PACIFIC ECONOMIC & MARKET INSIGHTS

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Contents

Global Economy 2

Commodities 2

PacificOverview 3

PapuaNewGuinea 4

Fiji 5

SolomonIslands 5

Samoa 6

Tonga 7

CookIslands 7

MarketRates 8

MacroForecasts 8

Highlights

• Globaleconomicgrowthforecastsfor2015were loweredto3.3%while2016growthwasraisedto3.8%bytheInternationalMonetaryFund(IMF). The distribution of risks is skewed to the downside,withfinancialmarketvolatilitybeinga majorneartermrisk.

• Commoditiescontinuedtoremainattheirlows, andsusceptibletovolatility.MostofPNGexportcommoditypricesfellovertheyeartoAugust2015,withcrudeoilfallingby49%yearonyear.

• The Pacific region has enormous opportunities forgrowthgivenitsproximitytooneofthefastest growingregionsoftheworld,Asia.

• All Pacific Islands economies are expected to growin2015and2016,exceptforVanuatuand CookIslands.Theeconomicimpactofthedisasters is prolonged, though we see recovery in reconstruction. The key challenge remains to buildresiliencetonaturaldisasters,whiletaking advantageoftheAsianCentury.

• PNGeconomicgrowthprojectionsfor2015,have been downgraded to 11.0% from 15.5% projected in the 2015 Budget. Government revenuewas revised downwards, with taxation revenuelowerthanexpected.

• AccordingtotheAsianDevelopmentBank(ADB), Pacificeconomiesareamongthemostvulnerable to natural hazards in the world. Estimates indicatethatanaveragecyclonereducesper capitaincomeby3.6%andacatastrophiccyclone by7.4%to15%.

GDPGrowth(%,annual)

June Quarter 2015

Source: ADB, BSP

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PACIFIC ECONOMIC & MARKET INSIGHTS

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Global Economy

Global growth is now projected to be 3.3% (downfrom 3.5% in April) in 2015, compared to 3.4% in2014.Thedownwardrevisionwasduetoasetbackineconomicactivity,mostlyinNorthAmerica.TheIMFcommentedinitsAprilupdatethatitwasatemporaryslowdownwithrecoveryremainingontrack.

Growth in advanced economies is expected toincrease to 2.1% in 2015, from 1.8% in 2014. Theunderlyingdriversforgrowthincludeeasedfinancialconditions, more neutral fiscal policy in the euroarea, lower fuel prices, and improving confidenceandlabourmarketconditions.

Emerging and developing economies are projectedto moderate to 4.2% in 2015, from 4.6% in thepreviousyear.Theslowdownreflectsthedampeningimpactof lower commodityprices,tighterexternalfinancialconditions(particularlyinLatinAmericaandoil exporting countries), the re-balancing in China,andstructuralbottlenecks.

TheAustralianeconomyisestimatedtogrowby2.7%in2015,beforeimprovingto3.0%in2016.GrowthinNZ is expected to growby 2.9% in 2015 and by3.1 % in 2016 due to lower government spendingandfixedcapitalformationdespitetheriseinprivateconsumptionandnetexports.

Commodities

The IMF Commodity Market Monthly (16 June)reportedthatcommoditypricesfellby1.6%inJune,drivenbypricedropsinmetalsandenergy.

Crudeoilpricesfell1.9%inJune,averaging$61.3perbarrel,duetostrongOPECproductionandpossiblesuspensionofsanctionsagainstIran.Crudeoilpricefellby49%to$49.2perbarrel(y-o-y)toAugust2015.

Metal prices are expected to remain broadlyunchangedowing to slowingdemand in China andincreasesinnewcapacity,althoughtherehavebeensomesupplydisruptions.

Overthe12-monthstoAugust2015,thegoldpricefellby12%toUS$1,135.TheGoldpriceisexpectedto increaseby3%toUS$1,231at theendof2016.SomeanalystshaveforecastthegoldpricetoaverageUS$1,220anouncein2015.

Palm Oil declined by 5% over the 12 months toRM1,928 per metric ton as at August 2015. PNGcommoditiespricesare forecast to fall in the shortterm, with crude oil expected to be hardest hit.Prices for PNG’s main commodities were mostlydownin2015YTD,drivenbychanges inthesupplyanddemandfundamentals.

Pacific Overview

The Pacific region is expected to grow by 9.9% in2015, compared to 6.1% in 2014. The downgradeinPNGgrowthexpectationshasloweredthePacificregions,growthestimatesfromthe10.7%projectedinMarch2015(ADBPacificEconomicMonitor,July15).

