Monthly Economic Review for June 2022

2022 Global growth downgraded amidst more uncertain outlook

Global economic growth is slower than previously anticipated while facing a more gloomy and uncertain outlook, according to the International Monetary Fund (IMF) World Economic Outlook (WEO) update in July 2022. Global economic growth projections for 2022 and 2023 was revised down to 3.2% and 2.9%, respectively. The downgrades resulted from the stalling growth in China, the United States (US), and the Euro area. Elevated inflation, tighter monetary policy, deepening real estate crisis and further lockdowns in China, and spillovers from the war in Ukraine are the culprits cutting back growth. The US Bureau of Economic Analysis reported that the US real GDP declined at an annual rate of 0.9% in June 2022 driven by the reduced household purchasing power, and the tighter monetary policy. Inflation rose higher than expected in the year to June by 9.1%, the largest 12-month increase in 40 years. The Federal Reserve also raised the target range for the federal funds rate to 1.5%-1.75% in June. The Australian Bureau of Statistics (ABS) recorded in the June 2022 quarter an annual inflation rate of 6.1%, increasing from 5.1% in the previous quarter. Reserve Bank Australia also increased its target rate by 50 basis points to 0.85%. Unemployment, on the other hand, declined to 3.5%, the lowest in almost 50 years. Similarly, New Zealand’s headline inflation overshot expectations at 7.3% in the June 2022 quarter, the biggest annual rise since June 1990 according to Statistics New Zealand.

Disaster recovery projects support domestic economic activities

The primary sector performance was weaker compared to the previous month reflecting the lingering impacts of the Hunga Tonga-Hunga Ha’apai (HTHH) disaster and the border lockdown. Agricultural exports slowed down by 31.6% (239.9 tonnes) in June 2022, coinciding with lower agricultural export proceeds of $0.4 million (60.0%). Annually, lower exports of yam, taro, and cassava resulted in a 13.5% (1,430.3 tonnes) decline in agricultural exports. However, agricultural export proceeds rose by $0.5 million (7.5%). The total marine export volume also fell by 24.3 metric tons (38.1%) over the month, solely driven by lower tuna exports. At the same time, aquarium exports also fell by 14.3% (2,050 pieces). These declines coincide with the slight fall in marine export proceeds over the month, indicative of the lower trips made by foreign vessels in the second quarter of 2022 due to the HTHH volcanic eruption and the hard national lockdown. Annually, marine and aquarium exports both declined by 428.3 metric tons (29.4%), and 2,809 pieces (2.1%), respectively. Consequently, marine export proceeds also fell by 25.6% ($1.2 million) annually. Meanwhile, foreign aid support is also directed to the primary sector to assist with its recovery such as farm tractors from the Chinese Government, and funding from the Government of Japan to assist the Fisheries sector.

The industrial sector remains active supported by the ongoing reconstruction and recovery projects from the HTHH disaster. Their Majesties have initiated the ‘Paletu’a Project’ estimated at around $24 million for the resettlement
and reallocation of the Kanokupolu and Mango people whose homes were destroyed by the HTHH disaster. The World Bank has also approved an additional US$20 million of Supplemental Financing for Tonga’s Disaster Recovery and Economic Reform, intending to elevate economic activities from the double blow of the HTHH volcanic eruption, and the Omicron outbreak. These projects will boost construction activities in the near term with positive spillover effects to the manufacturing, mining and quarrying, and the utility sector. The utility sector, the Niuafo’ou Water supply project received 168 water tanks aiming to improve access to clean drinking water, while multi-million dollar renewable energy projects are attracting more attention in light of the very high oil prices and inflation.

The service sector continues to show consistent rebound from the downturns in previous months, as lockdown restrictions are lifted. The tourism industry is expecting more activities in line with the increasing international arrival and departure of passengers as border restrictions and Managed Isolation and Quarantine (MIQ) periods are further eased. Container registrations rose in June 2022, reflecting improvement in supply-bottlenecks and a strong rebound in trading activities. Higher business containers drove the increase in container registrations (60 containers) over the month, coinciding with the $2.7 million (9.5%) increase in the payment for wholesale and retail imports. However, container registrations fell by 2,130 containers (17.9%) over the year, driven by a fall in both business and private containers. Meanwhile, imports payments excluding oil rose by 2.7% ($11.1 million) reflecting higher freight costs and imported inflation. Primary and early childhood schools have also returned to classroom learning.

