Financial crisis in Europe shadows economic outlook
On Friday morning government released the Budget Policy Statement for 2012/2013 and the Half Yearly Economic and Fiscal Update for 2011/2012.
Time does not permit a detailed comment on the documents in this issue and that will be reserved for next week’s Herald.
The critical item noted is the medium term policy, government has adopted in acknowledgement of a possible fall -out from the crisis in Europe concerning the Euro. Our government to its credit has adopted a cautionary approach because should the crisis affect NZ and Australia, there may be a flow on effect to our tourism in which case, our economy will be affected.
Government has gone so far as to make some predictions of this possible affect.
This is what the Update has to say about the overseas crisis:
“2.0 ECONOMIC UPDATE
The Cook Islands economy grew moderately in 2009/10 following a period of contraction in 2008/09.
Stronger growth over the forecast horizon is anticipated, however, there are risks to this growth.
The forecasted growth relies on the current global uncertainty not creating further contractions in our major tourism markets – which could potentially lead to a negative growth shift in the number of visitors expected to the Cook Islands. This economic update also provides a sensitivity analysis on what might happen to growth rates if this were to eventuate.
2.2 Sensitivity Analysis
The economic forecasts for the Cook Islands do have an element of risk around them.
A second global contraction affecting major destination markets might alter the number of tourists coming to the Cook Islands. Following the global financial crisis the growth rates of tourists from New Zealand and Australia was flat. The sensitivity analysis assumes no growth in New Zealand and Australian visitor numbers.
As a consequence reduced growth rate would result in lower revenue levels and almost eliminating the current net operational surpluses which are currently being forecast.”
During the last financial global crisis, the Democratic Party government, as a rather late measure, deposited $50 million into the banks to increase liquidity.
This time, government is not going to sit on its hands to see what’s going to eventuate. It plans to increase the cash reserves. This is what the document has to say:
“Government budget policy on the use of operating surpluses going forward
In its 2012/13 Budget Policy Statement, Government has explicitly stated that it notes the caution in the global economic environment.
Government will not seek to expend the higher levels of budget surpluses that have come about based on year to date activity. It will look to provision approximately half for policy initiatives over the next three years and allow the balance to be transferred into general cash reserves.
This provides for a healthy level of operating surplus; puts aside appropriate provisions for future budgets, and places government in a more favourable net worth position in a time of uncertainty. This is Government’s stated fiscal policy over the medium term.”
Regarding government’s establishment of a medium term policy, it is interesting to note a comment by World Bank Managing Director Sri Mulyani Indrawati who said in a Reuters interview on the sidelines of the Asia-Pacific Economic Cooperation summit in Honolulu, “Everybody expects this weakening of the European economy is going to be quite long because the adjustment is going to be quite severe and significant,” she said “That’s why they’re not just making sure that the policy response is going to be short term, six or 12 months, they’re thinking more medium term.”
U.S. Treasury Secretary Timothy Geithner commented that countries with the capacity to drive stronger economic growth should act now to buffer the global economic impact of Europe’s debt crisis.
Indrawati said many Asia-Pacific countries had space to increase government spending or reduce interest rates to spur faster economic growth.
“The logical thing in order for them to be able to maintain the (economic) performances is try to boost domestic demand,” she said.
For our government, driving stronger economic growth and boosting domestic demand is difficult. Tax revenue is barely enough to cover civil servant’s pay packets and bank loans for growth initiatives carry high interest rates. Those interest rates are likely to go higher as the crisis in Europe should drive up the LIBOR rates (the rates banks charge each other for inter-bank loans). During the last global financial crisis our banks maintained high rates because of the high LIBOR rate.
Economic growth may only be possible and affordable through low interest loans from China. -Charles Pitt

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