National Reserve Bank of Tonga

Monthly Economic Review for June 2018

Global growth expected to soften due to trade pressures

The IMF anticipates that global growth is expected to soften considering risks to the outlook which includes trade policy measures by the United States. Additionally, upward pressure on oil prices underpinned by supply shortages from Venezuela, Libya, and Iran following the US imposed sanctions are expected to dampen business confidence. However, developments amongst Tonga’s major trading partners such as New Zealand and Australia were mixed. The New Zealand Treasury reported that public investment and consumption rose in June whilst business confidence fell further during the month. The Reserve Bank of Australia reported that economic indicators for the June quarter such as exports and business investment jumped whereas household consumption declined.

Domestic economic activities slowed over the month

Indicators of economic activity suggest slowed growth over the month. The total export volume of agricultural products declined mainly due to lower exports of taro and yam. However, domestic food supply continued to improve particularly for root crops and vegetables which was reflected in the decline in food prices. Activities in the secondary sector continued to be supported by the ongoing construction activities, and the growth in banks’ lending for housing (1.1%) and the construction sector (2.0%). Electricity consumption however declined by 7.5% which indicates a slowdown in economic activities over the month. Indicators of the tertiary sector were mixed over the month with prominent results from the banking sector. The banking system’s profitability continued to improve over the month with a 44.6% increase in total Net Profit After Tax. A $0.5 million rise in travel receipts was also recorded despite a fall in total air arrivals by 2.3%, which coincided with less international flights arriving during the month. The total number of container registrations also declined over the month by 2.1% due mainly to a fall in private containers.

Consumption activities slowed over the month of June 2018. Despite a 0.7% increase in household lending and the distribution of the Government’s cash hand-outs to some of the cyclone affected families, the Consumption Tax (CT) collected over the month declined in line with a fall in businesses’ total sales. Consumption activities however remained strong over the year. Year on year growth shows CT collected has increased by more than 15% coinciding
with a 13.7% rise in total sales. Remittances and banks’ lending to households also increased by 11.8% and 8.5% respectively which may have translated into solid consumer spending. Going forward, consumption spending is expected to be strong supported by the continuous increase in new loan commitments to households and the expected continued increase in remittance receipts.

Weather conditions likely to negatively affect future economic activities

The demand for financing from industries involved in the secondary sector pushed new loan commitments higher for housing, manufacturing and utilities over the month which point toward future development, however weather uncertainty pose a risk to the outlook. According to the latest Climate Update from the Tonga Meteorological Service¹, rainfall is forecasted to be average to below average in August to October 2018 and below average for all of Tonga from November to January 2019. This will negatively affect activities in the primary sector and other sectors of the economy in the future. The level of competition between banks in terms of housing loans coupled with the accommodative monetary policy is expected to utilize the excess liquidity in the near future to encourage lending and support economic activities.

Partial indicator of employment increased

According to the Reserve Bank’s survey on job advertisements, the total number of vacant positions that was advertised in the local newspapers and the Matangi Tonga website grew over the month and over the year by 57 vacancies and 80 vacancies respectively. Recruitment intentions over the month were mainly for non-government organisations reflecting plans for the implementation of donor funded projects. Looking ahead, the number of persons in employment is expected to increase though growth may be slow in line with the domestic economic outlook.

Inflationary pressure eases

Food prices remained the main factor behind the easing of headline inflation. A 6.3% decline in domestic prices over the month was driven by a significant drop in food prices contributing a negative 2.9 percentage points to the overall monthly inflation. The decline in the price of root crops and vegetables such as cassava, yam, tomatoes, capsicum, head cabbage and leafy vegetables contributed to the decline in food prices. This outweighed a 0.4 percentage points contribution from imported prices due to an increase in petroleum prices and the price of chicken pieces.

The annual headline inflation rate slowed to 5.9% in June compared to 9.4% last month and 10.7% in June 2017, which is closer to the Reserve Bank’s reference rate of 5%. The slowdown of annual inflation was mainly due to developments in domestic food prices as the annual growth in June 2018 was much lower than it was in May 2018. The increase in imported prices contributed 3.9 percentage points to the overall annual headline inflation due to higher prices of imported meat, fuel and tobacco. The domestic prices contributed the remaining 2.0 percentage points with food items as the lead contributor followed by kava-Tonga and coral aggregates.

Exchange Rates remain competitive

At the end of June 2018, the Nominal Effective Exchange Rate (NEER) index slightly rose due mainly to the depreciation of the AUD, NZD and CNY against the TOP, partly offsetting the appreciation of the USD, FJD, JPY, GBP and EUR against the TOP. This was largely driven by the strengthening of the USD due to a solid economic outlook in the U.S. The Real Effective Exchange Rate (REER) index also rose over the month and year which reflected Tonga’s higher headline inflation rate relative to its trading partners.

