## _wp12154 - Executive Summary

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### Executive summary — key messages
- Regional integration of Pacific Island countries (PICs) with Australia, New Zealand, and emerging Asia has increased over the last two decades, presenting PICs with large opportunities.
- PICs have become more exposed to regional business cycles; strong linkages with resilient economies in the region (Australia and emerging Asia) have helped cushion the downturn.
- Integration has greatly benefitted PICs but has also posed challenges because shocks are transmitted more rapidly in a more interconnected world.
- Australia and New Zealand account, on average, for one-third of PICs’ trade.
- Remittances from Australia and New Zealand account for about 60 percent of total remittances in Fiji and Samoa.
- Tourist arrivals from Australia and New Zealand represent 60–70 percent of total arrivals in Fiji, Vanuatu, and Samoa.
- PICs’ trade with China has increased sevenfold, on average, since the early 2000s, with China becoming the largest trading partner for some (e.g., Solomon Islands).
- The elasticity of PICs’ output with respect to regional partners’ GDP is at times higher than one.
- PICs remain particularly vulnerable to global commodity price shocks; an adverse oil shock (oil prices rise 50 percent above the baseline) would have a substantial impact on growth, in some cases larger than a negative global demand shock.
- Policy prescription: continue to rebuild policy buffers and implement growth-oriented structural reforms to ensure sustained and inclusive growth.

### I. Introduction — context and vulnerability
- Growth in the Pacific island countries (PICs) has been weak over the last decade.
- The crisis in 2008–09 compounded the problem by reducing growth further, especially among the commodity importers.
- Recovery is still under way, but headwinds remain due to global economic uncertainty.
- Should downside risks to the global outlook materialize, adverse spillovers would occur mainly through regional partners.
- Linkages with Australia, New Zealand, and emerging Asia would help offset a global downturn, thanks to their strong fundamentals; but PICs remain particularly vulnerable to commodity price shocks.
- Policy prescription reiterated: rebuild policy buffers and implement growth-oriented structural reforms.

### II. PICs before and after the global crisis — performance and drivers
- Over the 10 years preceding the 2008–09 global financial crisis, PICs’ growth averaged just 2 percent a year.
- Comparators: Asian low-income countries (6 percent), the Eastern Caribbean Currency Union countries (4 percent), small states (4½ percent).
- Volatility remains high, but it has declined over the last decade.
- Relative growth performance shifted in favor of commodity exporters since 2004.
- In 2009, excluding net commodity exporters (Papua New Guinea and Solomon Islands), average real GDP fell by 1.2 percent; growth rebounded to just over ½ percent in 2010 and to about 2 percent on average in 2011.
- Papua New Guinea and Solomon Islands: real GDP grew by 7–7½ percent in 2010 and 9 percent in 2011 — driven by an LNG project in Papua New Guinea amounting to 200 percent of GDP, and strong mining and logging activity in the Solomon Islands.
- Over the past four decades, PIC importers experienced five episodes of economic contraction—1975, 1980, 1987, 1997, and 2009. Only two coincided with global recessions (1975 and 2009).
- The 2009 contraction was milder than previous PIC downturns, yet the recovery has been much weaker for commodity importers; commodity exporters experienced a faster recovery.

### III. Channels of spillover — qualitative assessment
- Tourism, remittances, and FDI:
  - Fiji, Palau, Samoa, and Vanuatu would be hurt through a fall in tourism, which accounts for between 20 percent and 50 percent of GDP, with spillovers to the broader economy through reduced tourism-related FDI.
  - Remittances are a main channel of contagion in Samoa, Tonga, and Tuvalu, and to a lesser extent in Fiji, Kiribati, Marshall Islands, and Micronesia.
  - Tourist arrivals and remittances declined during the 2008–09 crisis.
- Terms of trade:
  - Worsening terms of trade would hurt Papua New Guinea and Solomon Islands; rises in the price of gold could mitigate negative impacts for these exporters.
  - Among commodity importers, declines in food and fuel prices could provide relief to household budgets.
- Financial channels:
  - A fall in stock prices in advanced economies would affect PICs with large trust funds invested offshore (Kiribati, Marshall Islands, Micronesia, Palau, and Tuvalu).
  - Large declines in value of these trust funds (as in 2008–09) could worsen fiscal sustainability over the medium and long term in Kiribati, Marshall Islands, Micronesia, and Palau.
- Aid:
  - Aid flows average 20 percent of GDP and are expected to hold up well.
  - Planned increases in ODA from Australia and New Zealand would continue to support growth in the Pacific island economies.

### IV. Assessing growth spillovers — stylized facts
- Direct exposure to Europe is limited; global slowdown impacts PICs mainly through regional economies and to a lesser extent from the United States.
- Strong linkages with Australia and New Zealand across trade, tourism, remittances, FDI, aid, and financial channels:
  - Trade with Australia and New Zealand accounts, on average, for one-third of PICs’ trade.
  - Remittances from Australia and New Zealand account for about 60 percent of total remittances in Fiji and Samoa.
  - Tourist arrivals from Australia and New Zealand represent 60–70 percent of total arrivals in Fiji, Vanuatu, and Samoa.
  - PICs’ banking sector is dominated by Australian banks.
  - Australia is the largest provider of aid and the largest foreign investor among OECD donors.
- The United States is the most important partner for the Compact countries (Marshall Islands, Micronesia, and Palau):
  - U.S. aid represents over 65 percent of total aid in Palau and 90 percent of total aid in the Marshall Islands and Micronesia.
  - Remittances from the United States account for 50 percent of total remittances in Tonga.
- Linkages with emerging Asia, including China, have grown substantially:
  - Trade with China has increased 7 times on average for PICs since the early 2000s, with China becoming the first trading partner for Solomon Islands.
  - External financing from China has become substantial for Tonga.
  - Inward FDI share from China and other East Asian partners (notably Korea) has grown at the expense of traditional investors such as Japan.

### IV. Assessing growth spillovers — econometric analysis (methodology and baseline findings)
- Methodology:
  - Vector Error Correction Model (VECM) for each PIC, annual data from the late 1970s through 2011 (shorter samples where required).
  - Cointegration techniques identify long-run relationships; structural models capture long-run and short-run dynamics for scenario analysis.
- Baseline findings:
  - Sub-sample analysis: PICs appear more integrated with regional economies (Australia, New Zealand, and emerging Asia) than twenty years ago — increased growth spillovers from the region.
  - Australia is the main source of direct and indirect spillovers, both short and long term, except for the Compact countries.
  - New Zealand has both direct spillovers and indirect impacts through Australia for several PICs.
  - Over the last decade, shocks from emerging Asia have had a greater impact on PICs’ business cycle; the role of Japan has declined.
  - In the short run, elasticity of output with respect to regional partners is at times higher than one.
  - In the short term, the main channel of spillovers is commodity prices; adverse oil shock scenarios show larger negative impacts on growth than global demand shock scenarios.