Figure1:GlobalGDPGrowth(%,annual)

Figure2:CommodityPriceIndices(2015=100)Source: IMF Data, BSP.

Source: IMF commodity market monthly, June 2015

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AccordingtotheADB,annualgrowthrateshavebeenhighlyvolatile inthesmallerPacificeconomies,buthave generally averaged around 2%. Larger Pacificeconomieshaveperformedbetter,withresource-richPNG,Timor-Leste,and, toa lesserextent,SolomonIslands, all enjoying high growth since 2005. Thenatural disaster in Vanuatu is expected to dampeneconomicactivityintheshortterm.

Inflationeased inmostPacific Islandcountries, theresult of falling international oil prices. Inflationis expected to increase to 4.7% in 2015 and slowslightlyto4.0%in2016.ThisisprojectedtobedrivenbygovernmentspendingandcurrencydepreciationinPNG.

Tourism isaneconomicdriver in thePacificregion,givenacompetitiveadvantageintourism.Australiacontinueditsdominanceasthelargesttouristsourcemarket (34.7%) followed by New Zealand (19%).ChinesetouristsvisitingPacificIslandCountries(PIC)has increased as well. Recent data from the ADBshowedthatdeparturesfromNewZealandtoSouthPacificcountriesroseby7.9%inJanuary-April2015compared with the same period last year. PacificcurrencieshavebroadlyweakenedoverthequarterreflectingastrongerUSD,weakercommoditypricesandsofterAUDandNZD.

Papua New Guinea

PNG economic growth projections for 2015 wereloweredto11.0%intheMidYearEconomic&FiscalOutlook Report 2015 (MYEFO) compared to 15.5%estimatedinthe2015Budget.Thefallincommodityprices, especially the oil price, will impact growth,withPNGDepartmentofTreasurydirectedtofurnishamini-budget.

Totalnon-miningGDP isexpectedtogrowat4% in2015, rebounding from the slower growth of 1.4%in2014.Thepick-upinthenon-miningsectorisdueto the rebound in the construction sector, leadingtowards the Pacific Games 2015 and associatedinfrastructurespending.

On 18 May, Moody’s credit ratings agency movedPNG’ssovereigncreditratingtoa‘negativeoutlook’.The rating agency cited fiscal deterioration, aweakenedexternalpaymentspositionandincreasedexternal vulnerability as the main factors for themove.

Consumer Price IndexAnnual headline inflation increased by 6.1% inthe March quarter of 2015, compared to 6.6% inDecember 2014. According to BPNG, retail priceindex(RPI)toJuneincreasedby5.9%,comparedtoanincreaseof2.7%inMay2015.Thisoutcomewasdrivenbyincreasesinthe‘food’,and‘drink,tobaccoand betelnut’ expenditure groups, combined withincreases in the ‘non-durable goods’ and ‘medicalandhealthcare(exc.Hospital)’sub-groups.

Inflation expectations for 2015 are between 5.0%and 6.0%. Bank of PNG projects trimmed-meaninflationandtheexclusion-basedinflationtobe3.0%and 4.0%, respectively. High inflationary pressureis likely to be exerted from high import demandcompounded by relatively lower supply of foreignexchangeliquidityinthemarket.

Figure3:PacificGDPGrowth(%,annual)

Figure4:Inflation(%quarterly)

Source: Bank of PNG, BSP.

Source: IMF Data, BSP.

PACIFIC ECONOMIC & MARKET INSIGHTS

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PNG Exchange RatePNGKinacontinuedtodepreciateagainstUSD,duetohighimportdemandresultingfromhigheconomicgrowthandlowcommodityprices.TheaveragekinaexchangeratedepreciatedagainsttheUSDby7%to0.3565,whileithasappreciatedagainstAUDby5%to0.4891overtheyearto31stAugust2015.Cross-currencymovementsimpactedPGK/AUD.

Since the introduction of the trading band in June2014,theexchangeratehasmovedinlinewiththesupplyanddemandfor foreigncurrency.BPNGhasintervenedwithUS$570.9m (PGK1.48b) to supportkinain2014.SincetheFXband,PGKdepreciatedby14% toUSD0.3565. Therewerenoted shortagesofforeigncurrenciesinthemarket.

ThedepreciationofKinawill impactPNG’sexternaldebt position, interest payments and foreignexchangereserves.GrossforeignexchangereserveswereUS$2,058.8mattheendofMay2015(sufficientfor 9.0 months of total and 13.9 months of non-mineralimportcover).

