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Rating Action:

Moody's upgrades Fiji's ratings to Ba3 from B1; changes outlook to stable from positive

06 Sep 2017

Singapore, September 06, 2017 -- Moody's Investors Service has today upgraded the Government of Fiji's local and foreign currency issuer ratings to Ba3 from B1 and changed the outlook to stable from positive.

The factors driving the rating upgrade and stable outlook are Moody's expectation that:

(1) The strengthening in Fiji's institutional framework and policy effectiveness, aided by political stability, will support economic growth

(2) The engagement with international financial institutions will continue to enhance government debt affordability and overall fiscal strength

Despite government measures to mitigate the impact of climate change, Fiji's economy and public finances will remain highly vulnerable to both sudden climate events and gradual climate change trends, a constraint on its rating.

Fiji's local and foreign currency senior unsecured ratings have also been upgraded to Ba3 from B1.

The local-currency bond and deposit ceilings were raised to Baa3 from Ba1. The foreign currency bond ceiling was maintained at Ba3 and the foreign currency deposit ceiling was raised to B1 from B2. In addition, the short-term foreign-currency bond and deposit ceilings are maintained at "Not Prime.''

RATINGS RATIONALE

RATIONALE FOR RATING UPGRADE TO Ba3

STRENGTHENING POLICY EFFECTIVENESS SUPPORTS ECONOMIC GROWTH PROSPECTS

Fiji has taken a number of measures which, together, enhance the institutional framework and strengthen policy effectiveness.

First, one set of measures relates to the effectiveness of fiscal policy and the use of government resources.

Effective tax cuts are bolstering revenue as a share of GDP to higher levels than many similarly rated peers. Cuts to the value-added tax (VAT) combined with a broadening of the VAT base through removal of exemptions and the recent increase in the personal income tax threshold are boosting disposable incomes and in turn bolstering private consumption and tax collection. Greater resources provided to Fiji's Revenue and Customs Service and public declaration of overseas assets will increase tax compliance.

We expect government revenues to rise to around 30% of GDP in the fiscal year ending in July 2018 (FY2018), compared to a Ba-median of about 28%, and from 27% in FY2017, and remain broadly stable around these levels in the next few years.

The government is using the fiscal space afforded by higher revenues to pursue investment in infrastructure and education, which will boost the economy's long-run productive capacity. This is reflected in an increasing share of capital expenditure in total government spending to around 40% in FY2017, up from about 27% in 2012.

Second, a set of measures are aimed at strengthening the economy's resilience to negative shocks.

These include government policies to diversify the services offered and markets reached by the tourism sector, to develop the information and communications industry through special economic zones, and support small and medium-sized enterprises and companies in the forestry industry. Over time, these measures have the potential to partially offset hurdles to investment posed by factors such as slow business registration and investment approval processes.

In addition, we expect the new strategic plan in the sugar industry, which involves greater engagement with farmers, the mechanisation of production processes and investment in rail to lower transportation costs to support a pickup in sugar production and productivity in the sector.

Policies aimed at bolstering resilience also relate to climate change risks. For instance, the Environment and Climate Adaptation Levy (ECAL), which was increased from 6% to 10% in the latest budget, will directly fund environment protection programmes and climate adaptation projects. The government has also strengthened building codes and implemented new construction designs to ensure structures are more resilient to climate change. The government's recent move towards a fiscal year running from August to July also allows for better budget planning around the cyclone season.

Although the extent and durability of credit positive changes has yet to be ascertained, we expect that, in combination, this range of measures will strengthen the effectiveness of fiscal policy and bolster the resilience of the economy to potential negative shocks.

Fiji's vulnerability to climate change will continue to pose significant challenges to policymaking that is inherent in small and narrowly diversified economies.