### IV. Assessing growth spillovers — downside scenarios (summary)
- Scenario framing:
  - Two external downside scenarios simulated using econometric models consistent with IMF Global Economy Model (GEM) scenarios in the April 2012 WEO.
- Euro-area intensification scenario (WEO downside):
  - Assumes financial turmoil in the euro area intensifies.
  - Global growth falls short of WEO baseline by about 1½ percentage points in 2012 and 2013.
  - Euro area growth rate declines by 2.5 percentage points in 2012 and a further decline of 1.1 percentage points in 2013.
  - Direct spillovers from euro-area stress to PICs limited; slowdown spills over to PICs within the same year through regional partners and the United States.
  - U.S. growth rate estimated to fall by 0.75 percentage point in 2012 and by 0.6 percentage point in 2013.
  - Emerging Asia growth assumed to decline by 0.8 percentage point in 2012 and 0.4 percentage point in 2013.
- Commodity-price shock scenario:
  - Adverse oil shock where oil prices rise 50 percent above the baseline would have substantial impact on PICs’ growth, in some cases larger than the negative global demand shock.
- Specific impacts (selected):
  - For the "other countries" grouping (includes Australia and New Zealand): growth estimated to decline by 1½ percentage points in 2012 and by ½ percentage point in 2013 under the euro-area scenario.
  - For PIC commodity exporters: impact on growth would decline by almost 1 percentage point in each year of the shock.
  - Under the oil-price-shock scenario: global output growth lower than WEO by about ½ percentage point in 2012 and a little more than 1 percentage point in 2013; U.S. growth falls by 0.7 percentage point in 2012 and 0.4 percentage point in 2013; Australia and New Zealand growth decline by 0.6 percentage point in 2012 and by 0.9 percentage point in 2013; emerging Asia declines by 0.8 percentage point in 2012 and 0.5 percentage point in 2013.
  - VECM simulations: negative spillovers reduce all PICs growth rates in both years except Papua New Guinea (terms of trade improve). The decline averages about 1½ percentage points of GDP for commodity importers (baseline trend growth about 2 percent).

### V. Assessing spillovers to the financial sector — structure, metrics, and resilience
- Ownership and structure:
  - Financial sector mainly foreign-owned banks—primarily Australian—and large provident and/or trust funds.
  - Bank of the South Pacific (PNG domestic bank) has branches in Fiji and Solomon Islands.
  - Foreign-owned banks equally split between branches or subsidiaries.
- Size, capitalization, funding, liquidity:
  - Total bank assets greatest in the largest economies (in U.S. dollar terms), although not as a percent of GDP.
  - Relative to GDP, banking system size broadly in line with Asian low-income countries.
  - Banks are well capitalized with high total capital and Tier 1 ratios; some authorities require capital ratios above Basel II minimum.
  - Banks rely largely on domestic deposits for funding.
  - Lower loan-to-deposit ratios in PNG and Solomon Islands reflect excess liquidity since the global financial crisis.
  - Loan-to-deposit ratios largely stable; improvements in Tonga and Solomon Islands since 2008 by increasing reliance on deposits.
- Profitability and income composition (selected 2008 figures: Net interest income / non-interest operations, percent of assets):
  - Solomon Islands: 8.6 / 8.6
  - Samoa: 6.1 / 4.9
  - Vanuatu: 3.6 / 2.9
  - Tonga: 5.8 / 6.3
  - Papua New Guinea: 3.8 / 3.0
  - Fiji: 5.2 / 2.6
  - Australia: 1.6 / 1.3
  - New Zealand: 1.9 / 0.8
  - Indonesia: 5.4 / 3.1
  - Malaysia: 2.3 / 1.6
  - Philippines: 1.6 / 0.8
- Loan quality and credit dynamics:
  - Loan-loss provisioning to total loans deteriorated in 2009 then improved across almost all PICs.
  - Econometric analysis links provisioning ratio to both the Australian and domestic business cycle with significant coefficients.
  - Credit growth fell across all PICs during 2008–09; commodity exporters experienced the largest decline (from a high base).
  - Since then, credit growth has remained anemic with mild pickup in commodity exporters; not yet recovered in commodity importers.
  - Under a downside scenario, provisioning ratio would increase by nearly 1 percent.
- Provident and trust funds:
  - Funds are large relative to GDP and domestic banking systems; objectives vary (retirement benefits vs. financing budget deficits).
  - Historical returns: negative returns exceeded 20 percent for compact trust funds of Micronesia and Marshall Islands during the global crisis.
  - Selected FY06–FY10 rates of return (in percent) examples:
    - FSM Compact Fund: 7.7 / 17.9 / (20.1) / (0.2) / 11.3
    - Fiji National Provident Fund: 6.2 / 5.5 / 4.9 / 4.8 / 5.5
    - Kiribati RERF: 7.2 / 3.4 / (8.0) / 4.9 / 4.8
    - RMI Compact Fund: 12.0 / 14.9 / (21.8) / 1.3 / 8.8
    - PNG Nambawan: 10.9 / 27.0 / 7.4 / 8.7 / 10.4
    - Tuvalu Trust Fund: 10.4 / 9.7 / (8.6) / (1.7) / 1.8
  - Asset allocation (selected):
    - Timor-Leste: 88% international (as of March 31, 2011).
    - Fiji: just 5 percent overseas.
  - Timor-Leste Petroleum Fund amendments (2011): allowed higher equities investment (up to 50 percent of the PF) and use of PF to secure government borrowing (up to 10 percent of the PF).
- Transmission channels and spillovers:
  - Financial stress via falling stock prices would affect PICs with large offshore provident/trust fund investments (Kiribati, Marshall Islands, Micronesia, Palau, Tuvalu).
  - Lower GDP growth from falls in remittances and tourism would weaken loan quality and bank profitability, affecting liquidity.
  - Banks may raise interest rates to offset lost non-interest income, further stifling credit growth.
  - Deleveraging of European banks could trigger a funding shock to Australian banks but risk limited due to sound regulation, the Australian government’s Guarantee Scheme for Large Deposits and Wholesale Funding, and RBA–Federal Reserve swap arrangements.
  - Jauregui and Schule (2012) and alternative IMF estimates cited: Australian growth rate drops by 1½ percentage points in the first year after a global negative shock and by 1 percentage point in the second year.

