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Rating Action:

Moody's assigns a first-time B3 issuer rating to Solomon Islands; outlook stable

26 Nov 2015

Singapore, November 26, 2015 -- Moody's Investors Service has today assigned first-time local and foreign-currency issuer ratings of B3 to the Government of the Solomon Islands. The ratings carry a stable outlook.

The rating and outlook reflect the following factors:

1. Solomon Islands is a small, narrowly-diversified economy, and GDP growth is likely to remain relatively modest

2. Institutional strength is very low, despite an ongoing process of capacity-building following the end of ethnic tensions in 2003

3. A relatively strong fiscal position, as debt-relief coupled with stringent legislation and several years of fiscal surpluses have sharply reduced government debt ratios.

4. Moderate susceptibility to event risk, predominantly driven by domestic politics

Moody's has also assigned a B2 ceiling for local-currency bonds and deposits, a B2 ceiling for foreign-currency bonds and a Caa1 ceiling for foreign-currency deposits. In addition, the short-term FC bond and deposit ceilings is "Not Prime.''

These ceilings act as a cap on the ratings that can be assigned to the FC obligations of other entities domiciled in the country.

RATINGS RATIONALE

1. Very Low Economic Strength, given a small, narrowly-diversified economy with a modest growth path

The Solomon Islands has a nominal GDP of approximately $1.0 billion, making it the second smallest of all countries Moody's rates. The economy is primarily agrarian. Although the logging industry is a key contributor to economic growth, commercial logging has over the years, changed the vegetation cover of the main islands, resulting in a gradual decrease in forest cover.

Over the last decade growth in real GDP growth averaged 5.4%. Economic growth in 2014 moderated to 2.0% from 3.1% the previous year, as severe flooding struck the capital and surrounding areas, and production from the country's single gold mine halted. In 2015, we estimate that real GDP growth will edge higher, to 3.2% supported by agricultural production and investment spending.

2. Very Low Institutional Strength as the process of capacity-building continues

The Solomon Islands' performance on the World Bank's Worldwide Governance Indicators ranks at the low end when compared across all Moody's-rated sovereigns-- particularly Government Effectiveness, Rule of Law, and Control of Corruption. Following the end of ethnic tensions that lasted from 1998 to 2003, there has been some progress on state-building, with an immediate focus on stabilizing the law and order situation. Still, most economic institutions are nascent and capacity limitations remain, partly due to a decentralized administration.

The government has a strong engagement with the IMF that has guided policy reform. In December 2012, a three-year, $1.6 million Extended Credit Facility was approved, making it the third consecutive program with the IMF. Structural reforms under the program focus on strengthening fiscal management and the quality of spending, improving monetary transmission and financial supervision.

Inflation, which Moody's uses as a proxy to gauge policy effectiveness, has slowed markedly over the last five-year period. However, trends are volatile and driven primarily by food and commodity prices.

3. High Fiscal Strength, informed by a very low debt burden

Fiscal metrics are robust. The Solomon Islands has posted fiscal surpluses since 2009, averaging over 5% of GDP. Total revenues, which stood at over 60% of GDP in 2013 according to IMF calculations, are higher than all B-rated sovereigns. Grants, primarily linked to development projects, comprise about a third of this amount.

The sovereign is heavily reliant on aid to finance its development needs. Looking ahead, there is a risk that budgeted aid faces cuts as donors are faced with competing demands. But as the largest donor, aid from Australia has remained stable and is uncorrelated with its own fiscal balances, although there is a possibility of re-allocation of aid within the budget.

The debt burden has fallen sharply since 2004 owing to a restructuring of debt following the end of the ethnic conflict in 2003. As a percent of GDP, general government debt amounts to a little over 10% in 2014, according to government estimates. At these levels, the debt ratio is the lowest within the B-rated category, and the Asia Pacific region. Fiscal legislation does not permit the use of borrowing for recurrent expenditure, and sets a ceiling of 25% of GDP on the overall stock of government borrowing. We expect government debt to remain around current levels, although any setback to donor assistance would adversely impact fiscal metrics.

4. Moderate Susceptibility to Event Risk, driven by domestic political risks

Moody's assessment of the Solomon Islands' susceptibility to event risk is driven by the domestic political environment, which is characterized by a fragile coalitions and frequent changes in government. A change in government presents risks to the pipeline for donor support, given the emphasis placed on adherence to reforms, particularly by bilateral donors.

Given the small size, healthy profitability and liquidity of the banking system, it presents limited contingent risks to the government.

Current account deficits are significant, averaging nearly 12% of GDP between 2005-14. However, they are easily financed through aid and FDI. Foreign reserves, at $518 million as of mid-November 2015, have been climbing steadily. Annual repayment needs are limited, due to the low external debt burden and limited debt service obligations from concessional, longer-term financing. As such, external risks are contained as reflected in Moody's forecasted external vulnerability indicator for 2016 of 8.5%.

GDP per capita (PPP basis, US$): 1,895 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.2% (2014 Actual)

Gen. Gov. Financial Balance/GDP: 2.4% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.2% (2014 Actual) (also known as External Balance)

External debt/GDP: 22.1% (2013 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 14 October 2015, a rating committee was called to discuss the rating of the Solomon Islands, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength. The issuer's institutional strength/ framework. The issuer's governance and/or management. The issuer's fiscal or financial strength, including its debt profile. The issuer's susceptibility to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy 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 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Anushka Shah
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
SUBSCRIBERS: (852) 3551-3077

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns a first-time B3 issuer rating to Solomon Islands; outlook stable
No Related Data.
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