## 1. Effect of Recent Natural Disasters on Debt

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### Context and key background
- Samoa is one of the most remote Pacific islands and is dependent on tourism, remittances and development aid.
- Samoa was hit by a tsunami in September 2009 and cyclone Evan in December 2012, which caused major destruction and prompted government requests for Rapid-Access/ Rapid Credit Facility disbursements in 2010 and 2013.
- Reconstruction is estimated to have cost 40 percent of GDP and added about 15 percent of GDP to Samoa’s external debt.
- Debt (mostly external) rose from 30 percent of GDP in 2008 to 55 percent in 2014, above the authorities’ medium-term target of 50 percent of GDP.
- Contingent liabilities: a subsidized lending program through public financial institutions (PFIs) and government guaranteed debt in state-owned enterprises (SOEs) represent contingent liabilities for the public debt.

### Findings from Box 1 — Effect of Recent Natural Disasters on Debt
- Using a synthetic control approach:
  - The tsunami in 2009 was responsible for an increase in debt of 10 percent of GDP.
  - The cyclone in 2012 led to another 5 percent of GDP increase.
  - Together, the two natural disasters added about 15 percent of GDP to Samoa’s external debt.
- Reconstruction costs of 40 percent of GDP:
  - 23 percent of GDP for the tsunami in 2009.
  - 17 percent of GDP for cyclone Evan in 2012.
- On average, Samoa has been hit by a major natural disaster once every five years.
- Policy implication: to create a cushion for another natural disaster, Samoa’s debt target should aim at 40 percent of GDP over the longer term, given the authorities’ medium-term debt ceiling of 50 percent of GDP.

### Recent macroeconomic developments linked to disasters
- Growth and inflation:
  - Real GDP expanded by around 2 percent in fiscal year 2013/14 (July to June), supported by reconstruction activities and events (SIDS conference) and a recovery in agriculture.
  - Underlying inflation (excluding food, transport and communication) remains stable at around 2 percent.
- External sector:
  - The external current account widened to 8 percent of GDP in 2013/14 following cyclone Evan as imports rose and exports lagged.
  - Reserves rose to 4 months of prospective imports of goods and non-factor services in 2014.
- Fiscal and monetary stance:
  - Fiscal deficit reached 5.3 percent of GDP in 2013/14 (GFS 2001).
  - Policy rate at the zero lower bound since 2010; exchange rate pegged to a basket of major trading partner currencies and broadly stable.
- Financial intermediation:
  - Commercial bank credit growth was negative through most of 2012–14; more recently recovered partly due to large one-off transactions.
  - PFIs control about 40 percent of all credit to the economy and 42 percent of all assets in the financial system.
  - PFIs have supplied credit for reconstruction and have been directed to refinance SOE loans with commercial banks.

### Outlook and scenarios
- Near-term (2014/15) projections and assumptions:
  - Growth expected to be 2½ percent for 2014/15, supported by the SIDS conference, Commonwealth Youth Games preparations, construction of a new airport terminal, and lower fuel prices.
  - Current account deficit expected to narrow by about 1½ percentage points of GDP due to lower oil prices and a gradual rebound in agricultural exports and tourism.
  - Overall credit expected to rise by 5½ percent:
    - Commercial bank credit growth at 6 percent (driven by the entrance of Bank of South Pacific - BSP).
    - PFIs expected to expand lending at around 5 percent.
- Medium-term outlook:
  - Growth expected to converge to 2 percent, supported by expansion of agriculture and tourism.
  - A downturn expected in 2016/17 as Yazaki corporation closes its harness assembly operation.
  - Inflation expected to remain between 2 and 3 percent.
  - Current account deficit expected around 5 percent of GDP.
  - Medium-term credit growth assumed to be in line with nominal GDP growth.

### Risks to the outlook
- Main external risk: occurrence of another natural disaster.
- External downside risks: slow growth in major trading partners (Australia, New Zealand and the US) and indirect risks from China.
- Domestic risks:
  - Delay in policy response to vulnerabilities in the financial sector and rebuilding buffers.
  - Delay in fiscal consolidation and further increases in public debt would reduce fiscal space to respond to natural disasters and could undermine confidence and growth.
  - Financial distress in PFIs and local commercial banks could require public funds, worsening public finances.
  - FSAP indication: the failure of a PFI would not necessarily be systemic for banks but would deteriorate public finances.
- Quantified fiscal exposure from potential financial sector stress:
  - A failure of PFIs could add up to 7 percent of GDP to the public debt (mostly from liabilities in the Development Bank of Samoa (DBS) to the government or explicitly guaranteed by the government).
  - Further defaults among SOEs could add another 17 percent of GDP, for a total contingent exposure of 24 percent of GDP.

### Policy discussion and recommendations to improve resilience
- Overarching policy goals:
  - Improve resilience to natural disasters by addressing financial sector risks and rebuilding macroeconomic buffers (lower public debt and increase reserves).
  - Boost growth through structural reforms, including facilitating access to finance.
- Specific recommendations for PFIs and related institutions:
  - Formulate a coherent policy framework for PFIs to redesign their role to provide development finance that is complementary to, not in competition with, commercial bank products.
  - Address weaknesses in asset quality and performance of PFIs.
  - Development Bank of Samoa (DBS):
    - Halt new lending outside of its original mandate.
    - Initiate a comprehensive restructuring of the bank.
    - Narrow the range and nature of operations in line with its original charter to finance agricultural production and SMEs.
    - Implement urgent reforms to address operational inefficiencies and financial weakness, including improved credit and risk management, strengthened recovery procedures and accounting practices.
  - Samoa National Provident Fund (SNPF):
    - Gradually reduce lending against contributions.
    - Diversify investment portfolio, including by increasing offshore investments.
    - Seek technical assistance to conduct a comprehensive review of its actuarial soundness, including the investment of its assets.

### Box 3 — Samoa: Public Financial Institutions (overview)
- PFIs have been growing rapidly and are increasingly competing with commercial banks.
- Asset quality has deteriorated for PFIs; some liabilities are to government institutions (central bank) or government guaranteed.
- The largest PFIs by assets are the Samoa National Provident Fund (SNPF) and Development Bank of Samoa (DBS). Unit Trust of Samoa (UTOS) and Samoa Housing Corporation (SHC) have been expanding rapidly.
- DBS on-lends funds from international institutions and has been funded through credit lines from the central bank to make loans for reconstruction. A large part of DBS’ portfolio is concentrated in tourism. Most loans were extended with subsidized interest rates. Portfolio quality appears substantially impaired; DBS offered a one year moratorium on interest and principal payments to a large proportion of its clients.
- SNPF concentrates on loans to members up to 50 percent of members’ contributions; about 60 percent of its assets comprise loans to members. SNPF also lends to other PFIs.
- UTOS diversified into a financing vehicle for SOEs issuing capital notes backed by a limited general government guarantee and has maintained a leveraged position.
- SHC is funded by the central bank with government guarantees.

