The Vanuatu Business Outlook

The Vanuatu Chamber of Commerce recently commissioned a survey of the private sector to provide a snapshot of the effect the economic crisis created by the Corona Virus and TC Harold on the business sector. The survey was conducted over a 5 week period between the 20 August and 22 September. 86 different businesses were interviewed across a wide selection of the economy, along with an online survey of 203 respondents covering 15 different subsectors. There was a specific focus on businesses that conduct trade with the rural areas/provincial islands to obtain a sense of what is happening outside of the urban economy.

The data that has emerged from this survey is clear. The Vanuatu Business Outlook is in serious decline as demand has fallen and businesses report revenues that are much lower that the same period in 2019. The subsequent report that was published only presented the data obtained and did not provide any economic analysis of the underlying reasons for the situation that Vanuatu is facing. There had already been problems with the economy in preceding years with the Banking sector reporting lower levels of lending in 2019. The COVID-19 crisis has only highlighted the vulnerabilities of the economy and exposed some harsh truths about it reliance on any one sector as a driver of economic growth.

9 Key points came out of the survey

1.Border Closures have meant that there are no international visitors coming to Vanuatu and the spending they bring.

2.Due to the loss of employment and reduced working hours, for many workers, consumer spending has dropped dramatically. In addition to this, there is still a large number of expatriates, who are traditionally high spending, that have not returned to Vanuatu. As a result, household incomes have reduced even if employment within the public sector has remained unaffected.

3.As a result of a drop in consumer spending and loss of confidence, local businesses have embarked in cost cutting measures to survive which has resulted in reduced spending within the community for services.

4.Financial institutions have reported a collapse in new loans for business investment indicating very little confidence in the future outlook of the economy.

5.Logistical costs of shipping have increased due to the fall in frequency of shipping and airfreight services and this has pushed up costs.

6.The online survey results showed that there is very low confidence in the future for the economic outlook and many businesses have indicated intentions to continue staff cuts which would in turn lead to lower consumer spending. It appears to be a downward spiral created by lack of confidence and uncertainty.

7.The economic downturn is worldwide resulting in reduced global demand for merchandise exports which is affecting the export sector.

8.The remittances of seasonal workers from Australia and New Zealand have stopped as they are repatriated. There used to be roughly 5,000 seasonal worker. who would remit approximately 400,000 per year. This calculates to about VT2B per year which is no longer coming in to the country.

9.Border closures has also limited the access of local businesses to skilled technician who would normally be able to travel to Vanuatu to provide specialized services in the maintenance of specialized machinery.

Highlights from the survey report and the case studies

•All sectors have experienced falls in revenue.

•Current very low levels of demand are likely to continue and worsen

•It is highly likely that a number of businesses will close and not re-open with the smaller firms at higher risk.

•Demand for Kava in Port Vila has dropped 40% resulting in the price falling 30%. This situation is likely to continue and worsen affecting incomes for kava farmers in the islands.

•Confidence and business investment are exceptionally low with Banks reporting very little appetite for new loans

•All sectors of the economy have experienced falls in revenue.

•Sales from VAS to small farmers has fallen 40% suggesting that demand for farm produce has also fallen.

•Kava Exports remain buoyant.

•Domestic Demand for fisheries has fallen as demand from the Tourism sector has stopped

•Construction is a mixed picture due to TC Harold reconstruction in Santo but, 2021 is likely to see a worsening outlook for construction in the absence of any large scale projects.

•UNELCO disconnections have increased from 800 per month to 2,000.

•Demand for utilities down substantially due to large consumers like the major resorts being closed.

•Retail and wholesale of food dropping 17%

•Tafea Land Transport has reported a sharp fall in demand for land transport resulting in operators reducing the charges for the Whitesands to Lenakel trip, from 500 vatu to 200 vatu.

•Overall changes in revenues across all sectors was -50% and -40% excluding Accommodation and Hospitality.

•The businesses surveyed reported a -22% change in Full time employees with 46% of these businesses planning to make staff redundant.

