Monthly Economic Review for June 2019

Global growth remains subdued

Global growth forecast for 2019 was further downgraded by 0.1 percentage point to 3.2% according to the IMF’s July World Economic Outlook (WEO), compared to a 3.3% in released in its April 2019 WEO. This downgrade is attributed to the escalated United States-China trade war, prospect US sanctions threatening global technology supply, Brexit-related uncertainty, and geopolitical tensions. Although global growth is forecasted to pick-up to 3.5% in 2020, it is also 0.1 percentage point lower than the previous forecast in the April WEO. Consequently, slower growth was observed amongst Tonga’s major trading partners such as New Zealand and Australia for June 2019. New Zealand Treasury reported that weak business confidence and global uncertainties continued to weigh on GDP growth prospects. The Reserve Bank of Australia lowered the cash rate by 25 basis points to a record low of 1.0% early in July, reiterating the same reason for the cut in June, which is to support employment growth and progress toward the medium-term inflation target. Economic growth for the first half of 2019 was lower than expected as household consumption declined, and the level of housing credit remained low.

Sector performance continue to be mixed

Activities in the primary sector were mixed in June 2019. The total volume of agricultural exports decreased by 206.1 tonnes due to lower exports of squash and cassava. This coincided with a $0.2 million decline in agricultural export proceeds following an offseason squash shipment on the previous month. Over the year, agricultural export volumes also declined by 30.7%. Fish exports, however, more than doubled over the month by 215.6 tonnes, mostly for exports of tuna. Exports of aquarium products, on the other hand, dropped by 59.5% weighing on the proceeds for marine exports, which slightly declined by 9.7%. Over the year, total marine export volumes rose coinciding with the 42.6% rise in proceeds.

Construction works was slow during the month, reflecting the decline in lending to the secondary sector. However, the road improvement project continued to support the mining & quarrying sector. Electricity consumers increased steadily throughout the year, as a consequence of the increase in new houses constructed and reflects the increase in housing loans over the years. Upcoming infrastructure projects earmarked for this fiscal year will further contribute to the growth of the industry sector.

Performance of the tertiary sector was mostly favourable. Container registrations rose by 270 containers over the month as both business and private containers increased by 238 and 32, respectively. Private consumption and trade are expected to thrive in June with activities relating to the annual church conference of the Free Wesleyan Church, preparations for His Majesty’s 60th Birthday, and the Heilala Festival. Visitors attending these annual events increased international air arrivals by 6.5%, further contributing to the tourism, transport, and communications sectors.

Available employment opportunities

Another 40 vacancies were advertised in June close to the 41 vacancies in May and mostly for public administration. Despite the Government’s initiative to tighten the wage bill, the on-going vacancies advertised suggest labour migration either to the private sector or overseas. Liaison with businesses indicates labour shortages in the local market due to the impact of the increase in Tongans participating in the New Zealand and Australia seasonal workers schemes. Labour shortages may continue as Australia and New Zealand expand the seasonal workers scheme to other sectors.

Slow headline inflation in May

The monthly inflation rate further slowed in June to 0.2% compared with a higher 0.8% inflation in the previous month. A 0.3% decline in domestic prices was driven by a substantial fall in the price of Kava-Tonga and domestic food prices over the month by 4.1% and 0.4%, respectively. The price of Kava-Tonga declined to an average price of $115.00 per kilogram whilst lower food prices were noted for eggs and vegetables such as tomatoes and head cabbages. This was however outweighed by a 0.6% increase in imported prices driven by a rise in the prices of imported meats such as chicken pieces, turkey tails, and mutton flaps.

The annual headline inflation was 1.8% in June, compared to 3.0% in the same period last year. Both imported and domestic prices rose over the year by 1.9% and 1.7%, respectively. Imported inflation contributed 1.0% to the annual headline inflation due to higher prices of imported food, tobacco, alcohol, maintenance & repair of the dwellings and fuel. Domestic inflation contributed 0.8% to the annual headline inflation as higher prices were noted for food, tobacco and restaurant services.

Major trading currencies strengthened against the TOP

The Nominal Effective Exchange Rate (NEER) index declined in June 2019 due to an appreciation of the NZD, AUD, FJD, JPY & EUR against the TOP. The Real Effective Exchange Rate (REER) also decreased during the month as Tonga’s inflation rate is lower compared to some of its major trading partners. Annually, both the REER and NEER rose, which may impact the international competitiveness of exported goods and services.

Higher overall balance due to official transfer receipts

Official foreign reserves rose by $16.0 million in June 2019 to $484.3 million, equivalent to 8.1 months of imports cover, as expected funds for budgetary support were received prior to the closing of the fiscal year.

The overall Overseas Exchange Transactions (OET) balance edged higher in June 2019, as a result of the receipt of budget support and government projects, totaling to $40.4 million. Other receipts such as interbank receipts and services for construction and telecommunication also rose. These outweighed the decline in receipts from private transfers, travel, and exports. At the same time, payments for investments abroad of $11.2 million and dividends of $6.8 million contributed to the increase in total payments.

In year ended terms, the OET balance surplus lowered due to higher outflows from the current and financial accounts. Higher payments were noted for goods & services, offshore investment, and interbank transfers. These outflows outpaced the rise in receipts from travel, income, and official receipts.

Broad money expanded

Net foreign assets hiked in response to the rising foreign reserves in June, thus further expanding Broad Money. Meanwhile, net domestic assets declined over the month, due mainly to higher government deposits, although it increased over the year, mainly on higher credit to the private sector.

