«MONETARY POLICY STATEMENT FOR THE FINANCIAL YEAR 2009/2010 APIA October 2009 CONTENTS Page 1. INTRODUCTION.. 1 2. EXECUTIVE SUMMARY. 3 3. WORLD ...»
With economic activity depressed, the Reserve Bank of New Zealand (RBNZ) has signaled its willingness to keep monetary policy settings at very low levels for some time as inflation is expected to remain very low and contained within the RBNZ’s inflation band of 1-3 percent.
While economic activity will continue to be hit hard as spending, notably for residential investment and consumption, remain weak, business and consumer confidence are on the mend and a pickup in migration should add to domestic demand. Due to the ongoing higher NZD and deteriorating dairy prices, concerns rest squarely with manufacturing and exporters. Unemployment’s climb is set to continue and expected to result in further softness in the labour market.
Australia The Australian economy grew 0.6 percent on an annual average basis to end June 2009. The positive contributors were “New Machinery” and “Equipment and Household Final Consumption”. The largest negative contributors were “New Building Construction” and imports.
Other poor performing sectors were “Agriculture” and “Forestry and Fishing”. Unemployment for the period in review was recorded at a multi year high of 5.8 percent.
The Reserve Bank of Australia (RBA) is expected to keep the cash rate at 3.0 percent as it judges the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation.
With a strong recovery in business and consumer confidence in a low interest rate environment and fiscal policy supporting domestic demand, economic activity is expected to pick up. Recent sentiments about the economy from the RBA Governor describe the economic risks as to “appear balanced” and that Australia might not have been affected as severely as its peers in the current global slowdown.
4. DOMESTIC ECONOMY IN 2008/09
4.1 Policy Developments Fiscal policy in 2008/09 continued on an expansionary path, with Parliament approving an overall Government Budget deficit of $84.8 million. However, the slow implementation of some of the major projects saw the actual budget deficit in the first nine months to end March 2009 (the period for which figures are available) amounting to only $49.7 million, equivalent to 4.7 percent of nominal GDP. The budget deficit was financed mainly by soft term foreign loans.
In January 2009, the updated Central Bank forecasts pointed to the economy contracting substantially, as a result of the rapid deterioration of the global economy. In contrast to an optimistic outlook for growth at the beginning of fiscal year 2008/09, the updated economic indicators for the period to end December 2008 pointed to real GDP contracting in 2008/09. Consequently, at its end January 2009 meeting, the CBS Board approved the continuation of the Central Bank’s accommodative monetary policy stance to stimulate the economy.
Consequently, the Bank’s open market operations focused on flooding the financial system with liquidity, in order to drive market interest rates down. Fewer CBS securities were therefore issued, with the aim of increasing the level of excess liquidity in the banking system. Consequently, the level of CBS securities outstanding declined 52 percent to $27.5 million in the fiscal year to end June
2009. The bulk of the securities outstanding ($16.0 million) were for very short term bills (below 91 days maturities) whereas $11.5 million were for the benchmark 91 day securities.
was well above the minimum comfortable level of $15 million. (See Graph 1.) As a result, total commercial bank liquidity rose from $86.4 million in June 2008 to $110.7 million in June 2009. (See Graph 2.)
In addition to limiting the volume of CBS securities issued, the Central Bank also reduced its lending rate to the commercial banks by
2.8 percentage points, from 7.8 percent to 5.0 percent, secured by Central Bank securities. In March 2009, the commercial banks were further allowed to borrow from the Central Bank, secured by up to 50 percent of their statutory reserve deposits (SRD) at the Central Bank.
In line with the Central Bank’s easing monetary policy stance, the weighted average interest rate on CBS securities fell steadily throughout the year to reach a low of 2.28 percent at end June 2009,
2.34 percentage points down from 4.62 percent in June 2008. In response, the commercial banks’ weighted average deposit rate fell by
0.96 percentage points to 5.19 percent in June 2009 from 6.15 percent in June 2008. Similarly, the commercial banks’ weighted average lending rate fell by 0.53 percentage points to 12.21 percent in June 2009 from 12.74 percent in June 2008. (See Graph 3.)
On credit, the combined total of commercial bank loans to the private sector and public institutions increased by $37.0 million to $685.3 million in the year to end June 2009, which was down from an increase of $47.8 million in the previous financial year. On an annual average basis, the growth rate of total credit to the two sectors combined fell from 10.8 percent in June 2008 to 9.1 percent in June
2009. This largely reflected the deceleration of credit growth to public institutions whereas the growth rate of credit to the private sector alone improved from 6.1 percent in 2007/08 to 7.2 percent in 2008/09. The relatively slow rate of credit expansion in the last two financial years indicated that the reduction in commercial bank interest rates so far was insufficient to boost credit demand under the prevailing recessionary economic conditions. (See Graph 4.)
In contrast to the decline in credit growth, in absolute and in relative terms, there was a substantial net inflow of foreign funds in 2008/09, associated with an overall surplus in the balance of payments.
Consequently, money supply (M2) expanded 7.6 percent ($46.0 million) in the fiscal year under review to $654.3 million at end June 2009. (See Graph 5.)
In 2008/09, the Central Bank allowed the exchange rate of the Tala to drift upwards to ease some of pressure from rising imported inflation.
