PRIVATE AND CONFIDENTIAL

16 March 2011

Debt Management in Fiji

2nd ADB Regional Debt Management Forum

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 PRIVATE AND CONFIDENTIAL

Republic of Fiji Representatives

David Kolitagane Isikeli Voceduadua

Deputy Secretary, Finance & Administration, Manager Debt & Cashflow Management Unit,
Ministry of Finance Ministry of Finance

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 PRIVATE AND CONFIDENTIAL

Agenda

Country Overview

Economic Review

Fiscal Policy Overview

Debt Management in Fiji

Conclusion

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 PRIVATE AND CONFIDENTIAL

Country Overview: A Key Hub in the Pacific

Overview
Overview Location
Location
 Fiji has a well-educated and mobile population of approximately 837,000
largely concentrated in two main cities of Suva and Lautoka (literacy rates in
excess of 90%)
 The main sources of foreign exchange revenue for the Fiji economy are
tourism, agriculture, and mining
 Given Fiji’s location and relative size, it serves as an important hub amongst
its South Pacific neighbors, its positioning consolidated with the recent
redrawing of the major international shipping channel from Asia to Australasia
via Fiji 3
 Fiji’s main trading partners are Australia, New Zealand, the US, the Eurozone,
Japan and increasingly China
 Fiji has a Sovereign Rating of B1 and B- from Moody’s and S&P respectively
 Fiji is an archipelago of approximately 330 islands in the South
Pacific approximately 2,700 km’s east of Australia

Key
Key Economic
Economic Indicators
Indicators

1
Converted to USD using an exchange rate of USD1.00 to FJD1.66, FJD1.55, FJD1.76, FJD1.98 and FJD1.55 for 2006 to 2010 respectively
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As at June 2010
3
Source: National Planning Office
4
4
Source: Fiji Bureau Statistics & Macroeconomic Committee
5
Source: Reserve Bank of Fiji
6
Source: National Budget, Fiji Economic & Fiscal Update: Supplement to the Budget Address
 PRIVATE AND CONFIDENTIAL

The Key Drivers of Fiji’s Economic Growth

GDP Growth Rate (%)1

4.0
1.9
2.0 1.3 1.2
0.8
0.2 0.1
0.0

(1.3) (0.9)
(2.0)
Revised / Provisional
(3.0) Forecast
(4.0)
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F

Key Highlights
 Removing inefficiency from recurring government expenditure and re-weighting spending toward key capital projects that will have a lasting social
and economic impact on the country
 Broadening the tax base while removing industry subsidies and concessions that have created economic distortion
 An open policy toward foreign investment combined with a pragmatic approach to providing incentives to attracting investment into key strategic
industries
 A significant review of land usage with a view to creating an available stock of land for commercial use within key industry sectors as well as creating
substantial scale efficiencies within the agriculture and forestry sectors
 An independent Reserve Bank that has met its objectives of rebuilding and maintaining foreign currency reserves as well as reducing domestic
inflationary pressure and maintaining financial stability throughout the financial crisis (as noted in a recent IMF report)
 Improving trend in the balance of payments coming from increased foreign exchange income from tourism and export industries as well as increased
foreign investment
 Strong rebound in tourism supported by a significant expansion in Fiji’s geographic tourist catchments, particularly from Asia, diversifying from a
traditional reliance on Australia and New Zealand
 Significant increase in exploration activity by major international mining companies with substantial projects currently at a post-feasibility or final
approval stage in gold, copper and bauxite with untapped opportunities in natural gas, oil and mineral sands2
 20 to 30 year revenue generating opportunities that have been untapped within the forestry sector3
1
Source: Fiji Bureau of Statistics, Macroeconomic Committee
2
Source: Mineral Resources Department, National Planning Office 5
3
Source: Department of Forestry, National Planning Office
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Key Economic Sectors generate flow of FX revenue

Key
Key Highlights
Highlights
 Fiji has a well balanced economy with key segments generating a steady supply of FX revenues, supporting reserves
 Agri, Forestry, Fishing, Mining and Tourism make up a significant proportion of GDP and are the first and second fastest growth
sectors
 Within other sectors of the economy further FX generating activities exist, with the opportunity for this to increase significantly
 Export Garment sector and Fiji Water are two current examples of manufacturing activities generating FX reserves
 Southern Cross fibre optic cable runs through Fiji connecting Australasia to the US and provides service industry-related FX
generating opportunities1
 Furthermore, Fiji has the potential to become a key assembly hub in the Pacific/Australasia for finished goods1
 Further analysis of the Tourism, Agriculture and Mining opportunities follow