Foreign Reserves heightened at end of financial year

The overall Overseas Exchange Transaction (OET) balance recorded a surplus of $26.8 million driven by a significant expansion in the current account balance. Subsequently, the official foreign reserves rose to $468.7 million, which is equivalent to 7.8 months of import cover.

Receipts of cyclone relief funds and other project funds

The substantial turnaround in the current account balance to record a $27.5 million surplus after recording a deficit last month was due mainly to receipts of cyclone relief funds together with funds from development partners for projects’ implementations. In year ended terms, the surplus in the OET balance improved due to surpluses noted in all accounts with the capital account recording the highest surplus. Despite a 6.3% rise in transfer receipts which stemmed from remittances and official transfers, the lower surplus in the current account was due to the widening of the merchandise trade deficit over the year. Payments for imports and services rose over the year by 10.5% and 16.8% respectively. The higher import payments were mainly for importing of wholesale and retail goods which rose by 26.7%. Payment of dividends to head offices explained the rise in services payments. Higher surplus in the capital account was attributed to a rise in both the official and private capital receipts which were mainly for construction purposes.

Growth in Broad Money slowed

Broad money grew over June 2018, slightly lower than a 2.6% growth recorded for last month. Year-on-year growth of broad money slowed in June 2018, from 8.5% in May 2018 and 13.7% in the corresponding month in 2017. The
expansion in broad money continued to be supported by the continued rise in the net foreign assets as the foreign reserves increased over the month. On the contrary, net domestic credit contracted in June 2018 due to a decline in
net credit to government as government deposits increased. Over the year, the increase in government deposits resulted from improvement in government revenue collections, receipts of cyclone relief funds, project grants and funding as well as budgetary support.

Liquidity increases by its highest

The banking sector remained sound, stable and profitable with levels of capital and liquidity above regulatory requirements. Liquidity in the banking system (reserve money) increased over June. This was largely driven by an increase in deposits by the commercial banks to the Reserve Bank vault reflecting receipt of cyclone relief funds. Growth in deposits contributed to the increase in the required reserves and the decline in the loan to deposit ratio to 73.3% from 75.2% last month. This ratio continues to remain below the 80% minimum loan to deposit ratio which indicates excess liquidity in the banking system and that there is capacity for further lending by the banks. The currency in circulation also increased over the month due to high demand for cash by the general public.

Credit to households continued to increase

Total banks’ lending declined over June yet increased over the year. Delays in project implementations appeared to have deferred the drawdown of loan commitments in these sectors hence the decrease in business outstanding loans balances over the month, particularly to the public enterprises and businesses in the manufacturing sector. On the other hand, household loans increased due to growth in housing loans. Banks’ lending recorded a credit growth of 10.6% over the year, which is lower than the forecasted growth of 16% due to delays and cancellation in implementing of projects in which loans were approved for.

Weighted average interest rate spread continued to widen

The weighted average interest rate spread widened further over the month and year attributed to movements in volumes. The slight decline in total lending together with an increase in the lending rates to the tourism sector over the month resulted in the weighted average lending rates increasing. The weighted average deposit rate however declined which was driven by the significant growth in the volume of deposits despite the rise in the term deposit rates for over 5 years over the month.

Improved access points for financial services

Over the year, both banks’ deposits and loans increased indicating improved access to banks’ financial services. The total access points in the banking system increased making financial services more widely accessible. In the year to June 2018, the banking system reported to have increased its access points by 109 to 647 access points. This was mainly due to more ATMs and EFTPOS machines that have been installed across Tonga. Furthermore, 88% of remittance receipts over the month were channeled through the Foreign Exchange Dealers (FEDs) compared to 87% in May 2018. This reflects the convenience of sending money via FEDs as FEDs have more access points and their services are much quicker. Other existing indicators depict how more widely inclusive the financial system is particularly in the outer islands as the number of inter-island transactions showed an increase of 71 transactions over the month to June 2018.

Outlook

In light of the above, activities in all sectors of Tonga’s economy supported the strong growth that is forecasted for 2017/18. The level of foreign reserves remained at comfortable levels and is expected to remain above the 3 - 4 months of import cover in the near term supported by higher receipts of remittances and foreign aid. The Government’s external loan repayments and the projected rise in imports will put pressure on the level of foreign reserves. Inflation is anticipated to fall below the Reserve Bank’s inflation reference rate of 5% per annum at the end of 2018. The Reserve Bank will continue to closely monitor developments in the domestic and global economies to ensure financial and macroeconomic stability are maintained and to change its monetary policy setting where necessary to support its monetary policy objectives.

^{1 - Issued by the Ministry of Meteorology, Energy, Information, Disaster Management, Environment, and Climate Change & Communication on 7th August 2017. During El Niño, rainfall in Tonga is below average especially on the onset of El Nino.}

Resources

Monthly Economic Review - June 2018 Released on 21 August 2018 |  431 KB - Download a copy of the full review.