### Financial snapshot — Samoa: Public Financial Institutions, FY 2014 (DBS / SHC / SNPF / UTOS)
- Total assets (% of GDP): 10.0 / 2.2 / 27.9 / 4.3
- Share in financial system (%): 8.7 / 2.0 / 24.4 / 3.7
- Gross loans & investments (% of GDP): 7.7 / 2.1 / 18.1 / 4.0
- Borrowing (% of GDP): 6.3 / 0.7 / - / 2.5
- CAR: 27.3 / 65.3 / - / -
- Net profit 1/: -4.6 / 0.7 / 31.2 / 2.8
  - 1/ For SNPF the net surplus from investment income is shown.
- NPLs (% of total loans): 4.6 / 2.1 / 5.8 / -
- ROA (%) 2/: - / -2.5 / 1.7 / 6.1 / 3.6
  - 2/ Ratio of net profits to total assets.
- Return on capital (%) 3/: - / -9.1 / 2.6 / - / 9.1
  - 3/ Ratio of net profits to capital and reserves.
- Source: Annual Reports of PFIs, FSAP questionnaire, and staff calculations.

### Financial stability concerns and supervisory issues (PFIs)
- Growing exposure of PFIs to policy lending, subsidized lending rates, and concentrations (e.g., DBS in tourism) has impaired asset quality.
- UTOS’s leveraged intermediation among SOEs increases risk to unit holders and relies on limited general government guarantees.
- Some PFIs’ liabilities are to the central bank or are government guaranteed, raising fiscal and monetary risks.
- Data weaknesses: improved collection and verification of PFI data are needed to support off-site analysis and stress-testing.

### Policy recommendations (PFI-specific)
- Clarify UTOS mandate and fully disclose its increased risk to unit holders from leveraged positions.
  - Government decision options: convert UTOS into a policy bank or deleverage it and continue as a conventional mutual fund.
  - Improve credit risk management and accounting practices at UTOS.
- Enhance transparency and governance of PFIs with improved accounting and disclosure practices.
  - Strengthen accounting, reporting and disclosure standards making PFIs IFRS compliant.
- Incorporate PFIs under the supervisory and regulatory framework of the central bank.
  - Prudential and regulatory guidelines need to be issued for UTOS and SHC, with UTOS being supervised as a bank.
  - CBS should improve collection and verification of data from PFIs and deepen off-site analysis, including stress-testing.
- Refrain from conducting further policy lending through PFIs not financed directly through the budget to enhance transparency and reduce CBS balance sheet risk.

### Authorities’ actions and views (PFIs)
- Authorities recognize risks in PFIs but view DBS and UTOS as instruments to supply credit for reconstruction during crisis and to lower interest rates.
- Authorities agreed on reorienting DBS’ lending toward agriculture and SMEs.
- Plans noted to reduce the ratio of lending against contributions at the SNPF from 50 percent to 40 percent over the next two years, and to diversify SNPF investments.
- Creation of a new Ministry of Public Enterprises is planned to review governance and reporting of PFI operations.
- The Central Bank of Samoa (CBS) is moving quickly to improve financial oversight of PFIs, including issuing and revising prudential regulations (particularly for SHC and UTOS) based on FSAP recommendations and conducting on-site inspections.

### Financial-sector constraints and SME finance
- Samoa has a high level of access to financial services by individuals and lower interest margins than most Pacific Island countries.
- Remoteness and small scale lead to a lack of competition and a high cost of financial services, particularly for SMEs.
- Financing to SMEs is provided by commercial banks and the DBS. There is also one microfinance institution beginning to make loans to SMEs and a government guarantee scheme for SME loans (with funds of 0.4 percent of GDP).
- Main obstacles to credit and financial deepening:
  - High level of collateralization of loans.
  - Large share of customary land that cannot be used as collateral.
  - Absence of a credit bureau.
  - Absence of a movable collateral registry.
  - Absence of standard accounting practices among SMEs.
- Evidence of binding constraints:
  - Latest enterprise survey from 2009 and a SME market assessment from 2012 confirm that a majority of SMEs experience financing constraints.
- Policy implication:
  - Addressing these constraints to credit is important to allow better financial access for SMEs and to support growth.

### Authorities’ views and actions (SME, structural)
- Agricultural diversification and processing for export are being pursued with development partners, including niche markets (for example organic certification or gluten free products).
- Solar and wind energy investments poised to come on line would help lower the cost of electricity.
- Development of essential financial infrastructure is a priority. Authorities see establishment of a credit bureau as a private sector investment, but note that personal property registry legislation is in place and implementation will be forthcoming.
- Authorities agree that lack of financial literacy among SMEs is an obstacle to credit.
- Work with the Asian Development Bank (ADB) to make customary land more accessible for business transactions:
  - A policy framework will be discussed in Cabinet in the first half of 2015.
  - Aim to revise legislation before 2016 (after consultation with major stakeholders) so leases of customary lands can be used more easily and securely as collateral for loans, while safeguarding the rights of customary land holders.

### Macroeconomic and financial sector overview — selected projections and indicators
- Inflation and external balance:
  - Headline inflation: expected to be a subdued 0.7 percent (given the sharp decline in oil prices).
  - For 2015/16 and later: headline inflation expected to edge up to around 2.5 percent.
  - Current account: authorities expect a gradual rebalancing to a deficit of around 5 percent of GDP over the medium term.
  - Total exports of goods (first six months of 2014/15 vs prior year): increased by 21.5 percent.
  - Total imports of goods: down by 10.1 percent.
  - Total exports of services: 2.5 percent higher; tourism up 7.9 percent.
- Fiscal policy and debt targets:
  - Medium-term fiscal stance: geared at gradual consolidation to slowly lower debt and maintain a budget deficit of not more than 3.5% of GDP.
  - Long-term debt target proposed by staff: 40 percent of GDP.
  - Authorities’ stated goal: reducing public debt to 50 percent of GDP by 2020.
- Financial sector and liquidity:
  - Banking sector capital adequacy ratio: 28.7 percent at end 2014.
  - Banking sector ROE: 7.1 percent at end 2014.
  - Non-performing loans: edged up to around 7 percent.
  - Annual average credit growth: rose to 5.9 percent at end December 2014 from 1.2 percent at end 2013.
  - Private sector credit drivers: credit to businesses up 16.4 percent; credit to individuals up 12.2 percent.
- Structural reforms:
  - Focus on diversification, business environment improvements, processed food exports, financial inclusion, SME support, and tourism market access.

### Debt Sustainability Analysis — key findings and scenarios
- Risk rating for debt distress changed from high to moderate since the 2013 DSA, reflecting an increase in the discount rate to 5 percent and a rebasing of GDP.
- Samoa faces a moderate risk of debt distress based on public external debt.
- Overall public debt rose from around 30 percent of GDP at end-2007/08 to about 55 percent of GDP at end-2013/14.
- A U.S. $51 million loan with China, if disbursed over three years, would bring the debt ratio to 56 percent of GDP in 2017.
- External debt makes up 98 percent of the total; most is concessional.
  - Multilateral creditors account for 58 percent of total external debt (including 25 percent owed to the World Bank, 31 percent to Asian Development Bank, and 2 percent to OPEC, IFAD and EIB).
  - Bilateral creditors account for approximately 42 percent of the total external debt (35 percent owed to China and 6 percent to Japan).
  - The grant element of external debt is 40 percent.
  - There is no external private debt.
- Central government’s net domestic debt is 2 percent of GDP, but domestic liabilities in PFIs and SOEs could add 24 percent of GDP to the debt ratio.
- Explicit government guarantees are estimated to amount to 7 percent of GDP at end-2014. SOE liabilities are about 17 percent of GDP, excluding on-lent amounts and inter-SOE loans.
- Stress-test outcomes:
  - “Non-debt flows shock” (sharp decline in remittances or FDI) breaches PV debt-to-GDP threshold in near term; improves over time.
  - An additional natural disaster (disaster within next five years reducing real GDP growth by 4 percentage points and adding 10 percent of GDP to public external debt) brings external debt close to the indicative threshold in 2017, then it falls steadily thereafter.
  - “Fixed Primary Balance” scenario (failure to consolidate) leads to a protracted breach of the PV debt-to-GDP benchmark starting in 2019.
  - A “one time 30 percent depreciation” most extreme shock causes a protracted breach but the debt ratio falls back below the benchmark in 2020.
- Conclusion and recommendation:
  - Samoa’s PPG external debt moved from high to moderate risk of debt distress; overall public debt distress risk remains higher due to contingent liabilities.
  - If contingent liabilities materialize and authorities delay fiscal consolidation, debt dynamics could become unsustainable.
  - Recommendation: Government needs to adhere to existing consolidation plans to reach its debt target by 2020 while safeguarding social spending and economic growth.