### VI. Policy space, buffers, and recommendations
- Fiscal space and buffers:
  - Fiscal space limited in PICs with high public debt, narrowing scope for countercyclical policies in Marshall Islands, Fiji, Tuvalu, and Tonga.
  - Papua New Guinea and Vanuatu retain some fiscal space.
  - Several islands have comfortable foreign exchange reserves (Fiji, Papua New Guinea, Tonga, and Vanuatu).
- Policy rule effects:
  - Fiscal rules preventing additional draw-downs of large trust funds in crises could result in pro-cyclical policies.
- Monetary and exchange rate considerations:
  - Greater exchange rate flexibility warranted in economies with weak monetary transmission mechanisms.
  - In Papua New Guinea, exchange rate channel remains effective, but excess liquidity is weakening interest rate and credit channels.
  - In Vanuatu, lower-than-anticipated inflation could allow a pause in monetary tightening.
- Rebuilding buffers and structural reforms:
  - PICs need to step up rebuilding of policy buffers; progress made after the crisis, especially with reserves.
  - More than half of PICs emerged from 2008–09 with somewhat less comfortable fiscal buffers (higher debt and larger fiscal deficits) than before the crisis.
  - Implement growth-oriented structural reforms to boost investor confidence and ensure sustainable and inclusive growth.
  - Emphasis on quality of spending (education, infrastructure) to lift long-term growth potential.
  - While rebuilding buffers, additional donor assistance would provide countercyclical support in several islands.
- Empirical indicators on buffer changes (2004–07 average vs. 2011):
  - Overall Buffer Index: 3 PICs have higher buffers in 2011 (above 45° line); 4 PICs have lower buffers in 2011 than in 2004–07 (below 45° line).
  - Fiscal Balance: improved in 2011 in 6 PICs; deteriorated in 5 PICs.
  - Current Account + FDI: improved in 2011 in 3 PICs; deteriorated in 6 PICs.
  - Gross Debt: higher in 2011 in 3 PICs; lower in 5 PICs.
  - Reserves (months of imports): higher in 2011 in 7 PICs; lower in 2 PICs.
  - Inflation: higher in 2011 in 4 PICs; lower in 5 PICs.

### Appendix: Technical summary of econometric methodology and country-level results (selected)
- Methodologies:
  - Cointegration analysis using VECM; impulse response analysis; structural VECM for immediate impacts and scenario inputs.
- Variables:
  - GDP in each PIC and partner GDPs; real oil prices; real food prices; real non-oil commodity prices; country-specific factors (sugar output in Fiji, aid, remittances, world equity prices).
- Cointegration findings:
  - Johansen procedure found cointegrating relationship for 10 of 11 countries examined.
  - Deviation from long-run equilibrium (error correction term) used to measure short-run dynamics and immediate spillovers.
- Selected country elasticities and structural coefficients (preserve reported estimates exactly):
  - Fiji: long-run elasticity to Australia: 0.8; error correction term: -0.77; ln(realoil) coefficient: -0.03*; ln(sugar output) coefficient: 0.10*; supply factor: 1% increase in sugar production boosts GDP by 0.13%.
  - Kiribati: long-run elasticity: 1 (χ2: 3.63, p-value 0.06); short-run elasticity to Australia DRGDP: 0.43*; error correction term: -0.75*( 1); ln(world equity prices): 0.05*; ln(realoil): 0.08*; short-run: 10% increase in oil prices reduces GDP growth by 0.8 percentage point; 10% rise in world equity prices boosts GDP by 0.5 percent.
  - Marshall Islands: long-run elasticity to US: 1 (χ2: 5.68, p-value 0.06); short-run elasticity to US DRGDP: 0.65*; error correction term: -0.91*( 1); ln(realoil): -0.03*; short-run: 10% increase in oil prices reduces GDP growth by 0.3 percent.
  - Micronesia: long-run elasticity to US: 1 (χ2: 0.05, p-value 0.82); short-run elasticity to US DRGDP: 0.84*; error correction term: -0.58*( 1); ln(realoil): -0.08*; short-run: 10% rise in oil prices lowers GDP growth by 0.8 percent.
  - Palau: long-run elasticity to US: 1 (χ2: 1.48, p-value 0.46); short-run elasticity to US DRGDP: 1.23*; short-run elasticity to own lagged DRGDP: 0.66*; error correction term: -0.64*( 1); ln(realoil): -0.05*; short-run: 10% increase in oil prices reduces GDP growth by 0.5 percent.
  - Papua New Guinea: long-run equation: Australia GDP coefficient: 0.21; real aid coefficient: 0.29; short-run elasticity to Australia DRGDP: 0.55*; error correction term: -0.07*( 1); ln(realoil): 0.02*; text interpretation: a 1 percent increase in Australian GDP would raise output in PNG by 0.8 percent (holding other variables constant).
  - Samoa: long-run coefficients: Australia: 0.16; New Zealand: 1 (χ2: 0.67, p-value 0.41); short-run elasticity to Australia DRGDP: 0.21*; to New Zealand DRGDP: 0.50*; own lagged DRGDP: 0.16*; error correction term: -0.85*( 1); ln(realcommodity): 0.05*; interpretation: long-run 1% increase in New Zealand GDP raises Samoan GDP by 1%; short-run elasticity to New Zealand: 0.5.
  - Solomon Islands: long-run elasticity: 1 (χ2: 3.16, p-value 0.02); short-run elasticity to Australia DRGDP: 0.47*; error correction term: -0.25*( 1); ln(realcommodity): 0.12*; ln(realoil): -0.04*; short-run: impact from Australia begins via error correction after one year.
  - Tonga: long-run elasticity to New Zealand: 0.47; short-run elasticity to New Zealand DRGDP: 0.27*; error correction term: -0.71*( 1); own lagged DRGDP: 0.17*; ln(realcommodity): 0.065*; interpretation: short-run 1% increase in New Zealand GDP boosts Tonga GDP by 0.2%; long run effect twice as large.
  - Tuvalu: long-run analysis not feasible (short sample); short-term elasticity with respect to world GDP: 0.5; elasticity to world equity prices: 0.05 (10% stock market increase → ½ percentage point GDP growth via wealth effects); elasticity to global oil prices assumed 0.02 for scenario analysis.
  - Vanuatu: long-run coefficients: New Zealand: 0.2; real tourism receipts: 0.3; short-run elasticity to New Zealand DRGDP: 0.27*; own lagged DRGDP: 0.20*; error correction term: -0.69*( 1); ln(real tourism receipts): 0.13*; interpretation: long-run elasticity of Australia and tourism with respect to Vanuatu GDP is 0.3; tourism captures spillovers from economies other than Australia.
- Impulse response figures (appendix) show dynamic elasticities for multiple country-partner shocks (Samoa–New Zealand, Marshall Islands–US, Micronesia–US, Palau–US, Fiji–Australia, PNG–Australia and real aid, Vanuatu–Australia and tourist receipts, Solomon Islands–Australia, Tonga–New Zealand).

