By ANOOP SINGH and
YONGZHENG YANG
(Anoop Singh is Director of the International Monetary Fund’s Asia & Pacific Department, and Yongzheng Yang is the Resident Representative of the IMF for Pacific Island
Countries.)
The IMF’s recently released Asia and Pacific Regional Economic Outlook (REO) shows the region facing better prospects and growth in Asia is expected to pick up in 2013. This
forecast, however, remains subject to downside risks, including external
shocks to Asia’s open economies. Along with the better regional growth prospects,
Fiji’s economy is expected to continue to grow at around 2 percent, above the average of the previous decade, driven by government investment and stronger tourism.
The global economy shows signs of improving as major risks emanating from advanced economies have receded. Asia also faces better prospects.
After a year of subdued economic performance, growth in Asia is set to pick up gradually in the course of 2013, to about 5¾ percent, on strengthening external demand and continued robust domestic demand.
Consumption and private investment are expected to be supported by favorable labor market conditions and relatively easy financial conditions.
The latter reflect a combination of accommodative monetary policies; rapid credit growth, particularly in China and some ASEAN economies; and the rebound of capital inflows since the summer of 2012.
Asia is also expected to benefit from intraregional demand spillovers; they mainly reflect growing Chinese demand and the near-term fiscal stimulus in Japan but also, in the case of ASEAN economies, growing integration in final consumer goods trade.
The outlook for the Australian economy remains favorable, with growth projected at about 3 percent for 2013 broadly in line with trend, and for New Zealand the growth forecast for this year, currently at 2¼ percent, is driven by an increase in construction activity.
Consistent with the moderate pickup in growth and absent shocks to global food and commodity prices, inflation in Asia is expected to remain broadly unchanged from 2012 and generally within central banks’ explicit or implicit comfort zones.
Risks to the outlook have become more balanced since the October 2012 Asia and Pacific Regional Economic Outlook Update, mainly because the risk of an acute euro area crisis has diminished and the U.S. “fiscal cliff” has been averted.
However, the potential impact of external shocks on Asia’s open economies remains considerable, and risks and challenges from within the region have come into clearer focus in recent months.
To begin with, financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several economies.
A number of other regional risks are more difficult to anticipate but could prove disruptive given Asia’s highly integrated supply-chain network and growing dependence on regional demand and finance.
These risks include trade disruptions from a natural disaster or geopolitical tensions, a loss of confidence in Japan’s efforts to restore economic health, or an unexpected slowdown in China.
Pacific island countries would be inevitably affected through terms of trade, external demand and investment channels, should any of these risks materialize.
Moreover, last’s year cyclones, floods and earthquakes around the region have shown that countries are highly exposed to natural disasters, possibly increasingly so because of climate change.
Meanwhile, Pacific island countries continue to face unique challenges in raising economic growth because of their remoteness and geographic dispersion.
Fiji faces many of these challenges and risks. It is encouraging that the economy has recovered steadily over the past two years despite various shocks.
Looking ahead, Fiji’s economy is expected to continue to grow at a rate just above 2 percent, above the average of the previous decade, driven by government investment and stronger tourism demand.
Moderating global commodity prices have helped contain inflation despite above-trend growth. The financial sector is broadly stable as banks are well capitalized with low non-performing loans and adequate loan loss provisioning.
The economic outlook appears stable, but there are downside risks related to the political situation, structural rigidities, and the global environment.
Going forward, Fiji should continue rebuilding policy buffers, including lowering the public debt, in a way that reinforces efforts to implement growth-enhancing reforms and increases the resilience of the economy. In particular:
q Strengthening domestic revenue mobilization—including limiting customs and tax concessions—would support the reduction of fiscal deficits without depriving the country of critical development spending, such as on roads, ports and hospitals.
q Sound structural policies can enhance long-term resilience to shocks and boost growth potential. In particular, implementing reforms that enhance the business environment—including streamlining regulation, increased regulatory predictability, continued progress on customary land issues and further scaling back of price controls—can boost investor confidence and private-sector growth. Continued state-enterprise reform should also be a key part of governments’ reform agenda.
Steadfast implementation of such reforms would lay the foundations for stronger and inclusive growth and go a long way towards realizing Fiji’s full potential.