Fiscal Position

Thegovernmentcontinuedexpansionaryfiscalpolicyin2015,withthedeficitbudgettobefundedmainlyfrom domestic sources. The government’s revenuewas impacted by the fall in oil price, with 2016expectedtobeachallengingyear.

AccordingtoMYEFO2015,totalgovernmentrevenuewaspressuredbythecontinuedfall inoilpriceandhigh expenditure plans. Revenuewas estimated atPGK2.4b,whiletotalexpenditurewasPGK5.5battheendofMarch2015.ThedebtfinancingrequirementstoodatPGK3.1b,whichwillmostlyberaisedonthedomesticmarket.

Total expenditure for the first three months toMarch 2015 was PGK1.8b, 4.9% lower than in thecorrespondingperiodof2014.Thiswasduetolowerrecurrent expenditure, which more than offset anincreaseindevelopmentexpenditure.

Fiji

AccordingtoReserveBankofFiji(RBF),Fiji’seconomyisprojectedtogrowby4.3%(ADB:4.0%,IMF:3.3%)in2015,withaslightaccelerationto4.5%expectedin2016.Growthisexpectedtobebroad-based,withtourismandsugarsectorsattheforefront.

Inflationwas up by 2.5%overApril, resulting fromthe increase indomesticand imported inflation. Inannual terms, the inflation rate declined by 1.5%due to global energy prices being 25% lower thantheprevious year. Inflation is expected to continueremaininglowbetween0-3%.

Tourismremainstheprimarydriverofgrowth,withvisitorarrivalsincreasingby7.5%(y-o-y)overthefirst4monthsof2015(ADB,PEM,July2015).FijireceivesthehighestnumberofvisitorsfromAustralia.

Figure5:PNGExchangerate(%,monthly)

Figure6:FiscalOperations

Source: Bank of PNG, BSP.

Source: MYEFO 2015, PNG Dept. of Treasury.

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Thegovernment’sfiscalstimulusinthe2015budgetwillincreasepublicexpenditureontransport,energy,and water supply and sanitation infrastructure.Whilstmonetarypolicyremainsaccommodative,thefiscal stimuluswill increase demand and economicactivity. According to RBF, investment to GDP willremainabove25%whilethedeficitisexpectedtobearound2%ofGDPin2015.

The banking sector in Fiji continued to grow, withRBF data indicating an increase in new lending forconsumption and investment purposes. Accordingto the RBF Governor, new lending for investmentpurposescumulativetoApril2015hasgrownby75%from2014compared toannualgrowthof11% lastyear(Governor’sspeech,16July,LaunchofBSPLife).Thecommercialbanks’weightedaverageoutstandinglendingrate increasedto5.78%in June2015, from5.72%inDecember2014.

Creditconditionsareexpectedtoremainconduciveforgrowthandinvestmentthisyear.Fiji’sinterestratespreadislowerthanmostPacificIslandcountries.

Solomon Islands

Economic growth is expected to remain at 3.0%in 2015, supported by foreign direct investment,resumption in mining, donor or governmentinvestmentandmajorinfrastructure.

Loggingisstillasignificantandimportantpartoftheeconomyaccountingfor15%ofGDPandlogexportsaccountforaround14%ofrevenue.

AccordingtotheCentralBankofSolomonIslands(CBSI),monthlyproduction indexdeclinedby9%inMarch2015to75points,comparedto21%surgeinFebruary.Thedeclinewasdrivenbyfallsinlogoutputandfishcatch,supportedbytheslowdownincopraoutput.

Log production, measured by export volumesreached a highof 2.1 billion cubicmeters in 2014,a12%increasefromthepreviousyearof1.9billioncubicmeters.TheIMFprojectslogpricetoincreasein2015,howeverthereisconcernonthedepletionoflogs.

Headlineinflationdeceleratedtonegative3%inApril,from-0.3%inthepriormonth.Thiswasattributedtodomesticinflationfallingbelowzeroto-3.3%,whileimportedinflationremainednegativeatminus1.8%.Thefall infood,drinksandtobaccopriceswerethemain contributors. CBSI reported that the averagefuelpriceinHoniaraeasedinMayto$8.50perlitre,followinganincreaseinthepreviousmonth.

Figure9:GDPGrowth(%,annual)

Source: IMF data, BSP.

Figure8:BankingsectorinFiji

Source: RBF Deputy Governor’s presentation, 15 July 2015.

Figure7:VisitorArrivals(%,quarterly)

Source: Fiji Bureau of Statistics, BSP.