Composition
Composition of
of GDP
GDP 2010
2010 (f)
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(f)2 Estimated
Estimated Growth
Growth by
by GDP
GDP Sector
Sector (2010f-2013f)
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(2010f-2013f)3
Sector 2010-2013 p.a.
Hotel & Restaurants
Financial, Real Agri, Forestry, Fishing & Mining 6.3%
5%
Wholesale & Retail Estate & Business
12% 18% Services Hotels & Accommodation 2.8%

Manufacturing 2.6%

Financial, Real Estate & Business Services 1.0%

Agri,
13%
Forestry, Wholesale & Retail 0.6%
Fishing & Tourism
18% General Services -0.4%
Mining 31%

Social Social Infrastructure -2.5%

15% Infrastructure
Notes:
Manufacturing 19% Blue denotes key sources of foreign exchange revenue
Social Infrastructure includes administration & defence, health & social
work, education and other community services
General Services General Services include electricity, water, transport, storage,
communications & construction
1
Source: Ministry of Industry & Trade, National Planning Office 6
2
Source: Reserve Bank of Fiji, Bureau of Statistics, Macroeconomic Committee
3
Source: Fiji Economic & Fiscal Update: Supplement to the 2011 Budget Address
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Fiscal Discipline with a Focus on Key Economic & Social Infrastructure

Fiscal Balance (% of GDP)1

2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F

Revised / Provisional
0.5
Forecast
-2.1
-3.4 -2.9 -3.5 -3 -2.5
-3.5
-6.6

 Widening of the Fijian tax base with increases to VAT and the introduction of a capital gains tax, while industry subsidies and
concessions have been removed to reduce economic distortions in the economy
 Significant enhancements in the efficiency of government spending via an active reduction in the size of the civil service with a
lowering of the retirement age to 55 from 60 as well as an increasing focus on the privatisation of state assets that will benefit from
the introduction of private sector expertise
 The government is committed to achieving a balanced budget by 20151
 A major refocusing of government expenditure toward the development of key social and economic infrastructure which will have a
lasting impact on future generations (representing 28% of total spending in the 2011 Budget), many of these projects will receive
bilateral support from foreign government and multilateral agencies including ADB and China EXIM

Select key infrastructure Projects1

Project Estimated Cost Exp Completion Date Economic Impact

Nadarivatu Dam USD 120mn Aug 2011 Will provide 80% of Viti Levu’s energy requirements
Queens Road Highway USD 40mn Dec 2012 Key transportation route for tourists and export goods
Rural Roads USD 95mn Dec 2015 Key transportation route for tourists and export goods
Fiji Sugar Restructure USD 55mn Dec 2012 Key export sector which will impact 100,000 households
E-Government USD 20mn Dec 2011 Enhanced revenue collection and reduced government expenditure
Low Cost Housing USD 35mn Dec 2015 Up to 15,000 new homes positioned in strategic urban growth areas

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Source: Ministry of Finance

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Agenda

Country Overview

Economic Review

Fiscal Policy Overview

Debt Management
Monetary in Fiji
Policy Overview

Conclusion

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Government Fiscal Debt Policy

o Government’s medium term debt policy is based on five (5) key objectives:
1. reduce net deficit.
2. increase operating savings.
3. ensure that the net deficit is wholly devoted to capital expenditures.
4. control contingencies and the rate of defaults.
5. implement appropriate debt and risk management strategies.
o Macroeconomic policy indicator

1. Is to reduce debt to GDP ratio to 40% in the medium term

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 Major Sources of Government Borrowing

 DOMESTIC
1. Bulk of Borrowing is sourced Domestically – this is through issuance of Bonds and Treasury Bills
2. Active Primary Market – commercial banks, NBFIs and Superannuation Industry actively
participate in Government Auction program (Fortnightly basis)
3. Secondary Market Trading is also encouraged but most bondholders hold stock till maturity
4. Primary Market is currently dominated by our sole Superannuation Industry
 EXTERNAL

1. External Loans are mostly for capital & Infrastructure Projects

ALL BORROWINGS ARE APPROVED BY PARLIAMENT DURING THE NATIONAL
BUDGET ADDRESS THAT NORMALLY TAKES PLACE IN NOVEMBER. BY JANUARY,
THE DEBT UNIT NORMALLY PREPARE AN FINANCING PLAN WHICH IS
FORWARDED TO ALL MARKET PARTICIPANTS AND LOADED ON
GOVERNMENT/RESERVE BANK WEBSITE. THE FINANCING PLAN SUPPORTS
MARKET PARTICIPANTS INVESTMENT PLANNING