### Risk Assessment Matrix — selected high-concern risks and policy responses
- Natural disasters:
  - Overall Level of Concern: High
  - Likelihood (next one–three years): High
  - Policy recommendation: A growth friendly fiscal consolidation is necessary to replenish buffers to face future natural disasters.
- Protracted slow growth in advanced and emerging economies:
  - Overall Level of Concern: High/Medium
  - Likelihood: Medium/High
  - Policy recommendation: Implement a growth friendly fiscal consolidation; accelerate structural reforms.
- Financial stress in PFIs:
  - Overall Level of Concern: Medium
  - Likelihood: High
  - Policy recommendation: Incorporate PFIs under CBS supervision; enhance transparency and governance.
- Delay in fiscal consolidation:
  - Overall Level of Concern: Medium
  - Likelihood: Medium/High
  - Policy recommendation: Implement growth friendly fiscal consolidation to bring debt down.
- Delay in structural reforms:
  - Overall Level of Concern: Medium
  - Likelihood: Medium
  - Policy recommendation: Develop finance sector institutional framework; enable use of customary lands as collateral.

*Source: _cr15191 - 1. Effect of Recent Natural Disasters on Debt*

### 1. Effect of Recent Natural Disasters on Debt ______________________________________________________5

### 1. Effect of Recent Natural Disasters on Debt

### Context and key background
- Samoa is one of the most remote Pacific islands and is dependent on tourism, remittances and development aid.
- Samoa was hit by a tsunami in September 2009 and cyclone Evan in December 2012, which caused major destruction and prompted government requests for Rapid-Access/ Rapid Credit Facility disbursements in 2010 and 2013.
- Reconstruction is estimated to have cost 40 percent of GDP and added about 15 percent of GDP to Samoa’s external debt.
- Debt (mostly external) rose from 30 percent of GDP in 2008 to 55 percent in 2014, above the authorities’ medium-term target of 50 percent of GDP.
- Contingent liabilities: a subsidized lending program through public financial institutions (PFIs) and government guaranteed debt in state-owned enterprises (SOEs) represent contingent liabilities for the public debt.

### Findings from Box 1 — Effect of Recent Natural Disasters on Debt
- Using a synthetic control approach:
  - The tsunami in 2009 was responsible for an increase in debt of 10 percent of GDP.
  - The cyclone in 2012 led to another 5 percent of GDP increase.
  - Together, the two natural disasters added about 15 percent of GDP to Samoa’s external debt.
- Recent natural disasters required reconstruction costs of 40 percent of GDP:
  - 23 percent of GDP for the tsunami in 2009.
  - 17 percent of GDP for cyclone Evan in 2012.
- On average, Samoa has been hit by a major natural disaster once every five years.
- Policy implication from the analysis: to create a cushion for another natural disaster, Samoa’s debt target should aim at 40 percent of GDP over the longer term, given the authorities’ medium-term debt ceiling of 50 percent of GDP.

### Recent macroeconomic developments linked to disasters
- Growth and inflation:
  - Real GDP expanded by around 2 percent in fiscal year 2013/14 (July to June), supported by reconstruction activities and events (SIDS conference) and a recovery in agriculture.
  - Underlying inflation (excluding food, transport and communication) remains stable at around 2 percent.
- External sector:
  - The external current account widened to 8 percent of GDP in 2013/14 following cyclone Evan as imports rose and exports lagged.
  - Reserves rose to 4 months of prospective imports of goods and non-factor services in 2014.
- Fiscal and monetary stance:
  - Fiscal deficit reached 5.3 percent of GDP in 2013/14 (GFS 2001).
  - Policy rate at the zero lower bound since 2010; exchange rate pegged to a basket of major trading partner currencies and broadly stable.
- Financial intermediation:
  - Commercial bank credit growth was negative through most of 2012–14; more recently recovered partly due to large one-off transactions.
  - PFIs control about 40 percent of all credit to the economy and 42 percent of all assets in the financial system.
  - PFIs have supplied credit for reconstruction and have been directed to refinance SOE loans with commercial banks.

### Outlook and scenarios
- Near-term (2014/15) projections and assumptions:
  - Growth expected to be 2½ percent for 2014/15, supported by the SIDS conference, Commonwealth Youth Games preparations, construction of a new airport terminal, and lower fuel prices.
  - Current account deficit expected to narrow by about 1½ percentage points of GDP due to lower oil prices and a gradual rebound in agricultural exports and tourism.
  - Overall credit expected to rise by 5½ percent:
    - Commercial bank credit growth at 6 percent (driven by the entrance of Bank of South Pacific - BSP).
    - PFIs expected to expand lending at around 5 percent.
- Medium-term outlook:
  - Growth expected to converge to 2 percent, supported by expansion of agriculture and tourism.
  - A downturn expected in 2016/17 as Yazaki corporation closes its harness assembly operation.
  - Inflation expected to remain between 2 and 3 percent.
  - Current account deficit expected around 5 percent of GDP.
  - Medium-term credit growth assumed to be in line with nominal GDP growth.

### Risks to the outlook
- Main external risk: occurrence of another natural disaster.
- External downside risks: slow growth in major trading partners (Australia, New Zealand and the US) and indirect risks from China.
- Domestic risks:
  - Delay in policy response to vulnerabilities in the financial sector and rebuilding buffers.
  - Delay in fiscal consolidation and further increases in public debt would reduce fiscal space to respond to natural disasters and could undermine confidence and growth.
  - Financial distress in PFIs and local commercial banks could require public funds, worsening public finances.
  - FSAP indication: the failure of a PFI would not necessarily be systemic for banks but would deteriorate public finances.
- Quantified fiscal exposure from potential financial sector stress:
  - A failure of PFIs could add up to 7 percent of GDP to the public debt (mostly from liabilities in the Development Bank of Samoa (DBS) to the government or explicitly guaranteed by the government).
  - Further defaults among SOEs could add another 17 percent of GDP, for a total contingent exposure of 24 percent of GDP.

### Policy discussion and recommendations to improve resilience
- Overarching policy goals:
  - Improve resilience to natural disasters by addressing financial sector risks and rebuilding macroeconomic buffers (lower public debt and increase reserves).
  - Boost growth through structural reforms, including facilitating access to finance.
- Specific recommendations for PFIs and related institutions:
  - Formulate a coherent policy framework for PFIs to redesign their role to provide development finance that is complementary to, not in competition with, commercial bank products.
  - Address weaknesses in asset quality and performance of PFIs.
  - Development Bank of Samoa (DBS):
    - Halt new lending outside of its original mandate.
    - Initiate a comprehensive restructuring of the bank.
    - Narrow the range and nature of operations in line with its original charter to finance agricultural production and SMEs.
    - Implement urgent reforms to address operational inefficiencies and financial weakness, including improved credit and risk management, strengthened recovery procedures and accounting practices.
  - Samoa National Provident Fund (SNPF):
    - Gradually reduce lending against contributions.
    - Diversify investment portfolio, including by increasing offshore investments.
    - Seek technical assistance to conduct a comprehensive review of its actuarial soundness, including the investment of its assets.

