009. Furthermore, in March 2009, the commercial banks were allowed to borrow from the Central Bank secured by up to 50 percent of their Statutory Reserve Deposits at the CBS. The CBS has MPS 2009/2010 actively consulted the four commercial banks in reducing lending rates and injecting much needed liquidity into the economy. In the process the weighted average interest rates (for both deposit and lending) fell continuously over the year. However, the reductions were insufficient to stem the decline in business confidence and loan demand. Consequently, the annual average growth rates of private sector credit and money supply slowed down dramatically.
The global downturn impacted adversely on the domestic economy, with the latest available estimates pointing to a 6.3 percent decline in real gross domestic product (GDP). Much of the downturn was driven by reductions in the ‘Other manufacturing’, ‘Construction’, ‘Food and beverage manufacturing’,‘Commerce’ and ‘Agriculture’ sectors.
Despite concerns in the first half of 2008/09, the external sector posted a positive outcome with an $11.1 million surplus in the balance of payments, maintaining a cover of 5.1 months of imports for 2008/09.
Inflation remained problematic in the year under review with both the domestic and external factors pushing both the headline and underlying rates to highs of 14.2 percent and 17.2 percent respectively at end June 2009.
For fiscal year 2009/10, Central Bank forecasts, which were based on information collected prior to the 29 September 2009 Tsunami, showed that the Samoan economy was destined to recover quickly in fiscal year 2009/10, bouncing back up by 5.0 percent in real terms.
This pre-tsunami projected turnaround is expected to be driven mostly by a record overall deficit in the Government Budget for 2009/10 which is equivalent to 11 percent of GDP. The Budget incorporates Government’s economic stimulus response in the form of heavy investments in construction activities such as the water and drainage projects, buildings, road infrastructure and road switch upgrades as well as private projects such as hotels and businesses.
Special focus is also placed on reviving the flagging agriculture sector MPS 2009/2010 with a planned USD $10 million assistance from the World Bank.
The prevailing pre-tsunami forecasts show that the balance of payments is expected to register a modest surplus of $12.5 million in light of significant Government loans disbursements, increased project grants and further growth in tourism earnings.
The pre-tsunami forecasts also show inflation declining significantly in 2009/10 with an expected recovery in agricultural produce supplies at the local market pushing down the annual headline inflation rate to
2.3 percent at end June 2010 from 14.2 percent at end June 2009. The annual underlying inflation rate is also expected to fall to 4.9 percent from 17.2 percent at end June 2009.
Given the expected recovery in real GDP and the projected strong external position, the CBS has decided to continue with its easing monetary policy stance in order to further drive down the high interest rates and boost the waning private sector credit, ultimately reviving business confidence and consumer demand. As a result, higher private sector credit and strong external inflows are expected in 2009/10. (See Table 1.) The macro-economic and financial impact of the tsunami is yet to be determined. However, it is felt that the recovery and reconstruction efforts will fuel further growth in construction, transportation, communication and commerce activities in the year ahead.
Consequently, the positive outlook for the real economy as suggested by the prevailing forecasts remains valid. Nevertheless, these forecasts will be revised as more up to date information on the macroeconomic impact of the tsunami comes to hand.
3. WORLD ECONOMY The IMF’s July 2009 World Economic Outlook (WEO) update forecasts a contraction of the world economy by 1.4 percent in 2009, recovering a bit in 2010, leaving a real growth rate of 0.6 percent in the 2009/10 financial year. On the other hand, inflation forecasts are at 0.1 percent for the Advanced economies and 5.3 percent for Emerging and Developing economies for 2009. On average, therefore, inflation for the Advanced economies is expected to increase to 0.5 percent in the 2009/10 financial year while the rate for Emerging and Developing economies is expected to decrease to 5.0 percent. Real economic growth rates for China and India are projected at 7.5 percent and 5.4 percent respectively for 2009 and 8.0 percent and 6.0 percent in terms of the 2009/10 financial year. The US, Euro-zone and Japan are expected to contract by 2.6 percent 4.8 percent and 6.0 percent respectively in 2009 or improvements of -0.9 percent, -2.6 percent and -0.2 percent respectively in the 2009/10 financial year.
With dismal global growth forecasts for 2009/10, monetary policy is expected to remain very expansionary throughout the global economy. Easing inflationary pressures across the globe, (helped immensely by the huge declines in oil prices, food and commodity prices) will continue for the period ahead. All over the world the main focus is now on inciting growth. (See Table 2.)
The global economic downturn has taken pressure off energy, food and commodity prices. Weak global demand will continue to depress oil prices which are forecast at around the US$68 per barrel mark for 2009/10. Commodity and food prices are still expected to remain high.
The US dollar is expected to be weighed down by the fragile US economic data, low interest rates and most especially improved risk appetite for other assets.
A look at Samoa’s two closest trading partners: New Zealand and Australia.
contracted 1.8 percent in the twelve months to June 2009. The recovery in the June 2009 quarter was driven by activity in “primary industries” (fishing, forestry, and mining industry) which grew 1.5 percent whereas activity in “goods-producing industries” decreased
0.5 percent reflecting contractions in manufacturing and construction activity. Service industries, however, remained flat in the June 2009 quarter.
For the twelve months to end June 2009, investment in fixed assets decreased and household consumption expenditure declined, the main driver of this was durable goods which includes spending on motor vehicles, furniture and major appliances. Business investment was also weak and unemployment continued to soar. Decreases in investment in non-residential buildings, transport equipment, and plant machinery and equipment were also noted.