Monthly Economic Review for April 2016

Economic growth in the overseas economies were mixed yet continued to support domestic activity. Growth in the US was held back by a slowdown in household consumption and exports. The US dollar has weakened in April driven by soft economic activity and low US inflation. The Consensus forecasts the real GDP of just 2.5% for Australia in the forth-coming financial year, due to a considerable economic downturn in the past few months. However, New Zealand continued to benefit from robust domestic demand, and rising employment levels have fuelled the economic growth. China’s Real GDP growth in the first quarter of this year was supported by an increase in industrial production, stronger construction activity and surge in credit growth. The headline inflation for Australia fell to 1.3% in the March quarter from 1.7% in the December quarter of last year, whilst inflation in New Zealand rebounded to 0.4% in the same period. Meanwhile Brent oil prices rose to US$47.69 per barrel in April 2016 from US$41.6 per barrel in March 2016, due to strong demand from China.

The local economy was vibrant over the month of April supported by an expansion in the primary sector, construction, trade, tourism and credit growth. Low consumer demand during the month may have contributed to a decrease in domestic food prices. A rebound in the exports of root vegetable products drove a significant increase in total agricultural exports volume over the month by 419.2 tonnes (123.2%) (Figure 1). The exports of yams markedly increased by 338.8 tonnes reflecting the harvesting season of late yams. Exports of breadfruits and brown coconuts continued to rise by 33.7 tonnes and 20.4 tonnes respectively. Total marine exports also rose by 6.6 metric tons (4.9%), due to an increase in tuna exports offsetting a decline in seaweed, snapper, shark meat and also reef fish exports (Figure 2)., The proceeds for the agricultural exports and total marine exports, on the other hand, fell by $0.20 million (53.8%) and $0.38 million (94.8%) respectively over the month of April indicating lagged effects on the receipt of proceeds.

The number of international arrivals rose by 482 (8.1%) passengers in April benefitting the activities in the tourism sector. The commencement of Fiji Airways’ direct route from Fiji to Vava’u and also the introduction of the Air New Zealand Boeing 777 in April contributed to the rise. This coincides with an increase in travel receipts of $2.1 million (43.8%). The transport sector was negatively impacted when global oil prices started to pick up, reflecting an increase in local fuel prices.  However, in April, there were 250 vehicles registered, 29.5% higher than the previous month, and vehicle import payments rose by $0.4 million (42.8%). The total number of container registrations fell by 188 registrations (19.1%) driven by a decline in the number of private and business containers registered during the month. This was due mainly to the delays in the shipments that were scheduled for February due to Cyclone Winston resulted in a significant increase in the total number of container registrations in March by 375 (61.5%). Import payments (excluding oil) however increased over the month by $0.5 million. The financial sector remained strong during the month and continued to record higher credit growth.

The total number of job advertisements in April declined by 47 vacancies attributed mainly to government vacancies. The intention to fill vacant positions in the government before the end of the financial year  had boosted the number of vacanies advertised in March. The NRBT expects the economy to grow strongly in the near future which will increase demand for labour hence reducing the unemployment rate.

Higher prices for Kava-Tonga drove a slight increase in headline inflation over the month by 0.2%. The shortage in supply of kava continues, reflecting a 2.9% rise in Kava-Tonga prices. This offset a 0.1% decline in domestic food prices. As a result, local prices increased by 0.1% in April. Imported prices also rose by 0.2% driven by a rise in petrol prices. This is in line with a USD$8.47 increase to USD$47.69 per barrel in global oil prices in April. Imported food prices rose by 0.2% for items such as chicken pieces and sugar. This reflects the short supply of sugar during the month. Prices for Winfield blue also increased.

The annual headline inflation slipped back to record a deflation of 0.9% in April. This follows an annual headline inflation of 1.4% in March (Figure 3). The turnaround was due to an increase in domestic prices of 12.6% in March outpacing a 6.6% rise in the year ended April. The rise was mainly driven by the increased Kava-Tonga prices, which has now doubled. The low production of Kava-Tonga continues and price is expected to also increase in the coming months.