*Source: _cr15191 - 1. Effect of Recent Natural Disasters on Debt*

### Box 3. Samoa: Public Financial Institutions

### Box 3. Samoa: Public Financial Institutions

### Overview and key developments
- PFIs have been growing rapidly and are increasingly competing with commercial banks.
- Asset quality has deteriorated for PFIs; some liabilities are to government institutions (central bank) or government guaranteed.
- The largest PFIs by assets are the Samoa National Provident Fund (SNPF) and Development Bank of Samoa (DBS). Unit Trust of Samoa (UTOS) and Samoa Housing Corporation (SHC) have been expanding rapidly.
- DBS was established in 1974 to provide development assistance to agriculture and SMEs. DBS on-lends funds from international institutions and has been funded through credit lines from the central bank to make loans for reconstruction. A large part of DBS’ portfolio is concentrated in tourism. Most loans were extended with subsidized interest rates. Portfolio quality appears substantially impaired; DBS offered a one year moratorium on interest and principal payments to a large proportion of its clients.
- SNPF was established in 1972 as a compulsory retirement savings scheme with a minimum 5 percent contribution paid by employees and employers. Public employees and those in private formal employment contribute, covering 78 percent of the formally employed population. SNPF concentrates on loans to members up to 50 percent of members’ contributions; about 60 percent of its assets comprise loans to members. SNPF also lends to other PFIs.
- UTOS, established in 2010 as an open-ended private unit trust, diversified into a financing vehicle for SOEs issuing capital notes backed by a limited general government guarantee. By intermediating funds among SOEs and maintaining a leveraged position the Trust has generated high returns to unit holders.
- SHC, established in 1989 to facilitate access to housing, is funded by the central bank with government guarantees.

### Financial snapshot — Samoa: Public Financial Institutions, FY 2014 (DBS / SHC / SNPF / UTOS)
- Total assets (% of GDP): 10.0 / 2.2 / 27.9 / 4.3
- Share in financial system (%): 8.7 / 2.0 / 24.4 / 3.7
- Gross loans & investments (% of GDP): 7.7 / 2.1 / 18.1 / 4.0
- Borrowing (% of GDP): 6.3 / 0.7 / - / 2.5
- CAR: 27.3 / 65.3 / - / -
- Net profit 1/: -4.6 / 0.7 / 31.2 / 2.8
  - 1/ For SNPF the net surplus from investment income is shown.
- NPLs (% of total loans): 4.6 / 2.1 / 5.8 / -
- ROA (%) 2/: - / -2.5 / 1.7 / 6.1 / 3.6
  - 2/ Ratio of net profits to total assets.
- Return on capital (%) 3/: - / -9.1 / 2.6 / - / 9.1
  - 3/ Ratio of net profits to capital and reserves.
- Source: Annual Reports of PFIs, FSAP questionnaire, and staff calculations.

### Financial stability concerns and supervisory issues
- Growing exposure of PFIs to policy lending, subsidized lending rates, and concentrations (e.g., DBS in tourism) has impaired asset quality.
- UTOS’s leveraged intermediation among SOEs increases risk to unit holders and relies on limited general government guarantees.
- Some PFIs’ liabilities are to the central bank or are government guaranteed, raising fiscal and monetary risks.
- Data weaknesses: improved collection and verification of PFI data are needed to support off-site analysis and stress-testing.

### Policy recommendations (PFI-specific)
- Clarify UTOS mandate and fully disclose its increased risk to unit holders from leveraged positions.
  - Government decision options: convert UTOS into a policy bank or deleverage it and continue as a conventional mutual fund.
  - Improve credit risk management and accounting practices at UTOS.
- Enhance transparency and governance of PFIs with improved accounting and disclosure practices.
  - Strengthen accounting, reporting and disclosure standards making PFIs IFRS compliant.
- Incorporate PFIs under the supervisory and regulatory framework of the central bank.
  - Prudential and regulatory guidelines need to be issued for UTOS and SHC, with UTOS being supervised as a bank.
  - CBS should improve collection and verification of data from PFIs and deepen off-site analysis, including stress-testing.
- Refrain from conducting further policy lending through PFIs not financed directly through the budget to enhance transparency and reduce CBS balance sheet risk.

### Authorities’ actions and views
- Authorities recognize risks in PFIs but view DBS and UTOS as instruments to supply credit for reconstruction during crisis and to lower interest rates.
- Authorities agreed on reorienting DBS’ lending toward agriculture and SMEs.
- Plans noted to reduce the ratio of lending against contributions at the SNPF from 50 percent to 40 percent over the next two years, and to diversify SNPF investments.
- Creation of a new Ministry of Public Enterprises is planned to review governance and reporting of PFI operations.
- The Central Bank of Samoa (CBS) is moving quickly to improve financial oversight of PFIs, including issuing and revising prudential regulations (particularly for SHC and UTOS) based on FSAP recommendations and conducting on-site inspections.

*This box is largely based on the FSAP Technical Note on Public Financial Institutions (forthcoming).*

### 26.      Structural improvements in the financial sector will also be important to support

### _cr15191 - 26.      Structural improvements in the financial sector will also be important to support

### Financial-sector constraints and SME finance
- Samoa has a high level of access to financial services by individuals and lower interest margins than most Pacific Island countries (Figure 5).
- Remoteness and small scale lead to a lack of competition and a high cost of financial services, particularly for small and medium-sized enterprises (SMEs).
- Financing to SMEs is provided by commercial banks and the DBS. There is also one microfinance institution beginning to make loans to SMEs and a government guarantee scheme for SME loans (with funds of 0.4 percent of GDP).
- Main obstacles to credit and financial deepening:
  - High level of collateralization of loans.
  - Large share of customary land that cannot be used as collateral.
  - Absence of a credit bureau.
  - Absence of a movable collateral registry.
  - Absence of standard accounting practices among SMEs.
- Evidence of binding constraints:
  - Latest enterprise survey from 2009 and a SME market assessment from 2012 confirm that a majority of SMEs experience financing constraints.
- Policy implication:
  - Addressing these constraints to credit is important to allow better financial access for SMEs and to support growth.

### Authorities’ views and actions
- Agricultural diversification and processing for export are being pursued with development partners, including niche markets (for example organic certification or gluten free products).
- Solar and wind energy investments poised to come on line would help lower the cost of electricity.
- Development of essential financial infrastructure is a priority. Authorities see establishment of a credit bureau as a private sector investment, but note that personal property registry legislation is in place and implementation will be forthcoming.
- Authorities agree that lack of financial literacy among SMEs is an obstacle to credit.
- Work with the Asian Development Bank (ADB) to make customary land more accessible for business transactions:
  - A policy framework will be discussed in Cabinet in the first half of 2015.
  - Aim to revise legislation before 2016 (after consultation with major stakeholders) so leases of customary lands can be used more easily and securely as collateral for loans, while safeguarding the rights of customary land holders.