PACIFIC ECONOMIC & MARKET INSIGHTS

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On the foreign exchange market, the SolomonIslandsdollar(SBD)appreciatedagainsttheUSDby2% and 4.8% to 0.1255 over the month and yearto July respectively. It has depreciated against theAUDby2% (mom)and6.4%(ytd) to0.1689at theendofJuly.Thegovernmentrecordedapreliminarydeficitof$40minMaydrivenbya24%increase intotal expenditure to $240m against the previousmonth. Total revenue collection remained broadlyunchangedat$200m.

Samoa

Economic growth is expected to grown by 2.3% in2015, driven by higher tourism earnings andremittance-relatedspending’s.Thetsunami in2009andCycloneEvanin2012causedestimateddamageand losses equivalent to 25% to 30% of GDP, andledtosharpcontractionsoftheeconomy.Recoveryis underway supported by development partnerfundedreconstruction.

ADB (PEM, July 2015) projects growth in Samoato moderate to 1.9% in 2016, driven by weakagriculture and non-food manufacturing output inrecentmonths.Inaddition,thegovernmentplantoreduceoverallexpenditurebyabout2%inresponseto lower external grants and higher external debtservicepaymentsaslargebilateralloanscomedue.

Tourismremainstheprimarydriverofgrowth,withvisitor arrivals increasing by 6.1% (y-o-y) over thefirstthreequartersof2015.Visitorarrivalspurposescontinuedtobefor ‘holidays’withtourismreceiptsrecordedatWST22mat theendofMar’15,havingrisenby7.7%(y-o-y).

Inflationwas up by 2.2% in the first 10-months of2015,mainlyfromimportedinflation.

Inflation is projected to remain at 2.0% in 2016.AccordingtotheCentralBankofSamoa(CBS),totalcommercial bank lending increased by WST136mor 18% to WST905m over the 12 months to May2015.CBS(March2015)notedthattheincreasewasdueentirelytoexpansionsofcreditdirectedtotheprivatesectorandpublicinstitutions.

On market interest rates, the weighted averagedeposit rate also declined to 2.47% in June 2015,down from 3.11% in May 2015. Likewise, theweighted average lending rate dropped to 9.43%from10.32%inMay2015.

Tonga

The Tongan economy remains stable, with alleconomic indicators reflecting positive growth.Tonga’s external position also strengthened, asgrantsandremittanceinflowsbolsteredinternationalreservestoTOP287mattheendofJanuary2015.

Inflationfellby0.7%inJun’15,andby0.6%YTDasaresultof low importedanddomesticprices.Bothimportedanddomesticpricesdroppedby1.0%and0.2% respectively, with low food prices being thedominantdriver.Thefallinglobalcommoditypriceshas also impacted inflation. The total remittancesreceipt for the month of April was $16.3m,representing44.5%of theTotalOverseasExchangeTransaction (OET) Receipts. Remittances continuedtobeoriginatedmainlyfromNZfollowedcloselybyAustralia.

Figure10:EconomicGrowth(y-o-y%change)

Figure11:EconomicGrowth

Source: ADB data, BSP.

Source: IMF data, BSP.

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NationalReserveBankofTongareported(May2015)thattotallendingincreasedslightlyoverMayby0.9%,drivenmainlybya1.1%riseinhouseholdloans.Theincreaseinhouseholdloanswaslargelyattributedtoariseinotherpersonalloans,whichwassupportedbylendingactivities.

Weighted average interest rate spread widenedinMay from5.92% to6.27%, reflectinga5.3basispoints increase in weighted lending rate to 8.32%,anda2.7basispointsriseinweighteddepositrate.The increase was due to a significant increase inbusiness loans interest, whilst increases in savingsand term deposit rates drove the rise in weightedaveragedepositrates.

Cook Islands

Real GDP is forecast to grow by 1.4% in 2015/16,drivenlargelybyshiftsinpublicspendingespeciallytheTeMatoVaiandtheSouthernGroupRenewableEnergyProject. This is expected tooffset theweakgrowth in tourism. Tourism remains the largestindustry in theCook Islands,accountingforaround60%of the economy. According to ADB (PEM, July2015)visitorarrivalsdroppedby2.2% in thefirst3quartersofFY2015(ended30June)fromthesameperioda year earlier.According to2014/15budgetestimates,growthintouristarrivalsisforecasttoslowto1.7%in2014/15and1.9%in2015/16,reflectingtheongoingsoftnessinkeymarkets.