Lower job vacancies advertised in June 2022

The Reserve Bank job survey shows a decline in vacancies advertised over the month by 17 vacancies (19.5%). Annually, job vacancies advertised rose by 323 vacancies (144.2%) mostly for public administration which partially reflect the loss of Tongan labourers to the Recognized Seasonal Employer (RSE) program to New Zealand, and the Seasonal Workers Program (SWP) to Australia and needs to be replaced. However, the implementation of the HTHH recovery and reconstruction projects and the reopening of the borders will create more employment opportunities in the near term.

Headline inflation still above 11%

Inflation rose over the month by 0.9%, driven by increases in both imported and domestic prices. Higher prices of kava, and food items were the main contributors to the monthly increase in domestic prices. Increased kava prices is indicative of the rise in demand as the commercial exports program to Australia opens up. Imported prices, on the other hand, was largely driven by higher prices of fuels, liquefied petroleum gas, alcoholic beverages, and tobacco. The local retail prices of petrol and diesel reached an all-time high in June 2022. Imported food prices recorded their first decline since July 2021, reflecting consecutive monthly declines in the Food Price Index (FPI) reported by the Food and Agriculture Organization (FAO).

The annual headline inflation rose by 11.2% in June 2022, slightly lower than 11.3% in the previous month but still higher than the 6.9% recorded in June 2021. The higher headline inflation was underpinned by increases in both imported and domestic prices. The annual rise in imported prices stemmed from higher prices of fuels, food items, construction materials, and liquefied petroleum prices. The lingering global Covid-19 restrictions and further shocks on oil and non-oil commodities markets exacerbated imported inflation. Domestic prices rose over the year driven by increasing prices of food items, electricity and kava. This reflects the HTHH impact on the local food supply, and the pass-through of soaring energy prices to local production prices.

The core inflation (excluding energy and imported food) was 7.3% in the year to June 2022 - lower than the headline inflation, yet remained above the 5% reference rate. Core inflation has also trended upwards from 3.2% in the past year, due to the strong pass-through of the higher energy prices to domestic production prices, the soaring freight rates, and the frequent shocks to the domestic food supply.

Major trading currencies depreciated against TOP

The Nominal Effective Exchange Rate (NEER) increased over the month reflecting the general depreciation of the major trading currencies against the Tongan Pa‘anga (TOP) except for the USD and CNY. Similarly, the Real Effective Exchange Rate (REER) increased over the month reflecting Tonga’s higher inflation rate.

In year-ended terms, the NEER still increased as trading partners’ currencies generally weakened against the TOP. This may assist in partially offsetting some of the impact of higher imported inflation. The REER also increased over the year in line with the higher inflation rate, indicating a loss in trade competitiveness.

Foreign reserves declined again in June

Foreign reserves fell in June 2022 by $9.2 million to $871.2 million, equivalent to 12.0 months of imports. This is attributed to the increase in import payments over the month reflecting the pick up in aggregate demand and consumption. In contrast, foreign reserves increased markedly by $155.9 million over the year underpinned by higher receipts of budget support, official grants, capital inflows, and remittances. The majority of the official foreign reserves are held in USD, NZD, and AUD.

Total remittance receipts declined during the month by $1.2 million (3.2%) to $38.2 million owing to lower private transfers and private capital transfer receipts. This coincides with the weaker growth in our major remitting countries, and the resumption of international travel activities diverting some of the remittance transfers to travel receipts. However, remittances continue to rise annually by $11.0 million (2.4%).

The overall balance deficit widened to $9.2 million in June 2022 underpinned by the worsening trade deficit as imports pick up.

In year-ended terms, the OET balance surplus decreased by $15.5 million, stemming mostly from lower surpluses in the current account (worsening services and trade deficits) and capital account (lower official capital receipts).

