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Moody's: Fiji's credit profile supported by continued improvements in economic and institutional strength; remains vulnerable to climate events

Moody's Investors Service says that Fiji's (Ba3 stable) credit profile is supported by continuing improvements in the country's economic and institutional strength, aided by political stability.

Government debt is moderately high, although Fiji's re-engagement with institutional financial institutions supports lower funding costs and improved debt affordability.

However, its economy and public finances are highly vulnerable to both sudden climate events and gradual climate change trends.

Moody's conclusions are contained in its just-released report on Fiji, "FAQ on climate change risk, policy effectiveness, and the country's fiscal and economic outlook".

The report addresses questions from investors and provides an overview of the key drivers of Fiji's credit profile. The report is a regular update and does not constitute a rating action.

Fiji's small size, lack of economic diversification and relatively low level of development increase the potential economic impact of climate change-related natural disasters.

In February 2016, Tropical Cyclone Winston, the strongest storm to ever make landfall in the Southern Hemisphere, damaged infrastructure and housing, and cut agricultural production, resulting in real GDP growth of only 0.4% for the year.

The impact on public finances and the current account has been modest, in part because of financial support from development partners. The government has implemented policies to enhance the country's resilience to climate events and trends, but the country's GDP growth and public finances remain vulnerable to weather-related events.

We also expect additional borrowing in the aftermath of the cyclone to come from domestic sources and external sources on concessional terms. We project government debt to rise to 46.5% of GDP in fiscal 2018, from 44.3% in fiscal 2017, before stabilising around these levels through 2020. Fiji's debt burden will remain moderately high, in line with the median of Ba3 rated sovereigns.

Furthermore, Fiji has taken a number of measures that improve its institutional framework and strengthen policy effectiveness. Effective tax cuts are bolstering revenue as a share of GDP to higher levels than many similarly-rated peers, denoting fiscal policy effectiveness.

The government is using these higher revenues for investment that will boost the economy's potential. These measures will help buttress the economy's ability to counter shocks.

In addition, political stability has been positive for Fiji's credit profile as it has supported macroeconomic stability, buoyed reform and improved the government's funding conditions. Continued GDP growth stamps the government's legitimacy and provides a favourable environment in which to implement policies that are likely to improve Fiji's credit profile. We expect continued political stability before and after elections in 2018.

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