Credit ratings agency S&P recently downgraded Fiji’s credit rating to B+ from BB-.
ANZ in its Pacific Insight says notwithstanding this and the higher level of public sector debt due to COVID-19 induced stimulus spending, Fiji’s debt servicing ability remains intact.
It says development partner support is strong and this year’s budget deficit funding looks solid, with the government not requesting any relief from private creditors.
Most importantly, it says the 2021-22 Budget Papers show the government will pursue a fiscal policy of bringing the deficit and debt down over the medium term.
As these metrics trend down, Fiji’s debt affordability will improve.
It says the ratings downgrade is a reflection of Fiji’s economic recession in 2020; and the two previous downgrades, in 2007 and 2009, also coinciding with economic downturns.
Political uncertainty contributed to the recession in 2007, while the global financial crisis led to weaker output in 2009.
It says economic conditions are expected to improve over 2022, in line with a more open economy and S&P is forecasting a GDP growth of 6.2% for 2022.
It also says this may be a conservative estimate especially if, as is expected, tourists from Australia are allowed to holiday in Fiji from late December this year.
Accordingly, an upgrade in Fiji’s credit profile is more likely over the next year or two.
That said, a sovereign credit downgrade could see interest rates stabilise at current levels with talks of any general lending rate changes delayed until the credit profile improves.
The Insight also highlights that following the onset of the pandemic, the Fijian government had little choice but to use the fiscal policy lever, run a larger deficit, support demand and prevent a deeper downturn in the economy.
However, it says running back-to-back fiscal stimulus packages will see debt rise to $9.1bn or 92% of GDP in 2021-22 from $5.7bn or 48% of GDP in 2018-19.
It highlights that nonetheless, a switch to cheaper overseas debt last fiscal year has lowered the cost of debt, which has limited the increase in the debt servicing burden.
Record levels of foreign reserves are providing stability to the exchange rate and offshore interest payments.
In addition, it says Fiji has a decent economy, which will return to robust growth once the worst of the pandemic is over.
With an improving economy, the debt-to-GDP ratio should come down over time to more sustainable levels, providing Fiji with continued market access to run its development goals.