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Rating Action:

Moody's affirms Fiji's Ba3 rating; maintains stable outlook

11 Jul 2019

Singapore, July 11, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Fiji's local and foreign currency long-term issuer and senior unsecured debt ratings at Ba3. The outlook is maintained at stable.

The Ba3 rating is supported by Moody's assessment that ongoing reforms, aided by the engagement with development partners, underpin the moderate strength of Fiji's institutions. The associated increase in financial assistance from development partners will also support government debt affordability and reduce government liquidity risk. At the same time, Fiji's small economy and limited economic diversification continue to constrain the economy's capacity to absorb shocks.

The stable outlook reflects balanced risks. On the upside, ongoing efforts by the authorities to diversify the tourism sector and attract investment into new sectors may boost Fiji's economic prospects and resilience beyond Moody's expectations. On the downside, moderating global and regional growth could weaken demand for tourism in Fiji and result in greater fiscal and external challenges than Moody's currently anticipates.

Fiji's long-term local currency bond and deposit ceilings remain unchanged at Baa3. The Ba3 long-term foreign currency bond ceiling and B1 long-term foreign currency deposit ceiling are also unchanged. The short-term foreign currency bond and deposit ceilings remain unchanged at Not-Prime. These ceilings typically act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR RATING AFFIRMATION

ONGOING REFORMS SUPPORT MODERATELY STRONG INSTITUTIONS, DEBT AFFORDABILITY

The Ba3 rating reflects Moody's assessment that institutions and policy credibility and effectiveness continue to strengthen in Fiji, aided by the government's engagement with development partners around its reform agenda. Increased financial assistance as part of the engagement will further anchor debt affordability and reduce government liquidity risks. Moody's expects ongoing political stability, marked by a second successive democratic election in November 2018, to foster policy continuity and sustain the reform momentum.

Fiji's institutional strength is reflected in the large captive source of domestic financing that supports the government's moderate debt burden, as well as the macroeconomic stability and generally low and stable inflation over the past few years, despite the occurrence of large climate shocks. The country also continues to address its vulnerability to climate change, by building more resilient infrastructure and early warning systems, financed by green bond issuances and an environmental and climate adaptation levy.

Moody's expects the coverage of government debt by assets at the Fiji National Provident Fund to remain high -- the assets were sufficient to cover around 140% of general government debt as of the end of fiscal 2018 (ending July 2018) and total assets continue to grow. Moody's also expects real GDP growth to remain solid over the next two years at around 3%, and consumer price inflation to remain anchored at around 3.5%.

Ongoing engagement with development partners will support the government's reform agenda and underpin Fiji's strengthened institutional capacity. Moody's expects the technical assistance from multilateral and bilateral partners, such as the Asian Development Bank (ADB), Australia, Singapore and the World Bank (IBRD), to raise the effectiveness of measures in areas such as climate change mitigation, public financial management, state-owned enterprise management, and economic competitiveness.

The engagement with development partners will further expand the external financing resource that is available to the government to meet the country's large financing needs for infrastructure, socioeconomic development, and climate change mitigation. These include a policy-based loan from the ADB and IBRD, the ADB's five-year country partnership framework for Fiji, and Australia's "Pacific step-up", an infrastructure financing programme for the South Pacific that is on top of its annual financial aid for the region. Borrowing terms from these sources are generally concessional, with low interest rates and long repayment terms, which enhance debt affordability. In addition, the government is in final stages of discussions with Japan International Cooperation Agency for low-cost contingency financing, which will mitigate sharp increases in financing needs and costs in the event of a natural disaster.

Moody's expects Fiji's debt affordability to remain high over the next three to five years. Further supporting debt affordability and sustainability is Moody's expectation for the government's fiscal deficit to narrow to around 2-3% of GDP over the next two to three years, after an average deficit of around 4% of GDP over fiscals 2018 and 2019. This will keep general government debt level stable at around 45-48% through fiscal 2022.

SMALL SIZE AND LIMITED DIVERSIFICATION CONTINUE TO CONSTRAIN THE ECONOMY'S SHOCK ABSORPTION CAPACITY

Despite stronger institutions, improved debt affordability and sound government liquidity, Fiji's economy and government finances will remain highly exposed to shocks, including the physical effects of climate-related disasters. In particular, its small size and still-limited diversification will continue to limit its shock absorption capacity.