Continued efforts have been made to boostthe tourism industry, with the Prime Minister,Honourable Henry Puna, announcing streamliningof department document requirement, effective1 Aug’15. This is expected to boost tourism in theeconomy.Inflationincreasedby1.3%inJunequarter2015, and by 3.04% on an annual basis. Transportgroup and apparels showed the highest increaseinMarch,withtheformercausedbyanincreaseinInternational airfares (up by 8.5%). To discouragesmokers, the government raised the excise tax ontobaccoby33.0%inJuly2014,whichwillpositivelyimpactgovernmentrevenue.

RobinFleming-GroupCEOrfleming@bsp.com.pg

PeterBeswick-GroupGMCorporatepbeswick@bsp.com.pg

PaulThornton-GroupGMRetailpthornton@bsp.com.pg

RohanGeorge-GMTreasuryrgeorge@bsp.com.pg

RichardBorysiewicz-GMBSPCapitalrborysiewicz@bsp.com.pg

AhoBaliki-GMParamountabaliki@bsp.com.pg

Malakai Naiyaga-MD,BSPLife,Fijimnaiyaga@bsp.com.fj

MathewHasu-SnrMgrCorpStrategymhasu@bsp.com.pg

JotamSinopane-Analystjsinopane@bsp.com.pg

KevinMcCarthy-FijikmcCarthy@bsp.com.fj

DavidAnderson-SolomonIslandsdanderson@bsp.com.sb

DavidStreet-CooksIslanddstreet@bsp.cpm.pg

DanielHenson-Tongadhenson@bsp.com.pg

MaryannLamekoVaai-Samoamlameko-vaii@bsp.com.pg

KEY CONTACTS

COUNTRY MANAGERS

Figure12:TourismGrowth

Source: Cook Islands Statistics office, ADB, BSP.

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FOREIGN EXCHANGE APRIL MAY JUNE LATEST(31/08/15)PGK/USD 0.3715 0.3675 0.3645 0.3565FJD/USD 0.4874 0.4893 0.4809 0.4634SBD/USD 0.1319 0.1294 0.1292 0.1255WST/USD 0.4045 0.3993 0.4025 0.3891TOP/USD 0.5072 0.5072 0.4777 0.4851NZD/USD 0.7602 0.7309 0.689 0.6454

COMMODITIESAPRIL MAY JUNE LATEST(31/08/15)

Oil(US$perbarrelWTI) 59.6 60.3 59.5 49Gold(US$perounce) 1,184 1,190 1,172 1,135Copper(US$permetricton) 6,335 6,015 5,765 5,135Nickel(US$permetricton) 13,915 12,588 11,932 10,033PalmOil(MYRpermetricton) 2,070 2,170 2,224 1,928Coffee(US$perLB) 144 132 136 124Cocoa(US$permetricton) 2,914 3,066 3,262 3,099Sugar(US$permetricton) 375 349 365 341Lumber(US$per1,000feet) 256 274 288 223

Real GDP Growth (%, annual)2013 2014 2015F 2016F

PNG 5.0 8.4 11.0 5.0Fiji 4.6 4.5 4.0 4.5SolomonIslands 3.2 1.0 3.0 3.5Samoa 0 1.9 2.3 1.9Tonga 0.8 2.4 2.4 2.6CookIslands 1.2 2.1 2.1 -0.3

Fiscal Balance (% of GDP)2013 2014 2015F 2016F

PNG -7.8 -6.9 -9.4 2.5Fiji -0.5 -2.0 -2.5 -2.0SolomonIslands 2.3 -1.3 -3.5 3.0Samoa -6.1 -4.8 -4.2 -3.9Tonga -1.1 -0.2 -0.1 -0.2CookIslands - -5.4 -7.4 -6.1

Foreign Exchange Reserves (USD m)2013 2014 2015F 2016F

PNG 2,750 2,296 2,059* 3,373Fiji 937 913 872 780SolomonIslands 515 530 550 550Samoa 137 155 156 160Tonga 140 138 140 140CookIslands na na na na

Inflation (%)2013 2014 2015F 2016F

PNG 4.7 6.6 4.9* 6.0Fiji 3.4 0.1 2.5 3.0SolomonIslands 5.8 4.8 3.0 5.5Samoa -0.2 -1.2 2.0 2.0Tonga 1.0 1.5 0.4 1.0CookIslands 1.9 2.1 2.4 1.4

*MYEFO2015

MACRO FORECASTS

MARKET RATES

Economic Data Sources:PNG: Department of Treasury, Bank of PNG, Asia Development Bank (ADB), BSPFiji: Reserve Bank of Fiji Solomon Is: Central Bank of Solomon Islands, ADB, BSPSamoa: Samoa Bureau of Statistics, ABD, IMF, BSPCook Is: Financial Supervisory Commission, ADB, IMF BSPCommodity Prices: Bloomberg

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