### Other macro and statistical issues
- Samoa’s economic statistics are broadly adequate for surveillance. Core macroeconomic data are regularly reported to the IMF and published on official websites, including monthly and quarterly statistics.
- Authorities recently rebased their GDP series to 2009 (from 2002) and introduced public accounting on a GFSM 2001 basis.
- Shortcomings remain in national accounts, financial sector indicators and external statistics; an ongoing program of technical assistance aims to improve statistics in these areas.

### Staff appraisal: outlook, risks, and policy priorities
- Recent performance and near-term outlook:
  - Authorities commended for maintaining macroeconomic stability and restoring growth despite multiple external shocks.
  - For the current fiscal year, growth is expected at around 2½ percent, boosted by reconstruction and the hosting of a major conference.
  - Growth expected to decline in the medium-term as one-off events dissipate and a major manufacturing plant closes.
  - External current account deficit expected to narrow on lower oil prices and the recovery of agricultural exports and tourism.
- Risks:
  - Main external risk: another natural disaster.
  - Domestic risks: high public debt and accumulation of contingent liabilities in PFIs and SOEs; weaknesses in the banking sector identified by the FSAP could increase public debt if another external shock materializes.
- Policy priorities and recommendations:
  - Improve resilience by addressing weaknesses in the financial sector, rebuilding macroeconomic buffers, and pursuing structural reforms to increase growth.
  - Review the role of PFIs:
    - PFI credit aided recovery but increased contingent liabilities and crowded out private credit.
    - PFIs should be brought back to original mandates as the economy recovers, with improved governance and transparency.
    - DBS should not provide any further policy lending outside of its original mandate and a comprehensive restructuring should be initiated.
  - Minimize financial-sector risks:
    - CBS moving to improve banking supervision and regulation in line with FSAP recommendations.
    - CBS working to improve legal framework for the financial sector, and banking resolution and crisis management with technical assistance from the IMF and PFTAC.
  - Address rising public debt:
    - Budget for 2014/15 and multiyear fiscal framework envisage gradual consolidation consistent with the goal of reducing the debt to GDP ratio to 50 percent by 2020.
    - Plan to maintain gains in tax revenue administration and improve non-tax revenue, while limiting current expenditure mainly by containing personnel costs.
    - Maintain reform momentum on public financial management in areas identified in the recent PEFA assessment to support fiscal consolidation.
    - Safeguard public expenditures to maintain public services for the poorest, address the epidemic of non-communicable diseases, and improve the quality of education for equitable and inclusive growth.
  - Monetary and exchange-rate policy:
    - Policies broadly appropriate, but foreign reserves, while adequate, could be higher to enhance resilience.
    - Authorities should stand ready to tighten monetary policy if inflation accelerates or external conditions weaken.
    - CGER-type analysis suggests no significant misalignment of the exchange rate; reserves are adequate by standard metrics but low compared to many peers.
    - A higher level of reserves would enhance resilience against natural disasters; first line of action should be aggressive structural reforms. A managed adjustment of the exchange rate could help strengthen the external position further.
  - Structural reforms to boost medium-term growth:
    - Concentrate on reforms in agriculture, facilitating business activity (particularly in tourism), and improving access to finance.
    - Authorities should concentrate on reforms that allow use of customary lands as collateral, a long-standing impediment to financial deepening in Samoa.

*Source: IMF staff report text as provided in the content unit.*

### 37.      It is recommended that the next Article IV consultation take place on the current

### _cr15191 - 37.      It is recommended that the next Article IV consultation take place on the current

### Economy and inflation
- Recent economic activity is boosted by transportation, commerce and services.
- Transport picked up on the back of lower oil prices.
- A rise in tourist arrivals supports commerce and services.
- Inflation dynamics:
  - "Inflation has picked up due to a rise in food prices ... but underlying inflation is stable, helped by lower import prices."
  - Change in CPI (end period): 5.5, -1.7, 0.2, 3.0, 2.1, 2.0, 3.0, 3.0, 3.0 (for 2011/12–2019/20 as listed).
  - Change in CPI (period average): 6.2, -0.2, -1.2, 2.3, 2.2, 2.1, 2.5, 3.0, 3.0 (for 2011/12–2019/20 as listed).
- Structural reforms are crucial to boost productivity, particularly the supply of credit.
- Real GDP growth by sector (selected years shown in figures): sectors include Others, Commerce and services, Construction, Transport, Agriculture, Total. (Exact annual series displayed in figures.)

### External sector and reserves
- The current account deficit has widened as recovery takes hold.
- Capital and financial account is dominated by official grants.
- Reserves are adequate, but low compared to other Pacific Island Countries.
- Real effective exchange rate has remained stable in recent years due to lower inflation.
- Indicators and selected values:
  - Current account balance (in percent of GDP): -8.7, -2.6, -8.0, -6.9, -5.4, -5.1, -4.8, -4.7, -4.1 (2011/12–2019/20).
  - Gross official reserves (millions of U.S. dollars): 157.1, 137.3, 155.3, 167.3, 178.4, 190.3, 197.7, 201.5, 252.4 (2011/12–2019/20).
  - Reserves (In months of next year's imports of GNFS): 4.7, 3.8, 4.3, 4.6, 4.8, 5.1, 5.2, 5.3, 5.8 (2011/12–2019/20).
  - Trade balance (in millions of U.S. dollars): -307.8, -278.6, -321.9, -320.4, -323.4, -329.6, -333.4, -339.5, -342.1 (2011/12–2019/20).
  - Exports, f.o.b. (in millions of U.S. dollars): 29.4, 27.2, 25.9, 26.7, 27.5, 28.3, 29.5, 30.7, 31.4 (2011/12–2019/20).
  - Imports, f.o.b. (in millions of U.S. dollars): -337.1, -305.8, -347.8, -347.1, -350.9, -357.9, -362.9, -370.2, -373.5 (2011/12–2019/20).
- Tourism and remittances:
  - Tourism earnings (in percent of GDP): 18.2, 17.3, 17.5, 16.6, 16.4, 16.5, 16.2, 15.9, 14.9 (2011/12–2019/20).
  - Remittances (in percent of GDP): 19.8, 21.2, 19.3, 19.0, 18.8, 19.2, 19.1, 19.0, 19.0 (2011/12–2019/20).

### Fiscal position, reconstruction costs, and public debt
- Fiscal balance deteriorated due to two natural disasters, mostly financed by external debt.
- Public debt rose rapidly to among the highest for Pacific Island Countries.
- Recent efforts to improve tax administration have yielded positive results.
- Current expenditure has increased, partly due to subsidies and grants related to disaster recovery.
- Capital expenditure has risen with reconstruction, boosted by capital grants.
- Fiscal consolidation is needed to restore fiscal space.
- Key fiscal figures (percent of GDP unless stated):
  - Revenue and grants: 30.1, 33.9, 38.5, 35.5, 30.3, 29.8, 29.8, 29.8, 29.8 (2011/12–2019/20).
  - Of which: grants: 7.5, 9.7, 12.8, 9.8, 4.6, 4.2, 4.2, 4.2, 4.2 (2011/12–2019/20).
  - Expenditure and net lending: 37.3, 37.6, 43.8, 39.1, 32.7, 31.2, 30.2, 30.2, 30.2 (2011/12–2019/20).
  - Of which: Development (capital) expenditure: 12.5, 11.5, 15.1, 12.3, 6.9, 6.0, 5.4, 5.4, 5.4 (2011/12–2019/20).
  - Overall balance: -7.1, -3.8, -5.3, -3.6, -2.3, -1.5, -0.5, -0.5, -0.5 (2011/12–2019/20).
  - External financing: 7.2, 3.5, 2.9, 4.3, 2.6, 1.7, 0.5, -1.0, 0.3 (2011/12–2019/20).
- Public debt (nominal, in millions of tala): 959.7, 984.5, 1,015.5, 1,076.4, 1,121.2, 1,149.3, 1,151.7, 1,153.0, 1,155.1 (2011/12–2019/20).
- Gross public debt (percent of GDP): 52.0, 53.6, 55.0, 55.5, 55.7, 56.5, 54.7, 52.4, 50.0 (2011/12–2019/20).
- Gross external public debt (percent of GDP): 49.8, 51.7, 52.3, 54.4, 55.0, 56.1, 54.7, 52.4, 50.0 (2011/12–2019/20).