*Source: _wp12154 - Executive Summary (page layout as provided).*

### Executive Summary ......................................................................................................

### _wp12154 - Executive Summary

### I. Introduction
- Indicates the beginning of the document. (see page 4)

### II. PICs Before and After the Global Crisis
- Section addressing the situation of PICs (Pacific Island Countries) prior to and following the global crisis. (see page 4)

### III. Channels of Spillover: A Qualitative Analysis
- Qualitative identification and discussion of channels through which spillovers occur. (see page 7)

### IV. Assessing Growth Spillovers
- A. Stylized Facts
  - Presents stylized facts relevant to growth spillovers. (see page 8)
- B. Econometric Analysis
  - (1) Baseline scenario
    - Econometric assessment under a baseline scenario. (see page 13)
  - (2) Downside scenarios
    - Econometric assessment under downside scenarios. (see page 14)

### V. Assessing Spillovers to the Financial Sector
- A. Stylized Facts
  - Presents stylized facts relevant to financial-sector spillovers. (see page 17)
- B. Spillovers from a Downside scenario
  - Analysis of financial-sector spillovers under a downside scenario. (see page 21)

### VI. What Role for Policies? Rebuilding Policy Buffers and Implementing Structural Reforms
- Discussion of policy responses focused on rebuilding policy buffers and implementing structural reforms. (see page 24)

### References
- Bibliographic references supporting the work. (see page 27)

### Appendix: Technical Summary of Econometric Methodology and Results
- Technical summary of econometric methodology and results. (see page 28)

*Source: _wp12154 - Executive Summary (page layout as provided).*

### Executive Summary

### _wp12154 - Executive Summary

### Executive summary — key messages
- Regional integration of Pacific Island countries (PICs) with Australia, New Zealand, and emerging Asia has increased over the last two decades, presenting PICs with large opportunities.
- PICs have become more exposed to regional business cycles. Strong linkages with resilient economies in the region (Australia and emerging Asia) have helped cushion the downturn.
- Integration has greatly benefitted PICs but has also posed challenges because shocks are transmitted more rapidly in a more interconnected world.
- Australia and New Zealand account, on average, for one-third of PICs’ trade, while remittances from these two economies account for about 60 percent of total remittances in Fiji and Samoa.
- Tourist arrivals from Australia and New Zealand represent 60–70 percent of total arrivals in Fiji, Vanuatu, and Samoa.
- PICs’ trade with China has increased sevenfold, on average, since the early 2000s, with China becoming the largest trading partner for some (e.g., Solomon Islands).
- The elasticity of PICs’ output with respect to regional partners’ GDP is at times higher than one, pointing to the critical role for policies to stabilize the business cycle.
- PICs remain particularly vulnerable to global commodity price shocks. The impact on PICs’ growth from an adverse oil shock (whereby oil prices rise 50 percent above the baseline) would be substantial, and in some cases larger than from a negative global demand shock.
- Sound policies can enhance resilience to shocks: PICs should continue to rebuild policy buffers and implement growth-oriented structural reforms to ensure sustained and inclusive growth.

*Executive Summary material from the source PDF.*

### I. Introduction — context and vulnerability
- Growth in the Pacific island countries (PICs) has been weak over the last decade.
- The crisis in 2008–09 compounded the problem by reducing growth further, especially among the commodity importers.
- Recovery is still under way, but headwinds remain due to global economic uncertainty.
- Should downside risks to the global outlook materialize, adverse spillovers would occur mainly through regional partners.
- Linkages with Australia, New Zealand, and emerging Asia would help offset a global downturn, thanks to their strong fundamentals; but PICs remain particularly vulnerable to commodity price shocks.
- Policy prescription: rebuild policy buffers and implement growth-oriented structural reforms to ensure sustainable and inclusive growth.

### II. PICs before and after the global crisis — performance and drivers
- Over the 10 years preceding the 2008–09 global financial crisis, PICs’ growth averaged just 2 percent a year.
- Comparators: Asian low-income countries (6 percent), the Eastern Caribbean Currency Union countries (4 percent), small states (4½ percent).
- Volatility remains high, but it has declined over the last decade.
- Relative growth performance shifted in favor of commodity exporters since 2004.
- In 2009, excluding net commodity exporters (Papua New Guinea and Solomon Islands), average real GDP fell by 1.2 percent; growth rebounded to just over ½ percent in 2010 and to about 2 percent on average in 2011.
- Papua New Guinea and Solomon Islands: real GDP grew by 7–7½ percent in 2010 and 9 percent in 2011 — driven by an LNG project in Papua New Guinea amounting to 200 percent of GDP, and strong mining and logging activity in the Solomon Islands.
- PICs’ recovery is proceeding more slowly than those in Asian low-income countries (LICs) and emerging economies, although growth has recently been reverting to pre-crisis levels.
- Over the past four decades, PIC importers have experienced five episodes of economic contraction—1975, 1980, 1987, 1997, and 2009. Only two of these coincided with global recessions (1975 and 2009).
- The 2009 contraction was milder than previous PIC downturns, yet the recovery has been much weaker for commodity importers; by contrast, commodity exporters experienced a faster recovery.

### III. Channels of spillover — qualitative assessment
- Tourism, remittances, and FDI:
  - Fiji, Palau, Samoa, and Vanuatu would be hurt through a fall in tourism, which accounts for between 20 percent and 50 percent of GDP, with spillovers to the broader economy through reduced tourism-related FDI.
  - Remittances are a main channel of contagion in Samoa, Tonga, and Tuvalu, and to a lesser extent in Fiji, Kiribati, Marshall Islands, and Micronesia.
  - Tourist arrivals and remittances declined during the 2008–09 crisis.
- Terms of trade:
  - Worsening terms of trade would hurt the trade position in Papua New Guinea and Solomon Islands; rises in the price of gold could mitigate the negative impact for these exporters.
  - Among commodity importers, declines in food and fuel prices could provide some relief to household budgets.
- Financial channels:
  - A fall in stock prices in advanced economies would affect PICs with large trust funds invested offshore (Kiribati, Marshall Islands, Micronesia, Palau, and Tuvalu).
  - A large decline in the value of these trust funds, as occurred during 2008–09, could worsen fiscal sustainability over the medium and long term in Kiribati, Marshall Islands, Micronesia, and Palau.
- Aid:
  - Aid flows average 20 percent of GDP and are expected to hold up well, consistent with past crises.
  - The planned increase in the official development assistance (ODA) of Australia and New Zealand over the next few years would continue to support growth in the Pacific island economies.