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 PRIVATE AND CONFIDENTIAL

Low Levels of External Debt

Key Highlights Total Government Debt (FJD mn)1

 Fiji has an unblemished debt repayment history since its Domestic External Forecast
creation as an independent Sovereign nation in October 1970 3,448 3,594
3,132
2,863 2,735 2,887 845
 The government’s estimated outstanding debt for 2010 is FJD 2,423 613
476 528
417 397
164
3,448mn, equivalent to 58.9% of GDP
2,446 2,338 2,411 2,605 2,835 2,749
 Relatively low proportion of external debt with in excess of 80% 2,258

of the government’s debt denominated in FJD, placed into

domestic portfolios in tenors of up to 30 years, limiting the 2005 2006 2007 2008 2009 2010(F) 2011(F)

country’s exposure to foreign exchange risk and aiding in the

development of a more vibrant capital market1
 The government’s international bond issue of USD 150mn
Government Debt ( % of GDP)1
matures in September 2011.
 Additional external debt is provided in the form of concessionary Domestic External Forecast
58.9 58.2
lending from a range of bilateral and multilateral institutions 53.3 49.9 50.8
56.6
48.2 47.7
including the ADB and JBIC to name a few 3.5 7.8 9.5 10.5 13.7
3.2 7.2 8.4

 The government’s medium-term debt target is 40% of GDP1

44.7 44.4 45.5 42.6 42.4 47.1 48.4 44.5
 The government is committed to achieving a medium-term
improvement in the international credit ratings
2004 2005 2006 2007 2008 2009 2010(F) 2011(F)

1
Source: Ministry of Finance, Reserve Bank of Fiji, Macroeconomic Committee, 2011 National Budget Estimates
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Composition of Debt Portfolio

 Domestic: Bonds $2.75 billion, T-Bills - $95 million. The Bond maturities range
from 3 years to 30 years.

 External: sourced from Multilateral & Bilateral Agencies and through the
International Financial markets. ADB held bulk of External Loans.

ADB Loans Loan Amount

Fiji Road Upgrading Project III US$47m
Fiji Road Upgrading Project III US$27m
(Supplementary)
Suva-Nausori Water & Sewerage US$47m
Project
Suva-Nausori Water & Sewerage US$27m
Project (Supplementary)
Emergency Flood Recovery Project US$20m

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Special Issuance - Fiji Global Bond
 13 September 2006 – For the first time, in September 2006 the Fiji Government
successfully raise US$150m in the International Market. Tenor 5 years, Coupon 6.875%

 15 March 2011 – In ensuring successful rollover of the1st Global Bond, the Fiji
Government successfully raise US$250m in the global markets a week ago. Tenor 5
years, coupon was 9.00%. The 2nd Global bond issuance will support the funding of the
budget deficit, capital projects and assist in the repayment of the global bond maturing
in September 2011.

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TOTAL DEBT STOCK

F($M) 2007 2008 2009 2010

Domestic $2,337.8 $2,411.0 $2,605.0 $2,834.7

External $397.0 $476.8 $527.5 $548.5

TOTAL $2,734.8 $2,887.0 $3,132.5 $3,383.2

DEBT/GDP RATIO 49.9% 50.7% 53.0% 57.7%

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MAJOR CHALLENGES
On-Lending & Contingent Liabilities

Policy
 Government can only on-lend and provide guarantees to Entities in which it has major
shareholders(51% shares )
On-Lending:

 Total on-lending by Government amounts to US$45 million as at December 2010. Bulk of on-
lending relates to Government borrowing offshore and on-lend to State Owned Entities;

Contingent Liabilities

Total contingent liabilities outstanding Dec 2010 is $1.9b (US$940m), 33% of GDP. While the
rate of default has been minimal, Government is concerned that most of these entities are
operating at a loss for the last few years.

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 MAJOR CHALLENGES
Risk Factors

 Interest Rate Risk – borrowing costs is at high end of the yield curve. For 2010, average borrowing
costs was 9.10%
 Rollover Risk – heavy reliance on a dominant player, the risks of rollover of maturing securities is
likely to occur if main player is absent from market for so long
 Liquidity Risks – apart from Government, other corporate entities also raise funds in the domestic
market. The Reserve Bank normally ensures all stakeholders interest are accomodated in the local
capital market.
 Operational Risks – inadequate internal process, systems & external factors.
 Exchange rate risks – movement in exchange rates, especially in US Dollar, Japanese Yen and Euro.

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Major Challengers to Debt Management in Fiji

Increased Fiscal Discipline

High Operating Costs Net Deficit wholly committed to

especially in Salaries & Capital Expenditure
Wages

Heavy Reliance on
Reform of Public Enterprises to Superannuation Industry
bring about efficiency to reduce
burden on Budget
Availability of Economic &
Financial Data for comprehensive
Rising contingent liabilities and analysis
defaults

Coordination between
Fiscal & Monetary Policy

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Thank you

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