### Financial sector, credit, and liquidity
- Policy rates have been low for an extended period but lending rates and spreads remain stable.
- Commercial bank credit growth collapsed in mid-2012 as SOEs refinanced their loans with PFIs.
- PFIs took over some lending to the private sector; recent pick-up in commercial bank credit related to lumpy one-off transactions (including the purchase of an airplane and a ship).
- Commercial banks have ample liquidity and large excess reserves in the central bank.
- Credit-to-deposit ratio remains below that of previous years.
- Monetary and credit indicators (selected values):
  - Private sector credit (percent change / percent of GDP as reported across tables): series include 2.8, 1.1, 3.4, 5.7, 3.8, 1.0, 3.0, 3.5, 5.0 (2011/12–2019/20).
  - Broad money (12-month percent change): -4.0, -0.8, 18.7, 17.6, 8.5, 1.1, 3.4, 4.5, 5.0 (2011/12–2019/20).
  - Policy rate, lending rate, deposit rate (series shown in figures; weighted average lending rate reported as 10.2, 10.2, 10.2 in some tables; deposit rate around 3.1).
- Central bank liquidity and monetary aggregates (selected levels, in millions of Tala):
  - Broad money: 735, 706, 700, 832, 978, 1,061 (2010/11–2015/16).
  - Gross reserves (Central Bank): 318, 324, 276, 302, 375, 429 (2010/11–2015/16).
  - Deposits: 684, 647, 640, 785, 929, 1,010 (2010/11–2015/16).

### Financial soundness and access
- Financial soundness indicators for commercial banks (2010–2014):
  - Loans to deposit ratio: 104.6, 113.4, 115.2, 118.1, 105.4 (2010–2014).
  - Capital Adequacy Ratio: 27.2, 27.1, 30.0, 27.4, 28.9 (2010–2014).
  - Tier 1 Capital Ratio: 22.8, 22.3, 25.4, 23.6, 24.6 (2010–2014).
  - Return on assets: 2.0, 2.2, 2.0, 1.6, 1.8 (2010–2014).
  - Non-performing loans to total loans: 6.1, 4.4, 4.7, 7.5, 8.3 (2010–2014).
  - Net interest margins: 3.5, 3.4, 3.4, 3.5, 2.9 (2010–2014).
- Financial access indicators (end of 2013):
  - Deposit accounts with commercial banks per 1,000 adults: Samoa 1,592; Fiji 1,127; Tonga 269; Vanuatu 258; Papua New Guinea 688.
  - Number of registered mobile money accounts per 1,000 adults: Samoa 356; Vanuatu 461; other countries reported as n/a.
  - ATMs per 100,000 adults: Samoa 36; Fiji 42; Tonga 81; Vanuatu 227; Papua New Guinea 37.
  - Commercial bank branches per 100,000 adults: Samoa 23; Fiji 11; Tonga 27; Vanuatu 21; Papua New Guinea 30.
  - Number of loan accounts in commercial banks (selected): Samoa 14,923; Fiji 87,624; Tonga 180,978; Vanuatu 12,126; Papua New Guinea 8,664.
  - Firms with a loan or line of credit (2009): Samoa vs peers shown in figures (percent).
  - Proportion of loans requiring collateral (2009): Samoa and peers shown in figures; value of collateral needed around 200 percent of the loan amount for many loans.

### Projections and medium-term baseline (illustrative)
- Real GDP growth (medium-term baseline projections): 1.2, -1.1, 1.9, 2.6, 1.6, -0.8, 0.8, 1.5, 2.0 (2011/12–2019/20).
- CPI inflation (period average) projections: 6.2, -0.2, -1.2, 2.3, 2.2, 2.1, 2.5, 3.0, 3.0 (2011/12–2019/20).
- Fiscal accounts (percent of GDP, projections):
  - Total revenue and grants: 30.1, 33.9, 38.5, 35.5, 30.3, 29.8, 29.8, 29.8, 29.8 (2011/12–2019/20).
  - Total revenue: 22.6, 24.2, 25.7, 25.7, 25.8, 25.6, 25.6, 25.6, 25.6 (2011/12–2019/20).
  - Total expenditure and net lending: 37.3, 37.6, 43.8, 39.1, 32.7, 31.2, 30.2, 30.2, 30.2 (2011/12–2019/20).
  - Overall balance (including grants): -7.1, -3.8, -5.3, -3.6, -2.3, -1.5, -0.5, -0.5, -0.5 (2011/12–2019/20).
- External debt and reserves projections:
  - Gross public debt (percent of GDP): 52.0, 53.6, 55.0, 55.5, 55.7, 56.5, 54.7, 52.4, 50.0 (2011/12–2019/20).
  - Gross official reserves (millions of U.S. dollars): 157.1, 137.3, 155.3, 167.3, 178.4, 190.3, 197.7, 201.5, 252.4 (2011/12–2019/20).

*Source: Samoa — IMF staff estimates, projections, and country authorities as presented in the provided content.*

### Appendix I. Samoa: Risk Assessment Matrix

### Appendix I. Samoa: Risk Assessment Matrix

### Risk assessment (RAM entries)
- 1. Natural disasters  
  - Overall Level of Concern: High  
  - Likelihood of Severe Realization of Risk in the Next one–three Years: High  
  - Expected Impact if Risk is Realized: Natural disasters can cause widespread damage to agriculture and infrastructure, possibly leading to a further reduction in fiscal space.  
  - Policy Recommendations: A growth friendly fiscal consolidation is necessary to replenish buffers to face future natural disasters.  
  - Note: On average, Samoa has been hit by a major natural disaster once every five years.

- 2. Protracted period of slower growth in advanced and emerging economies  
  - Overall Level of Concern: High/Medium  
  - Likelihood of Severe Realization of Risk in the Next one–three Years: Medium/High  
  - Expected Impact if Risk is Realized: A sharp decline in exports, tourism earnings and remittances would worsen the current account balance. It would also reduce fiscal revenue and weaken the reserves buffer.  
  - Policy Recommendations: Implement a growth friendly fiscal consolidation to replenish buffers to cope with adverse shocks; accelerate structural reforms to improve competiveness.  
  - Note: Prolonged slow growth in advanced economies and emerging markets would reduce exports and GDP growth.

- 3. Financial Stress in Public Financial Institutions (PFIs)  
  - Overall Level of Concern: Medium  
  - Likelihood of Severe Realization of Risk in the Next one–three Years: High  
  - Expected Impact if Risk is Realized: Financial spillovers will have limited effects on banks, but would significantly deteriorate public finances and eliminate an important source of credit to the economy.  
  - Policy Recommendations: Strengthen the financial operations of the PFIs by incorporating them under the supervisory and regulatory framework of the CBS; enhance the transparency and governance of the PFIs.  
  - Note: PFIs play an important part in the financial system, but asset quality has deteriorated sharply in the wake of recent natural disasters.