### IV. Assessing growth spillovers — stylized facts
- Direct exposure to Europe is limited; the impact of a global slowdown on PICs would occur through spillovers from regional economies and to a lesser extent from the United States.
- Linkages with Australia and New Zealand are strong across trade, tourism, remittances, FDI, aid, and financial channels:
  - Trade with Australia and New Zealand accounts, on average, for one-third of PICs’ trade.
  - Remittances from Australia and New Zealand account for about 60 percent of total remittances in Fiji and Samoa.
  - Tourist arrivals from Australia and New Zealand represent 60–70 percent of total arrivals in Fiji, Vanuatu, and Samoa.
  - The PICs’ banking sector is dominated by Australian banks.
  - Australia is by far the largest provider of aid and is the largest foreign investor among OECD donors.
- The United States is the most important partner for the Compact countries (Marshall Islands, Micronesia, and Palau): U.S. aid represents over 65 percent of total aid in Palau and 90 percent of total aid in the Marshall Islands and Micronesia. Remittances from the United States account for 50 percent of total remittances in Tonga.
- Linkages with emerging Asia, including China, have grown substantially:
  - Trade with China has increased 7 times on average for PICs since the early 2000s, with China becoming the first trading partner for Solomon Islands.
  - External financing from China has become substantial for Tonga.
  - FDI patterns have become more diverse, with the share of inward FDI from China and other East Asian trading partners, notably Korea, growing at the expense of traditional investors such as Japan.

### IV. Assessing growth spillovers — econometric analysis (summary)
- Methodology:
  - A Vector Error Correction Model (VECM) is used for each PIC, with annual data from the late 1970s through 2011 (shorter samples where data availability requires).
  - Cointegration techniques identify long-run relationships between GDP in PICs and GDP of main trading partners; structural models capture both long-run and short-run dynamics for scenario analysis.
- Baseline findings:
  - Using sub-sample analysis, PICs appear more integrated with regional economies (Australia, New Zealand, and emerging Asia) than twenty years ago — increased growth spillovers from the region.
  - Australia is by far the main source of direct and indirect spillovers, both in the short and long term, except for the Compact countries (Marshall Islands, Micronesia, and Palau).
  - New Zealand has both direct spillovers and indirect impacts through Australia for several PICs.
  - Over the last decade, shocks from emerging Asia have had a greater impact on PICs’ business cycle; the role of traditional partners such as Japan has declined.
  - In the short run, the elasticity of output with respect to regional partners is at times higher than one, indicating substantial pass-through of regional growth shocks.
  - In the short term, the main channel of spillovers is commodity prices; adverse oil shock scenarios show larger negative impacts on growth than global demand shock scenarios.

### IV. Assessing growth spillovers — downside scenarios (summary)
- Scenario framing:
  - Two external downside scenarios are simulated using econometric models consistent with global scenarios developed using the IMF Global Economy Model (GEM) and presented in the April 2012 World Economic Outlook (WEO).
- Euro-area intensification scenario (WEO downside):
  - Assumes financial turmoil in the euro area intensifies.
  - Global growth falls short of WEO baseline projections by about 1½ percentage points in 2012 and 2013.
  - Euro area growth rate declines by 2.5 percentage points in 2012 and a further decline of 1.1 percentage points in 2013.
  - Direct spillovers from euro-area stress to PICs will be limited; slowdown spills over to PICs within the same year through regional partners and the United States.
  - U.S. growth rate is estimated to fall by 0.75 percentage point in 2012 and by 0.6 percentage point in 2013.
  - In emerging Asia, growth is assumed to decline by 0.8 percentage point in 2012 and 0.4 percentage point in 2013.
- Commodity-price shock scenario:
  - An adverse oil shock where oil prices rise 50 percent above the baseline would have a substantial impact on PICs’ growth, in some cases larger than the negative global demand shock.

### Policy implications and recommendations
- Given heightened regional integration and increased exposure to regional business cycles, PICs should:
  - Continue to rebuild policy buffers.
  - Implement growth-oriented structural reforms to ensure sustained and inclusive growth.
  - Strengthen policies to stabilize the business cycle, given short-run output elasticities with respect to regional partners that are at times higher than one.
  - Manage commodity-price vulnerabilities through fiscal and macroeconomic frameworks that can absorb large commodity-price swings.

*Source: Executive Summary text from the IMF working paper PDF.*

### 2013. For other countries (a grouping of countries in GEM that includes Australia and New Zealand, among

### _wp12154 - 2013. For other countries (a grouping of countries in GEM that includes Australia and New Zealand, among

### Growth scenarios and impacts on PICs
- Downside scenario (financial turmoil in the euro area):
  - Growth is estimated to decline by 1½ percentage points in 2012 and by ½ percentage point in 2013 for the "other countries" grouping that includes Australia and New Zealand.
  - For PIC commodity exporters, impact on growth would decline by almost 1 percentage point in each year of the shock.
  - For other PICs (commodity importers), the milder impact depends on oil prices declining under this scenario.
- Oil-price-shock scenario (geopolitical uncertainty in the Middle East):
  - Assumes a negative oil-price shock that would raise the real oil price by 50 percent, relative to the baseline, for at least two years.
  - Global output growth would be lower than the WEO projection by about ½ percentage point in 2012 and a little more than 1 percentage point in 2013.
  - U.S. growth would fall by 0.7 percentage point in 2012 and 0.4 percentage points in 2013.
  - Growth rates in Australia and New Zealand would decline by 0.6 percentage point in 2012 and by 0.9 percentage point in 2013.
  - Growth in emerging Asia is assumed to decrease by 0.8 percentage point in 2012 and 0.5 percentage point in 2013.
  - Simulations (VECM) suggest negative spillovers will reduce all PICs growth rates in both years, except for Papua New Guinea (commodity-exporter) whose terms of trade would improve.
  - The decline would average about 1½ percentage points of GDP for commodity importers, where the baseline trend growth is about 2 percent.
- Relative sensitivity and drivers:
  - PICs’ greater sensitivity reflects the large weight of fuel and food in the consumer price index basket and a relatively larger share of imported items in consumption and investment.
  - PICs face higher oil prices amid slower growth among their trading partners, amplifying the impact.