Liquidity declined in June

Liquidity in the banking system fell over the month and year by $8.8 million (2.8%) and $15.5 million (4.9%) respectively to $302.2 million. These were mostly driven by the decline in the exchange settlement accounts mainly on withdrawals for investments abroad, and to cater for the June festivities. The required reserves also fell supporting the monthly decline. The banks’ total loans to deposit ratio fell from 78.7% to 77.9% over the month, reflecting declining loans against increasing deposits.

Credit remained high despite the slight decline

The total banks’ lending slightly fell by 0.2% over the month yet increased over the year to $486.3 million. The partial write off of non-performing business loan in the construction and tourism sector led the monthly movements. The decline in lending to the agricultural and fisheries sectors, and households also contributed to the monthly fall in lending. However, the expansion of lending to both businesses (transport, professional & other services & distribution) and household (housing and other personal loan) drove the 8.7% annual growth. This is lower than the previously anticipated 13% annual growth and is mainly due to delays and cancellation of some projects, coupled with few debts written off. However, the excess liquidity in the banking system remains and there is still available capacity for further lending.

Weighted average interest rate spread widened

The weighted average interest rate spread widened over the month and year to 6.09%, by 0.2 basis points and 10.9 basis points, respectively. The monthly rise was largely driven by the decline in weighted average deposit rates outweighing the decrease in weighted average lending rates. Demand deposit rates decreased, offsetting the increase in saving and time deposit rates, whereas lower lending rates were mainly for the construction, tourism and agricultural sectors.

The annual rise was a result of the 10.3 basis points decrease in weighted average deposit rates coupled with the 0.4 basis points rise in weighted average lending rates Both demand and time deposit rates decreased and outweighed the increase in savings deposit rates, while the increase in lending rates were mainly for the manufacturing, distribution and utility sectors.

Outlook

The Reserve Bank expects domestic economic activity to remain positive in the medium term. Furthermore, foreign reserves is also expected to remain at comfortable levels, while inflation will continue to remain below the Reserve Bank’s inflation reference rate of 5% per annum throughout 2019. The Reserve Bank will maintain its monetary policy stance, continue to closely monitor developments in the domestic and global economies, and make adjustments to its policies, to ensure financial and macroeconomic stability are maintained.


Monthly Economic Review Releases

Monthly Economic Review Releases for 2019


pdfIcon May
Released on 24 July 2019 | 118 KB 
pdfIcon June
Released on 19 August 2019 | 119 KB

pdfIcon March
Released on 16 May 2019 | 129 KB 
pdfIcon April
Released on 18 June 2019 | 145 KB

pdfIcon January
Released on 14 March 2019 | 129 KB 
pdfIcon February
Released on 23 April 2019 | 129 KB

2018


pdfIcon November
Released on 18 January 2019 | 115 KB 
pdfIcon December
Released on 15 February 2019 | 121 KB 

pdfIcon October
Released on 27 December 2018 | 361 KB 
pdfIcon September
Released on 27 November 2018 | 383 KB 

pdfIcon July
Released on 21 September 2018 | 383 KB 
pdfIcon August
Released on 11 October 2018 | 383 KB 

pdfIcon May
Released on 3 August 2018 | 171 KB
pdfIcon June
Released on 21 August 2018 | 431 KB 

pdfIcon March
Released on 14 May 2018 | 165 KB
pdfIcon April
Released on 18 June 2018 | 395 KB 

pdfIcon January
Released on 16 March 2018 | 400 KB
pdfIcon February
Released on 11 April 2018 | 494 KB

2017


pdfIcon December
Released on 16 February 2018 | 422 KB
pdfIcon November
Released on 22 January 2018 | 414 KB

pdfIcon October
Released on 18 December 2017 | 125 KB
pdfIcon September
Released on 1 December 2017 | 317 KB

pdfIcon August
Released on 1 November 2017 | 391 KB
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Released on 6 October 2017 | 423 KB

pdfIcon June
Released on 28 August 2017 | 125 KB
pdfIcon May
Released on 2 August 2017 | 403 KB

pdfIcon April
Released on 10 July 2017 | 421 KB
pdfIcon March
Released on 8 June 2017 | 121 KB

pdfIcon February
Released on 27 April 2017 | 425 KB
pdfIcon January
Released on 30 March 2017 | 420 KB

2016


pdfIcon December
Released on 3 March 2017 | 421 KB
pdfIcon November
Released on 3 February 2017 | 398 KB

pdfIcon October
Released on 16 December 2016 | 448 KB
pdfIcon September
Released on 15 November 2016 | 532 KB

pdfIcon August
Released on 21 October 2016 | 196 KB
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Released on 29 September 2016 | 839 KB

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Released on 25 August 2016 | 822 KB
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Released on 21 July 2016 | 665 KB

pdfIcon April
Released on 21 June 2016 | 481 KB
pdfIcon March
Released on 20 May 2016 | 475 KB

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Released on 26 April 2016 | 932 KB
pdfIcon January
Released on 29 March 2016 | 461 KB

2015


pdfIcon December
Released on 24 February 2016 | 593 KB
pdfIcon November
Released on 18 January 2015 | 709 KB

pdfIcon October
Released on 23 December 2015 | 320 KB
pdfIcon September
Released on 18 November 2015 | 395 KB

pdfIcon August
Released on 23 October 2015 | 405 KB
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Released on 22 September 2015 | 365 KB

pdfIcon June
Released on 14 August 2015 | 490 KB
pdfIcon May
Released on 24 July 2016 | 383 KB

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Released on 15 June 2015 | 500 KB
pdfIcon March
Released on 18 May 2015 | 523 KB

pdfIcon February
Released on 17 April 2015 | 375 KB
pdfIcon January
Released on 11 March 2015 | 395 KB

2014


pdfIcon December
403 KB
pdfIcon November
553 KB

pdfIcon October
321 KB
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388 KB

pdfIcon August
512 KB
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473 KB

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