- 4. Delay in fiscal consolidation  
  - Overall Level of Concern: Medium  
  - Likelihood of Severe Realization of Risk in the Next one–three Years: Medium/High  
  - Expected Impact if Risk is Realized: Delay in fiscal consolidation would undermine confidence in public finances with higher interest rates and lower growth.  
  - Policy Recommendations: Implement a growth friendly fiscal consolidation that maintains improvements in tax administration and current expenditure at pre-crisis levels.  
  - Note: The authorities need fiscal consolidation to bring the debt down to a more sustainable level.

- 5. Delay in implementing structural reforms  
  - Overall Level of Concern: Medium  
  - Likelihood of Severe Realization of Risk in the Next one–three Years: Medium  
  - Expected Impact if Risk is Realized: In particular, reforms to improve the functioning of the financial system and access to credit are critical for private sector growth and exports.  
  - Policy Recommendations: Develop the institutional framework for the finance sector; unleash economic potential in customary lands; lower the cost of remittances.  
  - Note: There is a strong need to move more quickly on implementing domestic structural reforms to improve growth.

### RAM methodological note
- The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).  
- Probability interpretation: “low” indicates a probability below 10 percent, “medium” between 10 and 30 percent, and “high” of 30 percent or more.  
- The RAM reflects staff views as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

---

### Debt Sustainability Analysis (DSA) — key findings and scenarios

### Baseline and recent debt developments
- Risk rating for debt distress changed from high to moderate since the 2013 DSA, reflecting an increase in the discount rate to 5 percent and a rebasing of GDP.  
- Samoa faces a moderate risk of debt distress based on public external debt.  
- Overall public debt rose from around 30 percent of GDP at end-2007/08 to about 55 percent of GDP at end-2013/14.  
- A U.S. $51 million loan with China, if disbursed over three years, would bring the debt ratio to 56 percent of GDP in 2017.  
- External debt makes up 98 percent of the total; most is concessional.  
  - Multilateral creditors account for 58 percent of total external debt (including 25 percent owed to the World Bank, 31 percent to Asian Development Bank, and 2 percent to OPEC, IFAD and EIB).  
  - Bilateral creditors account for approximately 42 percent of the total external debt (35 percent owed to China and 6 percent to Japan).  
  - The grant element of external debt is 40 percent.  
  - There is no external private debt.  
- The central government’s net domestic debt is 2 percent of GDP, but domestic liabilities in PFIs and SOEs could add 24 percent of GDP to the debt ratio.  
- Explicit government guarantees are estimated to amount to 7 percent of GDP at end-2014.  
- SOE liabilities are about 17 percent of GDP, excluding on-lent amounts and inter-SOE loans.

### Underlying macro assumptions (selected)
- Real GDP growth was around 2 percent in 2013/14.  
- Real GDP growth is expected to be around 2½ percent in 2014/15.  
- The current account deficit widened to around 8 percent of GDP in 2013/14.

### DSA baseline and stress test outcomes
- Under the baseline, the present value (PV) of external debt-to-GDP ratio remains below indicative thresholds over the projection period. Public external debt service ratios are relatively low due to concessionality.  
- Stress tests indicate Samoa faces moderate risk of debt distress.  
  - Under the “Non-debt flows shock” (sharp decline in remittances or FDI), the PV of debt-to-GDP ratio breaches the threshold in the near term; over time debt dynamics improve as one-off shock effects wind down.  
  - An additional natural disaster shock (disaster within next five years reducing real GDP growth by 4 percentage points and adding 10 percent of GDP to public external debt) brings external debt close to the indicative threshold in 2017, then it falls steadily thereafter.  
  - Results do not change when remittances are added to denominators, though including remittances provides additional buffer. The most extreme shock scenarios can still breach thresholds for PV of debt-to-GDP and PV of debt-to-exports.  
  - In the public DSA, a “Fixed Primary Balance” alternative scenario (failure to consolidate) leads to a protracted breach of the PV of debt-to-GDP benchmark starting in 2019.  
  - A most extreme shock scenario (“one time 30 percent depreciation”) results in a protracted breach of the PV of debt-to-GDP benchmark, but the debt ratio falls back below the benchmark in 2020.

### Fiscal-financial linkages and contingent liabilities
- The baseline includes SOE liabilities and government on-lending to SOEs (through PFIs), adding 24 percentage points to the debt ratio in 2014.  
- Contingent liabilities from government guarantees and on-lending to PFIs and SOEs heighten overall public debt distress risk.  
- Example contingent liabilities: central bank credit lines with government guarantees to DBS of SAT 65 million and Samoa Housing Corporation (SHC) of SAT 14 million; other explicit guarantees include loan to DBS (SAT 20 million) and Samoa Shipping Corporation (SAT 1.3 million) by the SNPF; share capital advance to UTOS (SAT 7.9 million); Small Business Loan Guarantee Scheme (SAT 9.6 million).

### Authorities’ stance and targets
- Authorities agree with DSA findings: current risk of debt distress is moderate, but fiscal consolidation is crucial.  
- Authorities committed to achieving debt target of 50 percent of GDP by 2020 and consider a long-term debt target of 40 percent of GDP appropriate.  
- They are committed to not take on additional external debt in the near term and will review strategy when formulating medium-term debt strategy for 2016-2019.

### Conclusion (from staff)
- Samoa’s PPG external debt moved from high to moderate risk of debt distress; overall public debt distress risk remains higher due to contingent liabilities.  
- If contingent liabilities materialize and authorities delay fiscal consolidation, debt dynamics could become unsustainable.  
- Recommendation: Government needs to adhere to existing consolidation plans to reach its debt target by 2020 while safeguarding social spending and economic growth.

---

*Source: Appendix I. Samoa: Risk Assessment Matrix and accompanying Debt Sustainability Analysis from the IMF staff report for the 2015 Article IV Consultation (May 14, 2015).*

### Box 1. Macroeconomic Assumptions Underlying the DSA Update

### Box 1. Macroeconomic Assumptions Underlying the DSA Update

### Real GDP growth
- Real GDP growth is projected at 1.5 percent on average over the medium term.
- Growth is projected to recover to 2 percent in the long run.
- Compared to the 2013 DSA, medium-term growth has been revised down by ½ percentage point, reflecting a planned exit from the country of Yazaki corporation’s harness assembly plant.

### Inflation
- Inflation is expected to stabilize over the medium term at about 3 percent and is maintained at this level in the long run.

### Current account
- The current account is projected to be around 5 percent of GDP on average over the medium term, and to stabilize at this level in the long run.
- Relative to the 2013 DSA, the medium-term current account deficit has narrowed by 7 percent of GDP due to lower commodity prices and the rebasing of GDP.

### External financing and grant element
- The grant element of loans is expected to decline to around 35 percent over the medium term and then stabilize at this level in the long run.
- As recovery from the cyclone takes hold, the share of external financing provided on concessional terms is expected to decline to around 5 percent of GDP over the medium term and then stabilize at this level in the long run.

### Fiscal balance and public debt target
- The primary fiscal balance is estimated to be in balance on average in the medium term, in line with the medium term fiscal framework which targets a public debt-to-GDP ratio at 50 percent by 2020.
- After 2020, the primary fiscal balance is projected to be a surplus of around 0.4 percent of GDP during 2021-35.