The report was released to the public before the National Business Forum which was conducted over 2 days at the National Convention Centre on the 30 Sept and 1 October.

The National Business Forum

The Business Forum was organized by the VCCI focusing on dialogue between the Vanuatu Government and the Private sector to acknowledge and agree on the present state of the economy with the objective of bringing together all stakeholders to agree on common goals on how the country could move forward sustainably.

There was a high participation rate at the Forum with attendees from the private sector, local Media, the leadership of the Opposition and the representatives of the government departments. Noticeably absent from the Forum were Parliamentary MP’s on the Government side. On the first day, there were presentations from the Government and the VCCI commissioned Survey Report.

The DG’s of the Prime Minister Office, the Ministry of Finance, and the Ministry of Agriculture all acknowledged the importance of engaging with the private sector to come up with ideas on how to rebuild the economy Post COVID-19 and agreed that a priority of the Government was to create an environment that was conducive to business opportunity and investment through better Connectivity between the Markets, transport infrastructure and better communications

August Letlet, The DG of Finance advise the Forum of the following

•Tax Income as a percentage of Government revenue was falling due to increases in Non Tax Revenues streams, ie Sale of Passports but this situation was unsustainable in the long term

.• The Government spendingcontinues to remain positiveagainst GDP growth.

• Private Sector investment overthe last few years had fallen withthe savings level in the country atuncomfortably high levels and thatthis has contributed to the lowerdemand within the economy.

• The forecast for 2020 was for theEconomy to contract 4.1%

• In 2021, the Government will implement an expansionary budget and commence large scale infrastructure projects that were meant to start in 2020 but had been postponed due to COVID19.In addition, EDF11 funding for the productive sectors will also come online in 2021 further complementing the planned expenditures on infrastructure

• As a result of the Government Expansionary Budget, despite low confidence from the private sector, growth was forecast to be 5% in2021.

The Government representatives continued to emphasis the message that its priorities were to redirect fiscal support to the primary sectors of the economy. There was no mention on how the Government would address the problems of business confidence and how to stimulate consumer spending.

Following the presentations from the Government, the VCCI presented the results of the surveys and the report. The common theme of this report was the linkages between all sectors of the economy. The border closure and large downturn in demand in one sector had resulted in the flow on effects to other sectors with large falls in revenues being reported by all businesses surveyed. AQ& A session followed the presentations.

Many topics were discussed during the Q&A session. Highlights of this was the statement by DG Leltlet that the amount of liquidity within the banking system was too high, and that businesses needed to invest. However the high cost of borrowing was affecting business investment and that the Government was considering implementing a scheme to provide cheap sources of funding through an interest rate subsidy on a VT3B facility. How this was to be implemented was not clear. They acknowledged that even with the ESP the private sector has still struggled financially and there is very little confidence.

On Day 2 of the forum, presentations were given by the Governor of the Reserve Bank and representatives from NBV and ANZ banks. The Reserve bank presentation of the fiscal outlook in Vanuatu was that despite the depressed business outlook, Vanuatu was in a sound fiscal position to withstand the economic downturn due to the large reserves it had accumulated over the years. Private sector lending had already been weakening in prior years andCOVID-19 had only made the problem worse.

The Banking sector then gave their presentations and re-affirmed their commitment to provide support to their client base through interest rate reductions, loan repayment deferrals and the waiving of fees. Both Banks have committed to providing additional support to their clients, of increasing their risk appetite for lending, but what was not mentioned was the position of the banks for those clients who no longer have a sustainable business, and are unable to repay or service their loans.

The picture that has emerged from the survey and the Business Forum is that there will be a large scale restructuring of the business environment postCOVID-19. A lot of businesses will close with the possibility of high impairment losses on the balance sheets of the Banks. The uncertainty as a result of COVID 19 and a possible vaccine and when it will all end, is still weighing on business confidence despite the strong fiscal position of the Government. Based on the outcomes of the Forum, a leaders Dialogue with 6 representative search from the Private Sector and the Government will be held in October. Whatever needs to be done to address the Economic Downturn in 2020 will not be led by the Private sector but by Government Actions and Policy.


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