Monday, February 29, 2016

Fiji holds rate, growth takes hit from Cyclone Winston

    Fiji's central bank left its benchmark Overnight Policy Rate (OPR) steady at 0.50 percent but said the impact from Cyclone Winston will lead to lower growth than expected this year and exacerbate the impact of weak global conditions on the economy.
    The Reserve Bank of Fiji (RBF), which has maintained its rate since October 2011, added the dual objectives of the bank remain stable but it will continue to monitor developments and align its monetary policy stance accordingly.
    Fiji was struck by Tropical Cyclone Winston on the night of Feb. 20, with wind gusts up to 325 kph (202 mph) that killed 42 people and left more than 62,000 people homeless. The government has estimated damage of 1 billion Fijian dollars, or US$460 million.
    In January the RBF forecast economic growth this year of 3.5 percent, down from an estimated 4.0 percent in 2015 and 5.3 percent in 2014, but RBF Governor and Chairman Barry Whiteside said Cyclone Winston was expected to lower this growth forecast, notwithstanding the impetus from recovery activities.
    With winds of 296 kph (184 mph), Cyclone Winston is the worst cyclone ever recorded in the Southern Hemisphere, smashing the previous record of 178 mph set by Cyclone Zoe which hit the Solomon Islands in 2002. If Winston had occurred in the Atlantic, it would have been categorized as a Category 5 hurricane.
    Fiji's inflation rate is expected to be below 3.0 percent by the end of this year, Whiteside said, taking into account low global commodity prices, soft inflation in trading partners, the lower Value Added Tax and temporary price increases of certain items following the cyclone.
    Fiji's inflation rate fell to 0.2 percent in January from 1.6 percent in December, reflecting a reduction in VAT to 9 percent from 15 percent.
    Fiji's foreign reserves were "comfortable" at $2.019 billion as of Feb. 29, sufficient for 5.7 months of imports, but Whiteside said these will be "slightly dented" by higher demand for imports in connection with the recovery of the Island nation and growth in exports will be "more subdued."
    However, he added that remittances from abroad and inflow from tourism should hold up.
    The RBF has activated its Natural Disaster Rehabilitation Facility (NDRF) to support relief efforts in the wake of Winston and is providing loans to businesses and homeowners through commercial banks, the Fiji Development Bank and credit institutions.

    The Reserve Bank of Fiji issued the following statement:

"The Reserve Bank of Fiji Board at its monthly meeting on 29 February agreed to maintain the Overnight Policy Rate at 0.5 percent and work closely with stakeholders to help rebuild the economy following the recent devastation by Tropical Cyclone (TC) Winston.

The Governor and Chairman of the Board, Mr Barry Whiteside in announcing the Board’s decision stated that while earlier expectations for positive sectoral outcomes and strong demand conditions in the economy were in line with the 3.5 percent growth projection for this year, the impact from TC Winston is expected to lower the current growth forecast, notwithstanding the impetus from rehabilitation activities.

Mr Whiteside highlighted that the recent natural disaster shock would exacerbate the impact of already weak global conditions on the domestic economy. He added that latest data and indicators point to slower growth in major advanced and emerging market economies despite lower oil prices and interest rates. Financial sector volatility and geopolitical risks have also added to global uncertainty, while long-term inflation expectations remained quite weak.

Given the current low global commodity prices, especially for oil, soft trading partner inflation expectations and taking into account the fuller effects of the lower VAT and temporary hikes in prices of affected market items following the cyclone, the 2016 year-end inflation is expected to be below 3.0 percent. Foreign reserves, which are currently (29/02) comfortable at $2,019 million, sufficient to cover 5.7 months of retained imports of goods and non-factor services, are expected to be slightly dented by a higher demand for imports to support the recovery as well as a more subdued growth in exports. Nevertheless, remittances and tourism inflows are expected to hold up.

Against this background, the Governor concluded that, “the dual objectives of the Bank remain stable at this time, and the RBF will continue to vigilantly monitor latest developments and risks to the global and domestic economic outlook and align monetary policy accordingly.”

Moreover, the Reserve Bank has reintroduced its Natural Disaster Rehabilitation Facility (NDRF) to support national relief efforts following the devastation by TC Winston. The facility provides funding for businesses faced with either production loss requiring replacement of stock or damaged inventory, or asset loss which may include repairs for damage to business premises as a result of the TC. The funding is also extended to homeowners for repairs and reconstruction. The facility is available through the commercial banks, Fiji Development Bank and licensed credit institutions (LCIs)1. NDRF loans are limited to $0.5 million per business and approval is left to the discretion of the respective financial institutions."


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