SI economy highly vulnerable to credit negative shocks

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SOLOMON Islands’ very small economy (nominal GDP of $1.1 billion in 2016) offers limited scope for diversification of economic activity and leaves the sovereign highly vulnerable to credit negative shocks.

This is according to Moody’s Investor Services.

Such potential shocks include Solomon Islands’ exposure to climate change, which poses significant economic and fiscal risks.

At the same time, resilience is low on account of the country’s low level of development, reflected in very low incomes, low quality of infrastructure and weak institutions.

These characteristics, Moody adds, are somewhat mitigated by low government debt levels that provide room for expansionary fiscal policy, if necessary, and the potential for physical assistance and financial support from international partners.

The economic base is narrow, reliant on agricultural and forestry production for around 30 percent of GDP.

The economy’s dependence on forestry resources — which are depleting at a sustained pace — and goods exports to China — which account for a sizeable 26 percent of GDP — raise the sovereign’s susceptibility to sector and market -specific shocks.

The Medium-Term Development Strategy 2016-2035 aims to bolster the economy’s resilience through new sources of growth and revenues, though the effectiveness of these measures has yet to be revealed.

Constraints on access to finance are a hurdle to strengthening economic output.

Moody adds that although banks are adequately capitalised, highly liquid and profitable, a potential further reduction in correspondent banking services could hinder the flow of credit to trade and investment sectors.

Incomes, with GDP per capita around $2,000 in 2016 at purchasing power parity, are very low relative to other B-rated sovereigns, despite more than doubling over the past decade.

“Furthermore, most economic and policy institutions are nascent.

“Solomon Islands’ rankings on Worldwide Governance Indicators, particularly government effectiveness and the rule of law, are low.

“Perceptions of corruption have the potential to hinder the implementation of key investment projects and stymie progress on economic development,” the released document states.

Lack of transparency, it adds, on parts of government funding and spending weighs on the operation of and reporting of the budget, particularly given the emphasis donors have placed on adherence to fiscal reforms.

Moody’s Investor Services then added that the country’s very small size constrains the effectiveness of institutions by subjecting Solomon Islands to factors beyond the control of domestic policymakers.

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