### Financial sector: structure, metrics, and resilience
- Ownership and structure:
  - Financial sector consists mainly of foreign-owned banks—primarily Australian—and large provident and/or trust funds.
  - A Papua New Guinea domestic bank—Bank of the South Pacific—has branches in Fiji and in the Solomon Islands.
  - Foreign-owned banks are equally split between branches or subsidiaries.
- Size and capitalization:
  - Total bank assets (in U.S. dollar terms) are greatest in the largest economies, although not as a percent of GDP.
  - Relative to GDP, the size of the banking system is broadly in line with Asian low-income countries.
  - Banks are well capitalized, with high total capital and Tier 1 capital adequacy ratios; some authorities have opted for capital requirement ratios in excess of the Basel II minimum.
- Funding and liquidity:
  - Banks rely largely on domestic deposits for funding, providing a buffer against turmoil in international financial markets.
  - Lower loan-to-deposit ratios in Papua New Guinea and Solomon Islands reflect large excess liquidity since the global financial crisis.
  - Loan-to-deposit ratios have been largely stable, with improvements in Tonga and Solomon Islands since 2008 by increasing reliance on deposits.
- Profitability and income composition:
  - Non-interest income, largely from foreign exchange activities, is higher in PICs than regional comparators and plays a key role in bank profitability.
  - Table 4 (interest and non-interest income, 2008): Net interest income (percent of total assets, 2008) and non-interest operations (percent of average assets, 2008) examples:
    - Solomon Islands: 8.6 / 8.6
    - Samoa: 6.1 / 4.9
    - Vanuatu: 3.6 / 2.9
    - Tonga: 5.8 / 6.3
    - Papua New Guinea: 3.8 / 3.0
    - Fiji: 5.2 / 2.6
    - Australia: 1.6 / 1.3
    - New Zealand: 1.9 / 0.8
    - Indonesia: 5.4 / 3.1
    - Malaysia: 2.3 / 1.6
    - Philippines: 1.6 / 0.8

### Loan quality and credit dynamics
- Provisioning and loan quality:
  - Ratio of loan-loss provisioning to total loans suggests deterioration in 2009 followed by improvement across almost all PICs (Figure 32).
  - Simple econometric analysis indicates the ratio of provisions to loans in PICs is linked to both the Australian and domestic business cycle, with coefficients significant and of expected sign.
- Credit growth:
  - During 2008–09, credit growth fell across all PICs; commodity exporters experienced the largest decline (from a high base).
  - Since then, credit growth has remained anemic, with some mild signs of pick up in commodity exporters, but has not yet recovered in commodity importers.
  - Figures: Credit to private sector (percent of GDP) and year-on-year change illustrate prolonged weakness.
- Estimated impact under a downside scenario:
  - The ratio of provisions to loans would increase by nearly 1 percent in the event of a downside scenario (Figure 36).

### Provident and trust funds: exposures and vulnerability
- Size and roles:
  - Provident and trust funds are large relative to GDP and to the size of the domestic banking system; objectives vary between retirement benefits and financing budget deficits.
- Historical returns and vulnerability:
  - Negative returns on investment exceeded 20 percent for the compact trust funds of Micronesia and Marshall Islands during the global crisis (Table 3).
  - Table 3: Rates of return on sovereign fund assets (In percent), selected examples FY06–FY10:
    - FSM Compact Fund: 7.7 / 17.9 / (20.1) / (0.2) / 11.3
    - Fiji National Provident Fund: 6.2 / 5.5 / 4.9 / 4.8 / 5.5
    - Kiribati RERF: 7.2 / 3.4 / (8.0) / 4.9 / 4.8
    - RMI Compact Fund: 12.0 / 14.9 / (21.8) / 1.3 / 8.8
    - PNG Nambawan: 10.9 / 27.0 / 7.4 / 8.7 / 10.4
    - Tuvalu Trust Fund: 10.4 / 9.7 / (8.6) / (1.7) / 1.8
- Asset allocation differences:
  - Domestic versus foreign investment split varies considerably across PICs (Figure 33):
    - Timor-Leste: 88% international (as of March 31, 2011).
    - Fiji: 5% overseas (example in text: "just 5 percent in the case of Fiji").
  - Timor-Leste Petroleum Fund amendments (2011):
    - Allowed higher investment in equities (up to 50 percent of the PF) and for the PF to be used to secure government borrowing (up to 10 percent of the PF).

### Transmission channels and spillovers
- Channels of financial stress:
  - Financial stress could occur through a fall in stock prices affecting PICs with large provident and trust funds invested off-shore (Kiribati, Marshall Islands, Micronesia, Palau, and Tuvalu).
  - Lower GDP growth from falls in remittances and tourism would weaken loan quality and banks’ profitability, affecting liquidity.
  - Banks may offset lost non-interest income by raising interest rates, which could further stifle credit growth.
- External funding and regional links:
  - Deleveraging of European banks could trigger a funding shock to Australian banks due to their reliance on wholesale funding, but this risk is limited owing to sound regulation, the Australian government’s Guarantee Scheme for Large Deposits and Wholesale Funding, and RBA–Federal Reserve swap arrangements.
  - Jauregui and Schule (2012) findings cited:
    - Australia is better placed to cope with shocks because of large policy space and flexible exchange rate.
    - An alternative IMF estimate cited: Australian growth rate drops by 1½ percentage points in the first year after the global negative shock and by 1 percentage point in the second year.

### Policy space, buffers, and recommendations
- Fiscal space and constraints:
  - Fiscal space is limited in PICs with high public debt, narrowing scope for countercyclical policies in Marshall Islands, Fiji, Tuvalu and Tonga (Figure 37).
  - Papua New Guinea and Vanuatu still have some fiscal space.
  - Several islands have comfortable foreign exchange reserves (Fiji, Papua New Guinea, Tonga, and Vanuatu) that could provide a temporary cushion.
- Policy rule effects:
  - In countries with large trust funds, fiscal rules preventing additional draw-downs to finance budget deficits in a crisis could lead to pro-cyclical policies.
- Monetary and exchange rate considerations:
  - Greater exchange rate flexibility would be warranted in economies with relatively weak monetary transmission mechanisms.
  - In Papua New Guinea, the exchange rate channel of monetary policy remains effective, but excess liquidity is weakening interest rates and credit channels.
  - In Vanuatu, lower-than-anticipated inflation could allow a pause in monetary tightening.
- Rebuilding buffers and structural reforms:
  - PICs need to step up rebuilding of policy buffers; progress has been made after the crisis, especially with reserves.
  - More than half of the PICs emerged from the 2008–09 crisis with somewhat less comfortable fiscal buffers (higher debt and larger fiscal deficits) than before the crisis.
  - Implementing growth-oriented structural reforms is recommended to boost investor confidence and ensure sustainable and inclusive growth.
  - Emphasis on quality of spending, for example on education and infrastructure, to lift long-term growth potential.
  - While rebuilding buffers, additional assistance from donors would provide countercyclical support in several islands.
- Empirical indicators on buffer changes (2004–07 average vs. 2011):
  - Overall Buffer Index: 3 PICs have higher buffers in 2011 (above 45° line); 4 PICs have lower buffers in 2011 than in 2004–07 (below 45° line).
  - Fiscal Balance: improved in 2011 in 6 PICs; deteriorated in 5 PICs.
  - Current Account + FDI: improved in 2011 in 3 PICs; deteriorated in 6 PICs.
  - Gross Debt: higher in 2011 in 3 PICs; lower in 5 PICs.
  - Reserves (months of imports): higher in 2011 in 7 PICs; lower in 2 PICs.
  - Inflation: higher in 2011 in 4 PICs; lower in 5 PICs.