### Contingent liabilities
- Contingent liabilities comprise explicit guarantees of around 7 percent of GDP in PFIs and implicit guarantees of around 17 percent of GDP in SOEs.
- The total contingent liabilities amount to approximately 24 percent of GDP at end-2014.

*Source: Box 1. Macroeconomic Assumptions Underlying the DSA Update (excerpt from the Samoa staff report).*

### 0.8 percent the previous year, mainly reflecting higher domestic inflation as imported

### Samoa — Macroeconomic and Financial Sector Overview

### Inflation and External Balance
- Headline inflation: expected to be a subdued 0.7 percent (given the sharp decline in oil prices).
- For 2015/16 and later: headline inflation expected to edge up to around 2.5 percent.
- Current account: authorities expect a gradual rebalancing to a deficit of around 5 percent of GDP over the medium term.
- Recent trade and services developments (first six months of 2014/15 versus same period prior year):
  - Total exports of goods: increased by 21.5 percent.
  - Total imports of goods: down by 10.1 percent.
  - Total exports of services: 2.5 percent higher, reflecting a 7.9 percent increase in tourism and gains in telecommunications services.
- External support: a strengthening of growth in Australia should further support the external position.

### Fiscal Policy
- Medium-term fiscal stance: geared at gradual consolidation to slowly lower debt and maintain a budget deficit of not more than 3.5% of GDP.
- Authorities’ debt target and related measures:
  - Long-term debt target proposed by staff: 40 percent of GDP.
  - Authorities’ stated goal: reducing public debt to 50 percent of GDP by 2020.
  - Measures: continue to implement the debt management strategy, procedures for contracting new loans and issuing new guarantees, and an improved legal framework (including amendments to the Public Finance Management Act to explicitly include government's borrowing purposes and debt management objectives, along with reporting requirements to Parliament).
- State-owned enterprises (SOEs) reform:
  - Ministry of Public Enterprises established (via amendments to the Public Bodies Act 2001) to ensure performance and accountability of SOEs.
  - Performance evaluations of boards of directors of SOEs to be concluded this year, underpinned by TA by ADB.
  - Manual for directors being revised to reflect the new Ministry.
  - Privatizations proceeding as planned for entities approved by Cabinet, including Agriculture Store Corporation, Polynesian Airlines Limited and Samoa Shipping Services.

### Monetary Policy and Exchange Rate
- CBS stance:
  - Central Bank of Samoa (CBS) will maintain its current monetary policy stance to support economic growth but remain vigilant to inflation risks.
  - Given low inflation pressures, the CBS sees little need to tighten monetary policy in the foreseeable future; will review and adopt tightening if a shock drives up inflation for a prolonged period.
- Transmission and market measures:
  - Policy priority: improving the effectiveness of monetary policy and its transmission mechanism.
  - Monetary policy transmission through the interest rate channel is limited; CBS believes market rates could be lower given current settings.
  - Moral suasion via quarterly meetings with CEOs of the four commercial banks is used to communicate monetary policy and encourage lending to private and public sectors.
  - CBS encouraging inter-bank market activity to strengthen the domestic financial market.
- Exchange rate:
  - CBS’ exchange rate policy seeks balance between maintaining Samoa’s export competitiveness and minimizing imported inflation.
  - REER has declined from high levels seen in 2009 and 2011, reflecting low inflationary pressures and improvements in Samoa’s terms of trade.
  - Compared to main trading partners, Samoa’s inflation was lower in 2014, helping drive the REER downward (aside from the last quarter of the year).
  - CBS considers the current level of the tala exchange rate appropriate.
  - Authorities’ assessment: REER was only very modestly misaligned with its equilibrium rate (by 2 percent) in the June quarter of 2014; no indication of persistent deviation.

### Financial Sector
- Overall soundness and emerging vulnerabilities:
  - Banking sector capital adequacy ratio: 28.7 percent at end 2014.
  - Banking sector ROE: 7.1 percent at end 2014.
  - Non-performing loans: edged up to around 7 percent.
- FSAP and supervisory reforms:
  - FSAP identified areas needing strengthening, particularly financial sector supervision and regulation.
  - Priority actions: better coordination between Ministry of Finance (MOF) and CBS at strategic and operational levels; key MoUs signed between CBS and MOF.
  - Contingency plans: coordinated plans drafted for system-wide and individual systemic institutions.
  - Revisions to the CBS Act to reform governance and safeguards are well advanced and consistent with IMF recommendations.
  - Technical assistance (TA) considered important to support implementation of FSAP recommendations in the Samoan context.
- Remittances and AML-CFT:
  - Remittances significance: 19 percent of GDP.
  - Authorities are strengthening AML-CFT monitoring and supervision and urge commercial banks abroad to assess AML-CFT on a case by case basis, and not on wholesale closure of money transfer operators’ agents bank accounts abroad.
  - International efforts to reduce remittance costs remain important.
- Credit developments:
  - Total credit to the private sector increased significantly over the year to end December 2014.
  - Annual average credit growth: rose to 5.9 percent at end December 2014 from 1.2 percent at end 2013.
  - Drivers: credit to businesses up 16.4 percent; credit to individuals up 12.2 percent.
  - Commercial banks’ credit growth: finally turning positive; sharp increase in foreign currency loans to the business sector.
  - Private sector credit expected to continue to increase in the last six months of 2014/15 but at a more moderate pace.
- Public Financial Institutions (PFIs) role and risks:
  - CBS’s Credit Line Facility (CLF) credited as effective in stimulating the economy since 2013 by extending credit to priority sectors (tourism, manufacturing, agriculture and housing) and increasing competition to drive down commercial bank interest rates.
  - Recent total credit growth mainly stems from credit extended by PFIs while bank credit has been slow in comparison.
  - Authorities intend to closely review credit provision through PFIs and return PFIs to mandated roles over time; view PFI credit guarantee support as temporary and complementary to commercial bank credit.
  - CBS strengthening financial oversight of PFIs with revised prudential regulations planned, based on FSAP recommendations.
  - PFIs to come under the auspices of the new Ministry of Public Enterprises to support transparency and accountability.
- Access to collateral and lending rates:
  - Main constraint to private sector credit: lack of acceptable collateral for many SMEs.
  - Measures: development of customary land leases as acceptable collateral; Personal Property Security Act now in place to allow use of movable assets as collateral.
  - A centralized asset registry is being developed.
  - Further analysis underway on relatively high lending rates to determine if policy response is appropriate.

### Structural Reforms
- Authorities welcome staff’s positive evaluation and endorsement of structural reform agenda.
- Challenge: lifting medium-term growth; focus on diversification and business environment improvements.
- Diversification measures under review:
  - Promoting processed food exports through establishment of plants for fish/cannery/virgin coconut oil processing.
- Financial inclusion and SME support:
  - Research underway to strengthen financial access for SMEs, including possibility of SME lending regulations and a credit bureau.
- Tourism support:
  - Authorities examining market access issues: increased airfares, reduction of flights from a key source market, and lack of inter-connecting airline links from long haul and secondary source markets.
- Appreciation:
  - Authorities thank staff for constructive policy dialogue in both the Article IV and FSAP discussions and value technical assistance from HQ and PFTAC for capacity building and implementation of FSAP recommendations.

*Source: IMF staff and Samoan authorities text as provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15191.pdf_