Consequently, the.nominal effective exchange rate (NEER) of the Tala appreciated 1.1 percent on an annual average basis against the currencies in its exchange rate basket. On the other hand, the high inflation rate saw the real effective exchange rate (REER) appreciate
10.6 percent. (See Graph 6.)
4.2 Macroeconomic performance 4.2.1 Real Sector National accounts figures for the June 2009 quarter are not yet available but estimates indicate that the economy contracted 6.3 percent in real terms in 2008/09, a far cry from the 4.8 percent real growth in 2007/08. The main culprit was the significant 24 percent real reduction in ‘Other manufacturing’ as the global recession affected the Australian automotive industry which subsequently reduced the demand for wire harnesses from Samoa. The ‘Construction’ industry shrank 33 percent reflecting the winding down of activities following the South Pacific Games in 2007/08. In addition, a few of the large Government projects were slow to be implemented in 2008/09. As evidenced by the very low supply of local agricultural products to the Fugalei Market, the ‘Agriculture’ sector declined 11 percent due to across the board reductions in most staple and vegetable crops. ‘Food and Beverage manufacturing’ MPS 2009/2010 decreased 24 percent in 2008/09 as a direct result of flagging production of beer and soft drinks. The combination of high excise taxes and cheaper imported alternatives (as the case with soft drinks) has greatly weakened the demand for locally produced soft drinks and, consequently, their sales and production. ‘Commerce’ sector also took a hit, going down 3 percent as a result of reduced consumption manifesting in slow sales at the large supermarkets and clothing retailers. The ‘Fishing’ output fell by 7 percent due to a large drop in fish catch during the first half of 2008/09.
On the upside, the ‘Transport and communications’ sector rose 3 percent reflecting continued improvements in the cell phone industry as well as expansion in taxi fleets. ‘Hotels and restaurants’ industry increased 9 percent in light of new hotels and upgrades and extension to existing ones such as the extension of the Hotel Millenia and upgrading of the Tusitala hotel. ‘Public administration’ increased by 3 percent reflecting the expansionary 2008/09 Budget while ‘Finance and business service’ sector rose by 2 percent in line with historical trends. (See Table 3 and Graph 7.)
4.2.2 Balance of Payments The balance of payments recorded another surplus of $11.1 million for the third consecutive year, following a huge surplus of $47.3 million in 2007/08. This surplus was mainly the result of continued improvements in tourism receipts, private remittances and net disbursement of Government loans during the course of the year. (See Table 4.)
The relative level of international reserves in 2008/09 was the same as that for 2007/08 at 5.1 months, well above the target cover of 4 months. (See Graph 8.) Total imports rose 6 percent to $626.1 million in 2008/09 as all of its three main categories recorded gains especially in the first half of the fiscal year. However, due to the impact of the global recession in the last half of 2008/09, imports fell notably. Non petroleum private sector imports increased 4 percent reflecting mainly a lot of food imported by wholesale companies such as meat products (poultry and mutton mainly), eggs, dairy products and fruits. Furthermore, 2008/09 saw a large shipment of EPC’s electricity meters which also accounted for the increase in this category. Petroleum imports rose 7 percent to $144.7 million as its price fell 21 percent from last financial year’s high but its imputed volume picked up 28 percent. In addition, Government imports increased 34 percent due to a 37 percent increase in its volume reflecting imported building materials for the new convention centre and pipes for the water and sanitation project. (See Graph 9.) MPS 2009/2010 Exports fell 13 percent in 2008/09 as a result of declines in fresh fish, beer, coconut cream, nonu juice and fruits and re-exports to name a few. On the upside, taro, copra meal and virgin oil recorded higher proceeds over the year. Coupled with the increase on import payments, the merchandise trade deficit widened 7 percent. (See Graph 10.)
Tourism earnings continued to improve, rising 15 percent in 2008/09 reflecting mostly the influx of holidaying visitors as well as sportspeople coming for various sporting competitions such as wrestling and rugby competitions. Visitors from New Zealand, Australia and Europe increased by 5 percent, 6 percent and 30 percent respectively, accounting for the bulk of the overall improvement in arrivals. Arrivals from the US and American Samoa rose by 10 percent and 0.2 percent in that order. With the prices of good and services consumed by tourists increasing over the year in light of high inflation in 2008/09, the average tourist expenditure rose by 11 percent in 2008/09. (See Graph 11.)
Private remittances in 2008/09 recorded a 6 percent increase to $365.5 million despite an expected contraction in the face of downturn in the main source countries of USA, New Zealand and Australia. Household remittances went up by 11 percent as Samoans overseas continued to remit funds and cars for the upkeep of their families in Samoa while funds for charitable organizations fell 18 percent. Australia and the US accounted for most of this overall increase with smaller gains for American Samoa and New Zealand.
Remittances from Fiji which largely constitute LDS funds from the US, fell substantially in 2008/09.
Actual official capital transfers figures are not available but an increase of 41 percent to $97.6 million was projected in the 2008/09 Budget, down from $69.2 million in the previous year. Government loans liabilities went up substantially reflecting new loan disbursements in the course of the year. In the event, a $40.8 million surplus was recorded in the financial account.