Broad money rose

After declining for three consecutive months, broad money increased in June 2022, by $3.9 million (0.5%) over the month and $81.8 million (10.7%) over the year. Net domestic assets increased over the month, from higher net credit to the Government reflecting Government disbursements for funding its operations and projects at the closing of the fiscal year. On the other hand, net foreign assets declined as the foreign reserves fell.

Annually, net foreign assets increased in line with the higher foreign reserves and outweighed the drop in net domestic assets, resulting in the higher money supply.

Liquidity in the financial system increased

Liquidity in the financial system grew in June by $15.8 million (2.6%), driven by increases in the Exchange Settlement Accounts (ESA), currency in circulation, and Statutory Reserve Deposits (SRD). The higher ESA reflects large end-of-fiscal year Government transactions, while higher demand for money drove the currency in circulation higher.

Liquidity also expanded by $116.1 million (22.6%) annually, again driven by the higher ESA, currency in circulation and SRD.

Positive credit growth continues

The banks’ total lending rose again in June 2022, by $3.4 million (0.7%). Lending to businesses increased over the month mainly for public enterprises and private businesses within the professional & other services, construction, and agricultural sectors. This mostly reflects new loan drawdowns and more uptake of the low interest rate offered by the Government Development Loan (GDL) scheme.

Credit growth however, was still negative over the year, declining by $9.1 million (1.9%). The loan repayments made by public enterprises and businesses such as construction, agricultural, and professional & other business services sectors drove the annual decline in business lending. Household loans also fell owing to lower housing and other personal loans. With the implementation of the recovery works for the HTHH disaster, and the reopening of the borders stimulating economic activities, credit growth is anticipated to gradually improve over the next year to positive growth.

Over the month and year to June 2022, the banks’ total deposits increased by $10.1 million (1.2%) and $68.7 million (8.6%) respectively, to a total of $868.6 million. The higher deposits more than offset the rise in lending thus reducing the loans-to-deposit ratio to 53.4%, compared to 53.6% last month, and 59.0% in June last year. This is still below the minimum threshold of 70%.

Weighted average interest rate spread narrowed in June

In June 2022, the weighted average interest rate spread narrowed again over the month as lending rates declined more than the fall in deposit rates. The weighted average lending rate declined over the month mostly for businesses in the tourism, agricultural, and transport sectors as well as households’ vehicles and other personal loan rates. The lower interest rates offered by the GDL scheme also supported the lower lending rates. The weighted average deposit rate also fell, due to lower time and savings deposit rates coupled with the increase in deposit volumes.

Over the year however, the weighted average interest rate spread widened to 6.14% driven by the higher weighted average lending rate coupled with the lower weighted average deposit interest rate. The weighted average lending rate increased for businesses in the utilities, construction, and agricultural sectors. The weighted average deposit rate continued to fall moslty due to the accumulating deposit volumes.

Outlook

The Tongan economy is projected to contract again in FY2021/22 as a result of the HTHH disaster and the Omicron outbreak. A moderate recovery is expected for FY2022/23 supported by the recovery and reconstruction from the HTHH disaster and the reopening of the international borders. The global economic growth has weakened while inflation remains elevated due to the spillover effects from the war in Ukraine, the China lockdowns, and the lingering supply-demand mismatches from the global pandemic. Monetary policy in many advanced economies have tightened in response to inflation. However, recent developments is showing a slow decline in global oil prices which will ease the inflationary pressure in the coming months. Imports are projected to strengthen in line with the economic recovery, while remittance receipts slows down. This will reduce foreign reserves levels but will still remain adequate at above the minimum 3 months of imports cover. The financial system remains stable with excess liquidity available as credit growth improves. Banks are also well capitalized to absorb further deteriorating asset quality.

Against this background, the Reserve Bank keeps its monetary policy stance unchanged in support of firming up the economic recovery. With regards to inflation, the Reserve Bank notes that the inflationary pressure is driven mostly by imported inflation. The Reserve Bank projects inflation to soon peak before gradually easing to desirable levels in 2023. Nevertheless, the Reserve Bank continues to engage in discussions on exploring measures to curb inflation and stand ready to realign its monetary policy should inflation continue to increase unsustainably.


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