Domestic food prices has increased as well by 5.9% as a result of higher prices recorded for talo tarua, swamp taro, cassava, yams (early & late), pele leaves, carrots, ripe bananas, watermelon, pineapple, coconuts (brown & green) and stringed fish. This is lower than the 19.4% increase in March. Higher domestic food prices also reflect lower food production due to the lag effects of unfavourable weather conditions over the year. Prices of house maintenance goods and services also increased offsetting a 0.4% decline in public transport.

Imported food prices declined by 11.1% causing a 6.5% fall in imported prices over the year. This was due to a fall in prices for almost all items such as mutton flaps, chicken pieces, potatoes, apples, onions and sugar. Price controlled by the Tonga Competent Authority on chicken, sugar, onions and potatoes contributed to the fall. A USD$17.94 drop in global oil prices over the year drove a decline in prices of petrol & diesel and electricity prices by 9.7% and 4.6% respectively. This offset the rises in prices for clothing & footwear (8.6%), alcohol (7.7%) and house maintenance goods (1.8%). The National Reserve Bank of Tonga (NRBT) continues to expect that headline inflation will remain low in the near term. However, risks to this forecast would be developments in world oil and food prices for both domestic and imported inflation.

Soft economic activities in the US and considerable economic downturn in Australia has led to the weakening of the United States Dollar (USD), and the Australian Dollar (AUD) against the Tongan Pa’anga, over the month of April 2016. However, robust domestic demand and rising employment levels are fuelling economic growth in New Zealand thus leading to the strengthening of the New Zealand Dollar (NZD) against the Tongan Pa’anga, and driving the fall in the Nominal Effective Exchange Rate (NEER) by 0.6% for the month of April (Figure 4). The Real Effective Exchange Rate (REER) also fell by 0.5% over the same month, upholding Tonga’s price competitiveness against that of its major trading partners. Over the year, both the NEER and the REER declined by 6.2% and 8.0% respectively.

Total Overseas Exchange Transactions (OET) payments fell over the month of April 2016 by $9.0 million (16.3%) from the previous month to $46.6 million. This was a result of a $9.3 million (82.2%) drop in financial account payments, due to large foreign exchange deals made in the month prior. Import payments slightly declined by $0.6 million (2.2%) over the month to $25.2 million, reflecting a fall in oil import payments. Payments for services rose by $2.9 million (29.6%) due to higher payments made for professional services. This was offset by a fall of $1.6 million (48.4%) in payments of primary income as there were lower payments made for interest on external loans.

Total OET receipts however rose significantly over the month by $13.7 million (30.5%), owing largely to a $9.4 million (26.4%) increase in the current account receipts. The rise attributes mostly to transfer receipts, particularly official transfers increasing over the month by $9.4 million (914.8%) due to large inflows of government grants and budgetary support that were received during the month. Remittances also rose by $1.0 million (5.1%) in April due mostly to the receipt of funds for private household constructions. Services receipts also increased by $0.7 million (6.5%) to $11.2 million, as there were higher travel receipts for the month, coinciding with the 8.1% rise in international arrivals. Export receipts on the other hand, declined by $0.6 million (44.0%) due to lower proceeds received from agricultural and marine exports.