*Source: IMF staff estimates and country authorities (content from the provided IMF document).*

### References

### _wp12154 - References

### References
- Berg, A., C. Papageorgiou, C. Pattillo, and N. Spatafora, “The End of an Era? The Medium- and Long-term Effects of the Global Crisis on Growth in Low-Income Countries,” IMF Working Paper, WP/10/205.
- Colmer, Patrick and Richard Wood, 2012, “Major Economic Shocks and Pacific Island Countries,” Australian Treasury, Presented at the Pacific Islands Conference in Samoa on March 23, 2012, http://www.imf.org/external/np/seminars/eng/2012/PIC/pdf/tre.pdf.
- Davies, Matt and John Vaught, 2011, “Interest Rates and Bank Profitability in the South Pacific,” http://www.pftac.org/page/resources/papers/.
- International Monetary Fund, 2012a, World Economic Outlook: Growth Resuming, Dangers Remain, World Economic and Financial Surveys (Washington, April).
- International Monetary Fund, 2012b, International Monetary Fund, 2012, “Tonga: Growth Spillovers from the Global Economy”, Box 1 in Tonga 2012 Article IV Staff Report (Washington, May).
- Jauregui, Juan and Werner Schule, October 2011, “Policy Challenges for Emerging Asia and Australia from Rebalancing in China and Downside Risks in the Global Economy”, published as selected issue paper, forthcoming as IMF working paper.
- Peiris, Shanaka Jayanath, 2012, “Global Commodity Prices, Monetary Transmission and Exchange Rate Pass-through in Pacific Island Countries,” forthcoming as IMF working paper.
- Sun, Yan, 2011, “From West to East: Estimating External Spillovers to Australia and New Zealand,” IMF Working paper No. 11/120.
- Yang, Yongzheng, Hong Chen, and Baljeet Singh, 2012, “The Pacific Speed of Growth: How Fast Can It Be and What Determines It?” Presented at the Pacific Island Conference in Samoa on March 23, 2012, http://www.imf.org/external/np/seminars/eng/2012/pic/pdf/yypap.pdf.

### Appendix: Technical summary of econometric methodology and results
- Methodologies employed:
  - Cointegration analysis using a vector error correction model (VECM) to test and estimate long-run relationships.
  - Impulse response analysis within the VECM to gauge impacts on PIC real GDP from shocks to other variables.
  - A structural version of the error-correction model to estimate immediate (within-period) impacts of shocks and to form scenario analysis inputs.
- Variables considered:
  - GDP in each Pacific Island country (PIC) and GDP in partner countries or regions.
  - Measures of real oil prices, real food prices, real non-oil commodity prices.
  - Country-specific factors: shocks to sugar output in Fiji, role of aid and remittances, impact of changes in global equity prices.
- Cointegration findings:
  - Using the Johansen procedure, a cointegrating relationship was found for 10 of the 11 countries examined.
  - For each country, the coefficient on the partner GDP variable is the long-run elasticity of PIC growth with respect to external partner GDP.
  - The deviation from long-run equilibrium (error correction term) is used in structural equations to measure short-run dynamics and immediate spillovers.
- The PICs in the study: Fiji, Kiribati, Marshall Islands, Micronesia, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.

### Country-level econometric results and key quantitative findings

- Fiji
  - Long-run: cointegrating relationship between log real GDP in Fiji and log real GDP in Australia.
  - Long-run elasticity: 0.8 (a 1 percent increase in GDP in Australia will raise GDP in Fiji by 0.8 percent).
  - Structural (short-run) equation coefficients:
    - Error correction term coefficient: -0.77
    - Short-run elasticity to Australia DRGDP: 1* (notation indicates inclusion)
    - ln(realoil) coefficient: -0.03*
    - ln(sugar output) coefficient: 0.10*
  - Supply factor: a 1 percent increase in sugar production would boost GDP by 0.13 percent.
  - Cointegration test (Trace/Maximum Eigenvalue) indicates 2 cointegrating equations at the 0.01 level.

- Kiribati
  - Long-run: cointegrating relationship with Australia.
  - Long-run elasticity: 1 (restriction equal to one not rejected; χ2: 3.63, p-value 0.06).
  - Structural equation coefficients:
    - Short-run elasticity to Australia DRGDP: 0.43*
    - Error correction term coefficient: -0.75*( 1)
    - ln(world equity prices) coefficient: 0.05*
    - ln(realoil) coefficient: 0.08*
  - Short-run impacts:
    - A 10 percent increase in oil prices reduces GDP growth by 0.8 percentage point.
    - A 10 percent rise in world equity prices boosts GDP by 0.5 percent.
  - Cointegration test indicates 1 cointegrating equation at the 0.05 level.

- Marshall Islands
  - Long-run: cointegrating relationship with the United States.
  - Long-run elasticity: 1 (restriction equal to one not rejected; χ2: 5.68, p-value 0.06).
  - Structural equation coefficients:
    - Short-run elasticity to US DRGDP: 0.65*
    - Error correction term coefficient: -0.91*( 1)
    - ln(realoil) coefficient: -0.03*
  - Short-run impact: a 10 percent increase in oil prices reduces GDP growth by 0.3 percent.
  - Cointegration test indicates 1 cointegrating equation at the 0.01 level.

