Triggered by the collapse of the US subprime mortgage market, the global financial crisis has led to an international crisis of confidence. Despite extensive support from governments and monetary authorities, there has been a squeeze on the availability of credit, international stock markets have fallen dramatically and a major downturn is now expected in the world economy. Commodity prices have eased from recent highs and large exchange rate realignments have taken place.

The crisis has already affected the Pacific by reducing the market value of the offshore investments held by the region’s Trust Funds and superannuation funds. Commodity export income will soon begin to decline. In PNG, the price boom that triggered a turnaround in economic growth in recent years is now over. Remittances and tourism activity are also likely to ease as economic growth slows in key source economies, and investment may slow as some major projects may find it harder to secure offshore funds at a reasonable cost.

The Pacific’s banking system does, however, appear to be well shielded from the most immediate effects of the crisis. The Pacific banking system raises and invests most of its funds within the region, and this has provided a barrier against the effects of the international credit crunch. Local supervision and monitoring of the region’s banking sector has improved considerably over time, and it is backed up by the offshore supervision of the overseas banks operating in the region.

The generally sound health of the Pacific’s banking system provides reassurance that it is well placed to cope with the immediate effects of the global financial crisis.

The global crisis nevertheless calls for a renewed look at financial sector surveillance. Once the immediate crisis subsides, there are likely to be international moves toward more integrated and standardized approaches to sector surveillance. The Pacific would benefit from ensuring it incorporates the lessons that will be learned from
crisis. There are likely to be opportunities to participate in some of the global regulatory and prudential reforms, and the Pacific could begin now to prepare for engagement. ...

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CONTENTS
Foreword v
Summary 1
The Global Financial Crisis 3
Is the Pacific at Immediate Risk? 9
Will the Pacific’s Growth Slow? 15
International Competitiveness 22
A Policy Response 25

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FOREWORD
The crisis in financial markets emerged at an alarming rate. The collapse of the US subprime mortgage market and its repercussions sent shockwaves through global financial markets that have challenged governments and monetary authorities, and will continue to do so over coming months. Against a volatile and uncertain background, this policy brief provides early advice on what the global financial crisis could mean for the Pacific Island economies.

The key message is that the Pacific Island economies are largely shielded from the most immediate effects of the crisis. The region’s banking system is reasonably well placed to weather the crisis, mainly because it raises most of its own funds from within the region. The generally sound health of the banking system provides further reassurance.

The global financial crisis, which has made a prolonged and painful recession in the United States and Europe almost unavoidable, will depress demand in several Asia Pacific countries and lower commodity prices. While the latter will provide some relief for the Pacific countries, particularly the most vulnerable nations, it has occurred because of a fall in world demand. The fall in world demand brings new concerns for the region.

Lower commodity prices will see the Pacific’s export income decline, remittances are likely to ease as source economies face challenging times, and tourism receipts will be adversely affected. The sharp decline in bourses means a number of the Pacific’s Trust Funds and superannuation schemes have already fallen in value and face a period of low income. ...

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