Monthly Economic Review for October 2019
- Details
- Category: Economic Releases
- Last Updated: 19 December 2019
IMF WEO1 indicates continued global slowdown
According to the IMF’s latest WEO in October 2019, they report that global performance has been the slowest since the Global Financial Crisis. As such, global economic growth for 2019 is revised downwards to 3.0% from the 3.3% projection in April 2019 WEO. This mostly revolves around the continuous trade uncertainties between the US and China. Tonga’s major trading partners, namely, the US, Australia, and New Zealand, all experienced slower than expected growth during October. Similarly, this stemmed from weakening business confidence, and thus investments.
Mixed outcomes in domestic activities
Partial data shows positive trends in the primary sector. Lending to the agricultural sector rose by $0.7 million (5.6%) over the month and $1.2 million (10.8%) over the year to October 2019, mostly to agricultural exporters. Proceeds from agricultural exports were maintained at $0.9 million while marine export proceeds rose by $0.2 million (20.2%) during the month. Export proceeds also performed positively over the year, with a rise in receipts for marine exports of $3.2 million (52.4%) and $0.6 million (6.0%) for agricultural exports. Domestic food prices were also cheaper than it was a year ago, specifically for root crops and kava reflecting better harvesting seasons this year.
Performance in the industry sector was mixed. Individual housing loans slightly declined in October by $0.4 million (0.2%), however, it continued to increase over the year by $4.7 million (2.3%) supporting the construction sector. Additionally, new commitment loans for October was $2.3 million for individual housing and $0.8 million for manufacturing indicating future investment prospects in the construction and manufacturing sectors. This may also have spillover benefits to the mining and quarrying sector. Payments for imports of construction materials also rose during the month by $0.9 million (54.5%). Meanwhile, the utility sector signaled some price rises commencing with the waste authority fees in October and electricity tariffs in November.
Similarly, the tertiary sector performance was also mixed. In October total air arrivals declined by 550 passengers (5.7%), despite the number of flights rising to 111 flights (4.7% increase). 2 cruise ships also arrived during the month coinciding with the $0.4 million (3.4%) rise in travel receipts, benefitting the tourism sector. Container registrations decreased by 394 (30.6%) over the month as both private and business container registration declined. This coincides with the monthly decline in total import payments of $1.6 million (4.1%). Vehicle registrations, however, slightly rose to 295 vehicles (2.8% increase), mostly for heavy and other light vehicles. The measles outbreak that started in October has escalated, leading to the cancellation of schools and major events such as prize-giving ceremonies, reunions, and other scheduled events, which may contribute to slowing economic activities in the upcoming months.
Partial indicator of employment remained positive
The Reserve Bank’s survey on job advertisements showed that advertised vacancies continue to rise to 44 vacancies in October compared to 42 vacancies in the previous month, with the majority for public administration. These work opportunities may contribute to lower unemployment rates.
Headline inflation slowed in October
Headline inflation rose by 0.5% over the month. Both domestic and imported prices increased by 0.9% and 0.2%, respectively. Domestic inflation was driven by higher prices of local food such as root crops, vegetables, seafood and eggs, and garbage collection services. Prices of various imported commodities’ also rose over the month and was driven by the increase in fuel prices, personal care services, and imported food items such as mutton, apples, sugar, and flour.
The annual headline inflation slowed further by 0.2% in October 2019 compared to 0.4% in September and 6.2% inflation in October 2018 owing mostly to declining domestic prices. Domestic prices declined over the year by 1.3%, attributing to prices of kava-Tonga, Tongan tobacco, electricity, and local food prices such as root crops, vegetables, eggs and seafood (octopus). This outweighed the 1.5% rise in import prices over the year. Higher imported prices were noted for alcohol, tobacco, and food items such meat, onions, flour and sugar. Fuel prices are still lower relative to the same last year.
Competitive exchange rates
During the month of October 2019, both the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) index slightly declined. This was attributed to the appreciation of the USD, FJD, GBP, EUR and CNY against the TOP. The NEER and REER also fell over the year due to Tonga’s lower inflation rate compared to most of its major trading partners, which may support Tonga’s international trade competitiveness.
Net outflow in foreign exchange
The level of official foreign reserves lowered by $1.5 million to $489.3 million (equivalent to 7.8 months of imports cover) attributed to higher offshore investments and payments for services during October 2019. However, the foreign reserves rose over the year by $32.0 million as a result of higher receipts of budget support, grants, and project funds from development partners. This was also supported by the increase in the remittance receipts from family and friends abroad.
The deficit in the overall Overseas Exchange Transactions (OET) balance widened during October 2019, mainly attributed to the $11.2 million portfolio investment abroad. Services payments also increased by $2.8 million which were mostly for telecommunication services. Nonetheless, receipts also increased over the month, mainly from transfer receipts, both official and private receipts. Official revenues were mainly budget support, grants & project funds, while private transfers are grants/donations to nonprofit organizations and remittance receipts to individuals.
A similar trend is portrayed in the annual movements, where the OET balance surplus decreased and is underpinned by higher outflows for offshore investments and import payments. These movements have offset the rise in receipts from travel, private transfer receipts, and exports.
Broad money decreased further
Broad money declined further by $2.0 million (0.3%), again driven by a decrease in net foreign assets, which offsets the slight rise in net domestic assets. The lower net foreign assets were mostly driven by offshore investments during the month, whereas lower capital accounts increased net domestic assets. Over the year, broad money declined by $3.3 million (0.6%) due to lower net domestic assets, mainly on higher government deposits, offsetting the growing net foreign assets.