ENGAGEMENT WITH INTERNATIONAL FINANCIAL INSITITUTIONS SUPPORT IMPROVEMENT IN DEBT AFFORDABILITY AND FISCAL STRENGTH

Progress on reforms combined with greater political stability since 2008 and the country's return to electoral democracy in 2014 have helped the government re-engage multilateral development banks for financing, which is often provided at low cost.

The Asian Development Bank's (Aaa stable) decision to host its annual meetings in Fiji in 2019, the first time the meetings will be held in a Pacific country, is in part the result of the credit-positive improvement in political stability and institutional progress that support increasing government effectiveness.

More directly, loans from the Asian Development Bank and World Bank (International Bank for Reconstruction and Development, IBRD, Aaa stable) will help diversify Fiji's government funding, including infrastructure development, which has been largely market-based over the past decade, and reduce its costs.

Lower interest rates, stemming from a more stable macroeconomic environment and lower refinancing costs on the government's international bond in 2015, as well as a larger tax take, will also enhance the government's debt affordability.

We expect interest payments to fall to 8.7% as a percentage of revenues in FY2018, well down from a peak of 14.3% in 2011.

With additional borrowing for cyclone-related and economic development spending, mostly from domestic sources and external sources on concessional terms, we project government debt to rise slightly to 46.5% of GDP in FY2018 from 44.3% in FY2017. Fiji's government debt burden will remain moderately high, in line with the median of Ba-rated sovereigns.

With the government budgeting FJD372 million in privatisation receipts in FY2018 (about 3.5% of 2017 GDP), the potential for delays to the sale of the government assets could result in a higher government debt burden than we currently forecast. Assuming that the deficit narrows significantly and durably from FY2019 once reconstruction costs following Tropical Cyclone Winston abate, our overall assessment of fiscal strength would not be materially affected by lower privatisation receipts than currently budgeted.

RATIONALE FOR STABLE OUTLOOK

The stable outlook indicates risks to Fiji's rating are balanced.

We expect reconstruction, strong demand for Fiji tourism, robust public expenditure and continued accommodative monetary settings to support real GDP growth of 3.8% in 2017 and 3.0% in 2018, following a disaster-affected 0.4% growth outcome in 2016. Over the medium term, rising incomes in Asia, increased hotel development and government policies to boost tourism will help support continued growth in the sector. We expect agriculture output to strengthen in line with new investment initiatives.

Prospects for continued political stability and economic growth will provide a favourable context to the continued implementation of government policies that bolster economic and fiscal management.

These positive prospects are balanced by downside risks related to Fiji's vulnerability to negative shocks, particularly environmental risks, and ongoing hurdles to doing business that could weigh on economic growth momentum and public finances to a greater extent than we currently assume. Wider fiscal deficits in recent years and moderately high government debt would constrain fiscal flexibility in the event of any future potential negative economic shocks.

WHAT COULD CHANGE THE RATING UP

Upward rating pressure could develop as a result of 1) more robust economic growth, for instance through improvements in the business climate, which would allow a faster narrowing of deficits and debt consolidation than we currently expect, and 2) significant diversification of the tourism industry and expansion in new industries which would enhance the economy's resilience to negative shocks.

WHAT COULD CHANGE THE RATING DOWN

Downward rating triggers could stem from 1) a large external or domestic shock, perhaps stemming from a natural disaster, that would result in substantially weaker economic growth prospects and fiscal outcomes for a prolonged period, 2) the reemergence of domestic political risks that would disrupt economic and fiscal management, potentially strain relationships with IFIs, and in turn weaken institutional strength, or 3) balance of payments strains that would result in a deterioration in the foreign reserve position and raise repayment risks on external debt obligations.

GDP per capita (PPP basis, US$): 8,926 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.4% (2016 Provisional) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.9% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.0% (2016-17 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.4% (2016 Actual) (also known as External Balance)

External debt/GDP: 18.6% (2016 Estimate)

Level of economic development: Low level of economic resilience

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

On 04 September 2017, 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 not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

Matthew Circosta
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

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 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
Client Service: 852 3551 3077

No Related Data.
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