Rating Action: Moody's revises outlook on Fiji's B1 rating to stable

Global Credit Research - 13 Feb 2013

Singapore, February 13, 2013 -- Moody's Investors Service has today affirmed the B1 foreign and local currency long-term bond ratings of the Government of Fiji. The ratings outlook has been changed to stable from negative.

The key drivers for the decision are:

1. Improved fiscal and macroeconomic outcomes; and

2. The demonstrated stability of the external payments position.

Moody's also affirmed Fiji's long-term foreign currency (FC) bond and deposit ceilings at Ba3 and B2, respectively. These ceilings act as a cap on the ratings that can be assigned to the FC obligations of other entities domiciled in the country.

Fiji's local currency (LC) bond and deposit ceilings have been lowered to Ba2 from Baa1.

RATINGS RATIONALE

In 2011 and 2012, real GDP is projected to have grown by an average of 2.2%, materially higher than the average contraction of 0.2% over the four-year period following the 2006 coup. Despite softening somewhat in late 2012, historically high tourist arrivals have spurred tourism-related investments and driven economic momentum. Income tax cuts and declining inflation have also supported the recovery in household and business spending. Nevertheless, the Fijian economy continues to grow at a slower pace as compared to similarly rated countries.

Improved economic growth and revenue reforms have contributed to lower fiscal deficits, which have narrowed from around 4% of GDP in 2009 to a projected average of 1.5% over the past two years. The shift away from direct to indirect forms of taxation, such as the value-added tax (VAT), has broadened the tax base and improved compliance. In 2011, the VAT rate was increased to 15.0% from 12.5% and a capital gains tax was introduced, while the following year's budget was characterized by an across the board cut in income taxes for individuals and businesses. As a result, revenue performance is projected to have improved by nearly two percentage points of GDP from 2009 to 2012. Consequently, primary surpluses in excess of 2% of GDP have been restored and the stock of general government debt has stabilized at around 52% of GDP.

The downgrade of Fiji's rating in April 2009 was precipitated by a fall in foreign exchange reserves, which subsequently led to a devaluation of the Fijian dollar and the imposition of exchange controls. Since then, however, the country's current account deficit has narrowed, while the overall balance of payments has not been adversely affected by the selective liberalization of exchange controls. The exchange rate vis-à-vis the US dollar has consequently stabilized, improving debt sustainability, while the Fijian dollar's relative weakening against the Australian dollar has supported tourism prospects. Foreign exchange reserves have also rebounded to around US$895 mn currently from a low of US$240 mn in March 2009.

More favorable economic prospects may be contingent upon the restoration of electoral democracy. Political concerns have affected Fiji's ability to attract investments with FDI inflows falling from a peak of 13.3% of GDP in 2006 to 1.9% in 2009 before recovering to 6.1% in 2010, the latest data available. Although sanctions continue to be imposed by two of Fiji's largest neighbors, Australia and New Zealand, both of these countries have acknowledged sufficient progress towards elections in 2014 by restoring diplomatic ties in 2012.

Because of the political situation, Fiji has limited access to external concessional financing from multilateral and bilateral sources unlike other countries at comparable levels of development. However, the situation has been mitigated by the captive market for government debt provided by the country's superannuation fund, the Fiji National Provident Fund (FNPF). The fund's balance sheet is continuously bolstered by mandatory contributions from those employed in the formal sector, providing a reliable source of demand for government securities. As of October 2012, the FNPF held about 65% of the Fiji government's total outstanding LC debt. The long-term actuarial sustainability of the FNPF have improved due to reforms that took effect in March 2012.

WHAT COULD CHANGE THE RATING--UP

A positive rating action could be prompted by a substantial reduction in the government's debt burden and a further improvement in growth performance, which continues to be weak relative to similarly rated countries. The successful holding of elections and consequently lower political risks would also be credit positive.

WHAT COULD CHANGE THE RATING--DOWN

A negative rating action could result from the reemergence of balance of payments pressures or the return to materially weaker growth conditions—both of which could be prompted by an escalation of political risks—as well as a deterioration of recently stabilized fiscal and debt metrics.

METHODOLOGY

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's country ceilings capture externalities and event risks that arise as a consequence of locating a business in a particular country and that ultimately constrain domestic issuers' ability to service their debt obligations. As such, the ceiling encapsulates elements of the economic, financial, political, and legal risks in a country, including political instability, the risk of government intervention, the risk of systemic economic disruption, severe financial instability risks, currency redenomination, and natural disasters among other factors, that need to be incorporated into the ratings of even the strongest domestic issuers. The ceiling caps the credit rating of all issuers and transactions with material exposure to those risks -- in other words, it affects all domestic issuers and transactions other than those whose assets and revenues are predominantly sourced from or located outside of the country, or which benefit from an external credit support.

Other Factors used in this rating are described in Local-Currency Country Risk Ceiling for Bonds and Other Local Currency Obligations published in August 2012.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308