- Micronesia
  - Long-run: cointegrating relationship with the United States.
  - Long-run elasticity: 1 (restriction equal to one not rejected; χ2: 0.05, p-value 0.82).
  - Structural equation coefficients:
    - Short-run elasticity to US DRGDP: 0.84*
    - Error correction term coefficient: -0.58*( 1)
    - ln(realoil) coefficient: -0.08*
  - Short-run impact: a 10 percent rise in oil prices lowers GDP growth by 0.8 percent.
  - Cointegration test indicates 1 cointegrating relationship at the 0.01 level.

- Palau
  - Long-run: cointegrating relationship with the United States.
  - Long-run elasticity: 1 (restriction equal to one not rejected; χ2: 1.48, p-value 0.46).
  - Structural equation coefficients:
    - Short-run elasticity to US DRGDP: 1.23*
    - Short-run elasticity to own lagged DRGDP: 0.66*
    - Error correction term coefficient: -0.64*( 1)
    - ln(realoil) coefficient: -0.05*
  - Short-run impact: a 10 percent increase in oil prices reduces GDP growth by 0.5 percent.
  - Cointegration test indicates 1 cointegrating equation at the 0.01 level.

- Papua New Guinea (PNG)
  - Long-run: cointegrating relationship with Australia GDP and real aid to PNG.
  - Long-run equation coefficients:
    - Australia GDP coefficient: 0.21
    - Real aid coefficient: 0.29
  - Structural equation coefficients:
    - Short-run elasticity to Australia DRGDP: 0.55*
    - Error correction term coefficient: -0.07*( 1)
    - ln(realoil) coefficient: 0.02*
  - Interpretation:
    - Holding other variables constant, a 1 percent increase in Australian GDP would raise output in PNG by 0.8 percent (text statement).
    - Aid appears important in the long run, not in the short run.
    - Positive coefficient on real oil price is consistent with PNG being a commodity exporter.
  - Cointegration tests: Max test indicates 1 cointegrating equation at the 0.05 level.

- Samoa
  - Long-run: cointegrating relationship with Australia and New Zealand.
  - Long-run equation coefficients:
    - Australia coefficient: 0.16
    - New Zealand coefficient: 1
  - Restriction equal to one not rejected (χ2: 0.67, p-value 0.41).
  - Structural equation coefficients:
    - Short-run elasticity to Australia DRGDP: 0.21*
    - Short-run elasticity to New Zealand DRGDP: 0.50*
    - Short-run own lagged DRGDP coefficient: 0.16*
    - Error correction term coefficient: -0.85*( 1)
    - ln(realcommodity) coefficient: 0.05*
  - Interpretation:
    - Over the long run, a 1 percent increase in New Zealand GDP will raise Samoan GDP by 1 percent, holding other variables constant.
    - Short-run elasticity of Samoa’s GDP with respect to New Zealand is 0.5.
  - Cointegration test indicates 1 cointegrating equation at the 0.01 level.

- Solomon Islands
  - Long-run: cointegrating relationship with Australia.
  - Long-run elasticity: 1 (restriction equal to one not rejected; χ2: 3.16, p-value 0.02).
  - Structural equation coefficients:
    - Short-run elasticity to Australia DRGDP: 0.47*
    - Error correction term coefficient: -0.25*( 1)
    - ln(realcommodity) coefficient: 0.12*
    - ln(realoil) coefficient: -0.04*
  - Interpretation:
    - Long-run elasticity of 1 to Australia.
    - In the short run there is no immediate impact from Australia (impact begins via the error correction term after one year).
    - Non-oil commodity prices have a strong positive impact on growth; higher oil prices are a drag on growth.
  - Cointegration test indicates 1 cointegrating equation at the 0.05 level.

- Tonga
  - Long-run: cointegrating relationship with New Zealand.
  - Long-run elasticity: 0.47 (ln real GDP Tonga = 0.47 ln New Zealand GDP).
  - Structural equation coefficients:
    - Short-run elasticity to New Zealand DRGDP: 0.27*
    - Error correction term coefficient: -0.71*( 1)
    - Short-run own lagged DRGDP coefficient: 0.17*
    - ln(realcommodity) coefficient: 0.065*
  - Interpretation:
    - In the short run, a 1 percent increase in New Zealand GDP boosts Tonga GDP by 0.2 percent (text: 0.2 percent); over the long run the effect is twice as large.
    - Commodity prices negatively affect the business cycle.
    - Sub-sample analysis suggests increasing importance of emerging Asia for Tonga spillovers.
  - Max test indicates 1 cointegrating equation at the 0.01 level.

- Tuvalu
  - Long-run analysis not feasible due to short data sample.
  - Short-term dynamics (growth rates) suggest elasticity of Tuvalu with respect to world GDP is 0.5.
  - Elasticity of Tuvalu GDP with respect to world equity prices is 0.05:
    - A 10 percent increase in the world stock market will affect Tuvalu GDP growth by ½ percentage point via wealth effects.
  - For scenario analysis, elasticity of Tuvalu GDP with respect to global oil prices is assumed to be 0.02.

- Vanuatu
  - Long-run: cointegrating relationship with New Zealand and real tourism receipts.
  - Long-run equation coefficients:
    - New Zealand coefficient: 0.2
    - Real tourism receipts coefficient: 0.3
  - Structural equation coefficients:
    - Short-run elasticity to New Zealand DRGDP: 0.27*
    - Short-run own lagged DRGDP coefficient: 0.20*
    - Error correction term coefficient: -0.69*( 1)
    - ln(real tourism receipts) coefficient: 0.13*
  - Interpretation:
    - Australia is identified as the main source of spillovers over both short and long run in text; real tourism receipts are relevant short- and long-run and capture spillovers from economies other than Australia.
    - The long-run elasticity of Australia and tourism with respect to Vanuatu GDP is 0.3.
  - Trace test indicates 1 cointegrating equation at the 0.10 level; Max test indicates 1 cointegrating equation at the 0.05 level.

### Figures and impulse responses (summary)
- The appendix contains impulse response figures showing response dynamics (elasticities over years) for:
  - Samoa response to a 1 percent shock in New Zealand GDP (elasticity path from 0.4 to 1.3 across years shown).
  - Marshall Islands and Micronesia responses to a 1 percent shock in US GDP.
  - Palau response to a 1 percent shock in US GDP (shows short-run overshooting with elasticity >1).
  - Fiji response to Australia GDP.
  - PNG response to Australia GDP and real aid (separate impulse paths for Australia and real aid).
  - Vanuatu response to Australia GDP and tourist receipts (separate impulse paths).
  - Solomon Islands response to Australia GDP.
  - Tonga response to New Zealand GDP.
- Figures are labeled "Source: IMF staff calculations."

*IMF staff calculations and referenced IMF working papers and presentations as cited in the references above.*

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