Liquidity declined
Higher foreign exchange payments made by the commercial banks for their underlying customers over the month and year to October 2019, lowered the liquidity in the banking system to $309.4 million, by $8.0 million (2.5%) and $15.7 million (4.8%) respectively.
Business loans increase in October
The banks’ total lending grew over the month and year to October 2019, by 0.6% ($3.0 million) and 6.6% ($30.6 million), respectively to $496.9 million. This increase was mostly driven by an expansion in lending to businesses. Loans to the professional & other services, agriculture, and tourism sectors expanded and drove the monthly rise, whereas more loans offered to the state-owned enterprises, professional & other services, transport and tourism sectors resulted in the annual increase. Household loans, however, decreased over the month but increased over the year reflecting the movements in housing loans.
The banks’ total loans to deposit ratio slightly increased from 78.6% to 79.1% over the month, reflecting the increase in loans and the fall in deposits.
Interest rate spread narrowed
Over the month and year to October 2019, the weighted average interest rate spread narrowed by 1.7 basis points and 10.5 basis points respectively to 6.04%, due to a decrease in both weighted average lending rates and weighted average deposit rates.
The lower lending rates over the month and year resulted from lower lending rates on non-profit institutions and household loans. Business lending rates slightly rose over the month; however, it decreased over the year and supported the annual decline in the weighted average lending rates.
The declining deposit rates over the month were solely driven by lower demand deposits rates, which outweighed the increase in both saving and time deposit rates. Over the year, the declined time deposit rates drove the lower weighted average deposit rates.
Outlook
The Reserve Bank expects positive domestic economic activity in the medium term. Foreign reserves will remain at comfortable levels above the minimum of 3 months of import cover. The inflation forecast is also expected to be relatively stable and below the Reserve Bank’s reference rate of 5%. Credit growth will continue to grow albeit at a slower pace, underpinned by excess liquidity in the banking system. The Reserve Bank, therefore, maintains its accommodative monetary policy stance to encourage the utilization of the excess liquidity in the banking system for further lending hence supporting economic growth. Nonetheless, the Reserve Bank continues to be vigilant in closely monitoring developments in the domestic and global economies and stands ready to adjust its monetary policy setting to ensure financial and macroeconomic stability are maintained.
1 - International Monetary Fund’s World Economic Outlook for October 2019
Monthly Economic Review Releases
Monthly Economic Review Releases for 2019
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September Released on 14 November 2019 | 417 KB |
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October Released on 19 December 2019 | 121 KB |
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July Released on 24 September 2019 | 423 KB |
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August Released on 8 November 2019 | 119 KB |
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May Released on 24 July 2019 | 118 KB |
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June Released on 19 August 2019 | 119 KB |
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March Released on 16 May 2019 | 129 KB |
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April Released on 18 June 2019 | 145 KB |
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January Released on 14 March 2019 | 129 KB |
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February Released on 23 April 2019 | 129 KB |
2018
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November Released on 18 January 2019 | 115 KB |
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December Released on 15 February 2019 | 121 KB |
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October Released on 27 December 2018 | 361 KB |
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September Released on 27 November 2018 | 383 KB |
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July Released on 21 September 2018 | 383 KB |
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August Released on 11 October 2018 | 383 KB |
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May Released on 3 August 2018 | 171 KB |
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June Released on 21 August 2018 | 431 KB |
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March Released on 14 May 2018 | 165 KB |
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April Released on 18 June 2018 | 395 KB |
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January Released on 16 March 2018 | 400 KB |
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February Released on 11 April 2018 | 494 KB |
2017
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December Released on 16 February 2018 | 422 KB |
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November Released on 22 January 2018 | 414 KB |
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October Released on 18 December 2017 | 125 KB |
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September Released on 1 December 2017 | 317 KB |
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August Released on 1 November 2017 | 391 KB |
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July Released on 6 October 2017 | 423 KB |
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June Released on 28 August 2017 | 125 KB |
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May Released on 2 August 2017 | 403 KB |
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April Released on 10 July 2017 | 421 KB |
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March Released on 8 June 2017 | 121 KB |
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February Released on 27 April 2017 | 425 KB |
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January Released on 30 March 2017 | 420 KB |
2016
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December Released on 3 March 2017 | 421 KB |
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November Released on 3 February 2017 | 398 KB |
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October Released on 16 December 2016 | 448 KB |
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September Released on 15 November 2016 | 532 KB |
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August Released on 21 October 2016 | 196 KB |
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July Released on 29 September 2016 | 839 KB |
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June Released on 25 August 2016 | 822 KB |
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May Released on 21 July 2016 | 665 KB |
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April Released on 21 June 2016 | 481 KB |
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March Released on 20 May 2016 | 475 KB |
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February Released on 26 April 2016 | 932 KB |
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January Released on 29 March 2016 | 461 KB |
2015
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December Released on 24 February 2016 | 593 KB |
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November Released on 18 January 2015 | 709 KB |
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October Released on 23 December 2015 | 320 KB |
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September Released on 18 November 2015 | 395 KB |
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August Released on 23 October 2015 | 405 KB |
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July Released on 22 September 2015 | 365 KB |
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June Released on 14 August 2015 | 490 KB |
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May Released on 24 July 2016 | 383 KB |
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April Released on 15 June 2015 | 500 KB |
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March Released on 18 May 2015 | 523 KB |
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February Released on 17 April 2015 | 375 KB |
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January Released on 11 March 2015 | 395 KB |
ECONOMIC RELEASES