Pacific Economic Outlook: Moderating growth across developing countries in 2013

By Pacific Region Team on Wed, 27 March 2013

Written by Emma Veve, Principal Economist and Christopher Edmonds, Senior Economist 

ADB is expecting growth to moderate across ADB's Pacific developing member countries (DMCs) this year (including Timor-Leste), mostly as a result of solid but slower growth in a few of the region’s larger, natural resource–extracting economies. The region's growth has fallen from the post-global economic and financial crisis high of 8.3%, to 7.2% in 2012, and growth is projected at 5.2% in 2013. 

But with 14 developing member countries (DMCs) making up the Pacific region there is actually considerable variation in economic performance within the region. 

Regional averages are dominated by developments in the region’s largest economy, Papua New Guinea (PNG), whose size means that it has a 50.5% weight in determining the regional average. Growth in PNG slowed to 9.2% in 2012, down from 11.1% in 2011; and it is expected to slow even more in 2013 (to just 5.5%) before rebounding to 6.0% growth in 2014. These growth fluctuations are traced principally to resource flows related to the enormous liquefied natural gas (LNG) pipeline project. While this project is nearing completion the 2012 slowdown (albeit still very strong growth) was also influenced by declining oil production and moderating prices of some of PNG’s most important agricultural exports (i.e., coffee, copra, and cocoa). The good news for PNG is that this slowdown is expected to only be temporary, and with commencement of LNG exports though the pipeline in 2014, PNG’s growth is expected to rise.

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The PNG government is hoping deficit spending on needed upgrades in public infrastructure and services reduces the negative economic impacts of the project's completion. However, success will depend upon the government’s ability to meet expenditure plans—and ensuring the increased public spending has minimal inflationary impact and does not crowd out of private investment. The other consistently strong performer in the Pacific, Timor-Leste, continues to grow at high rates, but outside the oil sector the economy is dependent upon government spending and faces similar concerns about implementation capacity, and inflationary and crowding out effects.

Growth performance in the rest of the Pacific was notably lower (averaging 2.5% in 2012 after 2.8% in 2011), but offers some encouraging signs. The economic performance of a few of the tourism based small island economies in the region improved. Increased numbers of tourists from Australia, New Zealand, and East Asia drove GDP higher in Cook Islands and Vanuatu, and maintained solid growth in Palau. Higher phosphate revenues pushed up Nauru's growth. Infrastructure spending, higher fishing revenues, and increased lending and investment prompted higher growth in the Fiji, Marshall Islands, and Tuvalu. Growth in the other Pacific DMCs (i.e., Kiribati, the Federated States of Micronesia, Samoa, and Tonga) was down in 2012 mainly due to falling public expenditures on infrastructure as projects neared completion. Slower growth in Solomon Islands (in recent years the strongest performer among the smaller islands) was due to a drop in logging revenues.

Despite a modestly improving global economic outlook in 2013, growth in the Pacific islands is projected to slow to 5.2% due to the scheduled completion of large infrastructure projects in a number of these economies. Economic fallout from Cyclone Evan is expected to weigh down 2013 growth in Fiji and Samoa. Improved growth in 2014 (projected at 5.5%) is underpinned by commencement of public infrastructure projects across the region and continued improvement in the global economy.

Growth trends and forecasts for the Pacific point to the macroeconomic fragility of the Pacific countries. The sizeable fluctuation in the regional growth average that is tied to the construction and production schedule of the LNG pipeline project in PNG— admittedly a massive investment—shows that not even the largest Pacific nation is immune to the problems created by the region’s narrow economic bases. Reducing fragility and broadening the economies needs more private sector investment in the region, which, in turn, requires countries to improve their provision of basic public goods and investment environments.

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