Moody's estimates that Fiji's tourism sector, including tourism-related activities, accounts for around 40% of GDP, a third of employment, and more than 50% of total domestic goods and services exports. The sugar industry accounts for an additional 20% of employment, although the contributions to GDP and exports are very modest. Moody's does not expect these shares to significantly reverse over the next three to five years. In fact, Moody's expects growth in Fiji's tourism sector to remain robust, as demand for the country's tourist offerings remains solid, aided by increasing air traffic with the fleet expansion of the national carrier, Fiji Airways. Meanwhile, Moody's expects sugar production to gradually recover in the aftermath of the large cyclones over 2016-18, helped by reinvestment by the government and Fiji Sugar Corporation into the production process to raise productivity and output.

Both the tourism sector and sugar industry are vulnerable to the physical effects of climate change, which threaten employment, incomes, domestic demand and government finances. Sugar cane crops are easily destroyed by cyclones and floods, while Fiji's attraction as a tourism destination has so far been centered around its physical environment, which can be affected by both climate trends and shocks.

The authorities are aiming to diversify the economy by offering incentives for private investment, and to broaden Fiji's tourism appeal by expanding into the sports and meetings, incentives, conferences and exhibitions (MICE) segments. Some headway has already been made, for instance in Fiji hosting the ADB's 2019 annual meeting, as well as some business processes outsourcing (BPO) by multinational companies to Fiji, albeit modest in scale thus far. While Moody's currently sees some potential in BPO, commercial agriculture, and events tourism, diversification will take time, given still-low levels of economic competitiveness and physical infrastructure constraints that will take years to address. Fiji's geographical remoteness compared to alternative events destinations with similar appeal will remain an obstacle to expanding tourism.

RATIONALE FOR THE STABLE OUTLOOK

The decision to maintain the stable outlook reflects balanced risks to the Ba3 ratings.

On the upside, ongoing efforts by the authorities to diversify the tourism sector and attract investment into new sectors may boost Fiji's economic prospects and resilience beyond Moody's expectations. In particular, a sustained increase in sports or MICE tourism, especially during the offpeak travel season, will help fill excess capacity during this period and raise economic growth and incomes. Sizeable investments into productive sectors such as in BPO and logistics can also increase incomes, employment and Fiji's growth potential materially.

On the downside, moderating global and regional growth could weaken demand for tourism in Fiji and result in greater fiscal and external challenges than Moody's currently anticipates. Given the importance of the tourism sector to government finances and exports, a sharp decline in tourist arrivals -- especially from the main markets of Australia, New Zealand and the US -- would result in weaker government revenue and wider fiscal and current account deficits. A severe shock, including from climate events and/or the reemergence of political instability, could also weigh more broadly on the government's credit profile by more than is currently factored into the ratings.

WHAT COULD CHANGE THE RATING UP

The rating would likely be upgraded if (1) ongoing and further reforms were to translate into sustained improvements in economic competitiveness and the business climate, which would lift Fiji's growth potential, and/or raise policy credibility and effectiveness beyond Moody's current expectations; (2) significant economic diversification, including in the tourism sector and the expansion into new industries, were to enhance the economy's resilience to shocks; and (3) fiscal consolidation and privatisation of state-owned entities were to raise prospects for a rapid decline in the government's debt burden.

WHAT COULD CHANGE THE RATING DOWN

The rating would likely be downgraded if (1) a large shock, possibly stemming from a natural disaster, were to substantially weaken Fiji's economic growth prospects and fiscal outcomes for a prolonged period; (2) balance of payments strains were to emerge and result in a significant decline in external buffers, threatening policy credibility and macroeconomic stability; and (3) domestic political risks were to reemerge, with the potential to disrupt economic and fiscal management and/or strain relationships with development partners, weakening institutional and fiscal strength.

GDP per capita (PPP basis, US$): 10,234 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2018 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.9% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -4.4% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.8% (2018 Actual) (also known as External Balance)

External debt/GDP: 19.1% (2018 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 08 July 2019, a rating committee was called to discuss the rating of the Fiji, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/framework, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. Other views raised included: The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian Fang
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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