«MONETARY POLICY STATEMENT FOR THE FINANCIAL YEAR 2009/2010 APIA October 2009 CONTENTS Page 1. INTRODUCTION.. 1 2. EXECUTIVE SUMMARY. 3 3. WORLD ...»
4.2.3 Prices As with the case in 2007/08, movements in consumer prices were influenced by both local and external pressures, with the latter having a more prominent impact. Many of the imported food items such as chicken, sugar, flour and rice as well as fuel (diesel, unleaded petrol and kerosene) registered price hikes in 2008/09, pushing up imported inflation quickly to 15.5 percent at end June 2009 from 8.0 percent at end June 2008.
Likewise, the local component of the headline Consumer Price Index (CPI) recorded an increase of 13.7 percent in 2008/09, much higher than 4.8 percent last year. One of the driving forces was the low agricultural production at the local market pushing up the prices for vegetable and stable food crops sold at the Market. Also, the higher fuel costs spilled over to affect the prices of consumable goods and services such as bread, electricity rates, transport fares (taxi bus and boat) as well as fish (whole, stringed and pieces). (See Graph 12.)
As a result of the higher imported and local components of the headline CPI, the headline annual inflation accelerated to 14.5 percent at end June 2009 from 6.2 percent at end June 2008.
Similarly, the underlying inflation rate surged upwards to 17.2 percent in 2008/09 from 6.9 percent in the previous fiscal year. (See Table 5.)
5. DOMESTIC ECONOMIC OUTLOOK FOR2009/2010 The following forecasts and macro-economic outlook was based on information available prior to the 29 September 2009 tsunami. The forecasts will be revised and updated as the economic and financial impact of tsunami becomes known. Meanwhile, it is expected that the recovery and reconstruction works associated with the tsunami will fuel construction, transport, communication, commerce and other economic activities. This, therefore means that the current positive direction of the prevailing forecasts remain valid.
5.1 Government Budget
With the global recession as a backdrop, Parliament approved another heavily expansionary Government Budget for 2009/10. The Budget for 2009/10 is projected to result in an overall deficit of $160.8 million compared to budget deficit of $84.8 million in 2008/09. This budget deficit is about 11 percent of nominal GDP, well above the 6 percent approved for 2008/09. This record budget deficit, to be financed largely by external soft term loans, reflects public and social infrastructural developments, including large education and health projects as well as the road switch preparations.
Total revenue is expected to contract in face of shrinking import duties and VAGST collections due to weak consumer demand.
External grants, however, are expected to increase significantly to $152.8 million, driving total revenue and grants to $511.0 million.
Total expenditure, on the other hand, is projected to jump to $671.8 million in 2009/10 from $595.5 million in 2008/09. (See Table 6 and Graph 13.)
5.2 Real Sector The economy in 2009/10 is expected to rebound from last year in light of the aggressiveness of the fiscal policy. Projects aimed at improving and strengthening the education, health, agriculture, water and electricity sectors in addition to continual infrastructural works have been expedited in the budget in order to stimulate economic growth in 2009/10. These are expected to combine with private sector projects and further growth in tourism to boost growth in the real sector.
In the event, real GDP is expected to increase by about 5.0 percent in 2009/10, driven by all sectors except ‘Other manufacturing’ (still in the recovery phase) and ‘Food & Beverage manufacturing’ (low demand from American Samoa). The ‘Construction’ sector (third largest) is expected to grow by 30 percent in line with government funded and private projects while ‘transport and communications’ sector is anticipated to improve by 10 percent as the transport industry is tied closely to construction activities. The ‘Commerce’ sector is expected to recover by 1 percent as demand picks up while MPS 2009/2010 the ‘Agriculture’ and ‘Fishing” sectors are expected to increase by 2 percent each. ‘Finance & business service’ and ‘public administration’ sectors are forecast to growth by 3 percent and 2 percent in that order. (See Graph 14.)
5.3 Balance of Payments The balance of payments is expected to record another surplus in 2009/10. Given the significant inflows projected in the 2009/10 Budget, such as the $149.6 million net disbursement of Government loans (of which only $100.0 million is actually expected to be disbursed in 2009/10) as well as a substantial increase in project grants to $137.5 million from $97.6 million in 2008/09.
On the current account, exports for 2009/10 are anticipated to remain more or less the same from last year to $28.1 million. This is due to modest gains in fish, coconut oil, nonu juice and nonu fruit being offset by reductions in beer, coconut cream, re-exports and virgin oil.
Fish exports is expected to recover in line with the new addition of a MPS 2009/2010 large fishing vessel to the current fleet as well as improvement in catch per effort while beer exports is anticipated to drop significantly in 2009/10 reflecting the already low demand from American Samoa being exacerbated by the closing of the Chicken of the Sea cannery which will mean around 800 jobs lost including local expats working in American Samoa.