The balance of OET as of April 2016, which is the net change to the foreign reserves, was a surplus of $5.5 million, following a deficit of $11.2 million in the previous month (Figure 5). Improvement in the balances of the current and financial accounts from deficits in March to surpluses in April, contributes to the overall surplus. Official foreign reserves remained comfortable at $322.9 million (Figure 6) at the end of April, equivalent to 9.0 months of import cover, well above the NRBT’s minimum range of 3-4 months.1             

Broad money fell over the month by $3.3 million (0.7%) to $448.3 million. This resulted from an $8.8 million (6.5%) decline in net domestic assets, which offset the $5.5 million (1.7%) increase in net foreign assets (Figure 7). The increase in government deposits drove the lower net domestic assets whilst net foreign assets rose on the back of higher foreign reserves. The liquidity in the banking system, which is the reserve money, also fell over the month by $7.0 million (2.8%) to $247.1 million.   This was mainly driven by a $5.6 million (9.0%) drop in currency in circulation reflecting buying of government bonds at the end of April. Over the year, broad money rose by $63.4 million (16.5%), underpinned by rises in both net foreign assets and net domestic assets.

Total bank lending continued to increase over the month by $5.3 million (1.6%) to $344 million (Figure 8). This was due to growth in lending to both businesses and households, with business loans driving the increase by $3.5 million (2.2%). Increased activities in the trade, agricultural, tourism and construction sectors fuelled the rise in business loans.  This was supported by a decline in banks’ interest rates on agricultural, trade and tourism loans over the month.  Meanwhile, ongoing competition among banks and a decline in banks’ interest rates on housing loans has continued to support growth in household lending, which has increased by $1.8 million (1.0%) to a new record high. The on-going construction works support the housing and construction industry. Vehicle loans also increased over the month by $0.2 million. In year ended terms, both household and business loans contributed to a $41.2 million (13.9%) growth in total bank lending, with household loans contributing the most by $28.2 million (18.6%) to record a total credit growth of 13.9%.

Weighted average lending rate rose over the month by 2.3 basis points to 7.97%, after 3 months of declining. The weighted average deposit rate continued to increase by 2.4 basis points to 2.26%. An increase in business lending rates by 12.5 basis points drove the higher weighted average lending rate, whilst a $1.8 million decline in total deposits caused the increase in weighted average deposit rate.

As a result, the weighted average interest rate spread narrowed slightly by 0.04 basis points to 5.71% in April 2016. Over the year, both weighted average deposit and lending rates fell with lending rate decreasing the fastest by 30.1 basis points, resulting in the weighted interest rate spread narrowing by 21.2 basis points.

Net credit to government decreased over the month by $11.1 million (25.1%) due to an increase in government deposits. During the month, government received budgetary support and there were new bonds issued of $8.0 million. Over the year to April 2016, net credit to government fell by 20.1% driven by a 21.5% rise in government deposits, due to the receipt of budgetary support and government bonds issued during the year.

The NRBT expects the domestic economic activity to remain strong in the near term. The projected growth in the domestic economy brings with it risks of lower foreign reserves and higher inflation. However, the level of foreign reserves is expected to remain comfortably above the minimum range of 3-4 months of import cover. Imports are projected to rise given the increased construction projects, however, the expected receipts of remittances and foreign aid funds will help to ease the downward pressure on foreign reserves. Inflationary pressure remains low due mainly to the declining global food and oil prices.  Given the above, together with the banking system remaining sound, the current monetary policy stance remains appropriate in the near term, which is consistent with the recent assessment by the 2016 IMF Article IV mission.

The NRBT Board of Directors at its meeting in April approved a minimum range in the banks’ loan to deposit ratio of 80% - 90% which is to be effective from the 1st July 2016 and to be achieved progressively over 18 months. This measure is to encourage the utilization of the excess liquidity in the banking system to increase lending in order to support economic growth. At the same time, the NRBT is exploring alternative monetary policy tools and macro prudential tools to strengthen the transmission mechanism and ensure financial stability is maintained. The NRBT will closely monitor the country’s economic and fiscal developments and financial conditions to maintain internal and external monetary stability, and promote a sound and efficient financial system to support macroeconomic stability and economic growth.

1 - IMF projects the level of foreign reserves for 2015/16 as equivalent to 7.6 months of imports cover. Their method of  calculation is based on imports over the next 12 months, whereas NRBT uses import data from the past 12 months.

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