Given the strong recovery in economic activity in 2009/10, total imports are expected to pick up strongly, up 12 percent to $699.4 million. Non petroleum private sector imports are envisaged to improve by 14 percent to $515.5 million reflecting more demand for food products by wholesale companies, more construction materials for new construction projects, higher demand for right hand drive cars and materials for the water and electricity projects. The value of petroleum imports is expected to increase by 9 percent to $157.9 million reflecting anticipated recovery of world oil prices as the recession bottoms out as well as increased demand for petroleum as the economy recovers. Government imports, on the other hand, are expected to decline by 7 percent reflecting large one off import shipments in 2008/09.
On the basis of the Samoa Tourism Authority’s Tourism Development Plan for the next five years, which was launched in July 2009, tourism is expected to continue to perform strongly in 2009/10 despite tourist arrivals from American Samoa expected to fall in view of expected closing of the COS Cannery in September 2009. Tourist arrivals are expected to increase by 4 percent to 131,687 in 2009/10.
The bulk of the visitors are expected to come from New Zealand and Australia. With a 5 percent increase anticipated for average tourist spending in 2009/10, total tourism proceeds are expected to increase by 9 percent to $338.8 million. Private remittances, on the other hand, is expected to decline by 4 percent to $351.5 million in 2009/10, driven by an 18 percent drop in charitable organizations remittances while household remittances are expected to increase by 3 percent reflecting steady inflows of cash, in kind and car remittances for family maintenance. (See Graph 15 and Graph 16.) MPS 2009/2010
On the whole, the balance of payments is expected to post another surplus of $12.5 million in 2009/10, slightly higher than the $11.1 million surplus last year. With the strong increase in total imports, the level of international reserves is anticipated to fall to 4.8 months of imports, below 5.1 months cover for 2008/09 but well above the minimum target of 4.0 months.
Consumer prices in 2009/10 are expected to decline sharply from the previous year as inflationary pressures that drove up prices in the preceding year start to abate. Imported inflation fell in May 2009 and will continue to do so for the rest of the 2009/10 fiscal year as the current weak global demand for international traded commodities will see prices remain lukewarm with oil prices to rebound but not as much as the price booms in 2008/09, hovering around the USD$68.75 per barrel in 2009/10. Domestic inflation is also anticipated to shrink reflecting the anticipated recovery in agricultural supplies at the Fugalei Market as well as the expectation of no further hikes in utility services such as water, electricity and transportation.
5.4.1 Headline Inflation Import Component The current weak global demand for internationally traded commodities, in the face of the prevailing recessionary pressures affecting the global economy, will have a depressurizing effect on imported inflation in the next twelve months. Likewise, the forecast low inflationary expectations in Samoa’s main trading partners (particularly, New Zealand, Australia and USA) in the immediate future will help reduce inflationary pressures that were quite significant in 2008/2009. For crude oil, expectations are that prices will not be much above the average of $68.75 per barrel in 2008/2009 with high excess capacity in oil producing countries expected to buffer any growth in demand. Despite the recent rebound in prices, it MPS 2009/2010 is expected that any price increases during 2009/2010 will be smaller than the price booms recorded in 2008/2009. And, along with the local pricing mechanism, particularly for imported fuel, prices of imported commodities are expected to stabilize at current levels. On average, food prices are estimated to grow by 5.6 percent compared to a 20.2 percent expansion in 2008/2009. The steady levels for fuel products over the next twelve months to June 2010 are expected to reduce the growth in price levels of the “housing and household operations” (down 3.6 percent compared to a 7.4 percent growth in the previous fiscal year) and “transport and communications” (decline by 10.6 percent compared to a 7.7 percent growth in 2008/2009) commodity groups. In the event, imported inflation is forecast to decelerate from 15.5 percent at end 2008/2009 to 2.6 percent at end 2009/2010.
Similar to imported inflation, the domestic headline inflation rate for the forecast period ahead (2009/2010) is expected to decline to 2.3 percent from 13.0 percent at end June 2009. Largely driving this reduction over the next twelve months is a lower 3.9 percent expansion in the “Food” sub-index compared to the 21.1 percent growth in the fiscal year 2008/2009, mainly reflecting an anticipated recovery in local agricultural production as well as the absence of any further upward revisions in bread prices, which is one of the main commodities in this sub-group. The estimated levels in imported fuel will also affect the cost of producing electricity, with further adjustments in the fuel surcharge on electricity expected. For the “Housing and Household Operations” sub-group, price levels are expected to decline 3.5 percent compared to a 5.9 percent growth in the previous twelve months to 2009. With transport fares already revised upwards in 2008/2009, the forecast local “Transport and Communications” sub-index for 2009/2010 does not include any further changes in fares, with the only adjustment for this sector to come from possible reductions in international calling rates. As a result, this commodity group is expected to register an expansion of MPS 2009/2010
2.3 percent, lower than the 12.9 percent growth in 2008/2009. All in all, the overall local component of the headline CPI is anticipated to grow by 2.3 percent in the year to end June 2010 compared to 13.0 percent in the year to end June 2009. (See Graph 17.) Headline Inflation Rate With the current weakening of global demand for internationally traded commodities, lower inflation for Samoa’s main trading partners and improved local agricultural production, inflationary pressures are expected to ease substantially in the next twelve months ending June 2010. The annual headline inflation rate is expected to decline from 14.2 percent at end June 2009 to around 2.3 percent at end June 2010. (See Graph 18.)