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 As 2009 kicks into gear, questions and more questions are continued to be asked about the state of our economy in light of the global financial crisis and the rising cost of living. The Central Bank of Samoa (CBS) has issued a statement about the Financial Crisis and the Samoan economy, which has been published.
Today, Sub-editor Kimberly Ah Chee interviewed the man controlling the economy, Governor of the Central Bank of Samoa (CBS), Leasi Papali’i Tommy Scanlan about tourism, remittances, unemployment, international reserves, interest rates, inflation and financial stability among other issues:
Samoa Observer (SO): The press release published in the Samoa Observer raises some questions. It is also likely that not everyone is quite up to date with the financial terms therein. Will you please clarify for the public? Leasi: Well usually we publish what we call a Selected Economic Indicators Report. The press release is a shorter version of that. Firstly, the numbers that we’ve got are the latest that we have, and that was from November last year. It takes quite a while for the numbers to come in because we have different sources. We get them from the Ministry of Finance; we get them from the statistics Bureau for inflation, Ministry of Revenue for Government revenue and expenditure; we get reports from the banks about the lending and the deposits and the financial information of the banks; and we also get the tourism figures from the Samoa Tourism Authority.
 TOURISM
SO: How do they interpret the tourism figures?
Leasi: They get the numbers of tourists coming in from the customs forms because they ask those questions, ‘How long are you coming here for?’ and so forth. The definition is that if you are here for less than a year you are a tourist. So everybody, even our people from overseas (what we call VFLs –Visiting Friends and Relatives), so they are classified as tourists. So we have the number of tourists that come in and we have a formula which is based on a survey which was done in 2005. That’s the formula which calculates how much each tourist spends in the country. Then using that formula and the number of tourists coming in, that’s how they come up with what we call the tourist revenue that’s collected; the cash. The cash that we collect from tourists. And that formula is also used in other countries like Fiji.
SO: So is that figure an average, a median?
Leasi: Yes. It’s an average amount that is spent by tourists, based on a survey by the hotels at that time. We get information about how much a tourist spends on food, how much they spend on accommodation, how much they spend on transport. And that’s all aggregated and the formula is produced from that.
SO: So given that some people only stay at open fale accommodations while others would stay at such places as Aggie Grey’s, does that seem a fairly accurate figure?
Leasi: It’s more accurate than anything else. I mean it’s the best of the worst. (laughs) The ideal situation would be for the hotels to forward reports to us on a monthly basis saying how much they earn from it. But, we’ve tried those surveys, the Ministry of Finance have done it... I mean understandably, if you’re running a hotel the last thing you want to do is fill up a questionnaire.
So, basically it’s the formula used by the region, in the Pacific, by the association of ASTPA, the Association of Tourists in the Pacific; a similar formula which is used by Fiji. So it’s an average formula and last year’s figure is based on the previous years, 2008, 2007, 2006. So what we’re saying is that because it’s the same formula this applies right through. So in terms of a margin of error, although there’s a margin of error there, it’s not comparing say this formula for a new formula. It’s the same formula so the consistency is there. But as I said it’s the best that we can come up with.
So based on those figures that we got in November, it showed that the number of tourists that arrived in Samoa increased, compared to the previous year. Now we average that year to year or month to month between years because of the seasonality aspect. So in November 2008 we’re saying that the number of tourists that came in was higher. Using the formula we calculated that it was 22% higher in revenue.
The reason why it’s larger or the reason why the increase in revenue is larger than the increase in numbers is because of the inflation rate.
The formula that we use has the inflation element in it, so if we have a higher inflation rate, which means that we expect people to spend more in Samoa, so that’s they we have a higher revenue in tourism. So what we are saying is that tourism revenue increased in November, and also remittances. Our estimate formula says it increased in November.
REMITTANCES
SO: How would you explain the increase in remittances...?
Leasi: While I’d like to think that people in New Zealand (and other countries) are still very kind to us
SO: How would you explain it when the projection is that there will be more unemployment and so forth? People are less willing to invest.
Leasi: I can’t. I can’t explain it. But our forecast said, and also what the other financial institutions like the ADB and the World Bank, and everyone forecast that remittances will decline, globally. Also in the Pacific because of unemployment rising in both Australia and New Zealand, but the numbers indicate that the remittances still went up. But, that doesn’t mean that it’s still going to continue to go up. We’ve got indicative reports from the money transfer operators here that the remittances still went up in December, but that’s also seasonal.
SO: So they’re up compared to December 2007?
Leasi: Indicative, yes. But we’re saying, and everybody is saying that we shall see a slowdown in January in the beginning of this year. And I think that we should expect that. I just had an interview on TV Samoa and I said that. I said that, just because the report says that we witnessed an increase in tourism revenue, remittances in November, and also export revenue, that doesn’t mean that that will continue. We should expect that the economy should decline, because of unemployment. There was a figure in the news, I think about 75,000 people becoming unemployed this year in New Zealand. I mean a lot of those people have got to be Samoans.
UNEMPLOYMENT
SO: Do you expect unemployment to be on the rise in Samoa?
Leasi: We don’t have unemployment figures. Because we don’t have unemployment figures and because the main employer is the government, I can’t see the government firing anybody. Of course we saw 80 people being made redundant at Yazaki, but those are the two main employers. I have not heard of other employers sacking people, like factories; unlike NZ where factories are closing down, banks are closing up, folding.
SO: So you don’t expect any private businesses to fold or struggle?
Leasi: No. I can’t see why. I think the logical conclusion could be that because of the slowdown in tourism revenue, we should see the tourism sector in terms of hotels and motels slowing down, which therefore could result in some people being laid off. But because of the number of employees in the fales for instance, I mean the families are running them. And the hotels themselves, I can’t see any firing any people because they would probably think that’s a seasonal thing, and then there will be a comeback.
I can’t see any noticeable increase in unemployment in Samoa because, as I said, we don’t have any unemployment figures. But the reports have always said that there is no unemployment in Samoa because people go out in the village and then they go and plant the taro and the bananas and fish so, they are becoming employed and revenue earners. So unlike the developed economies where we are witnessing now a lot of factories closing down, and banks closing, and motor vehicle factories closing down, there’s no such noticeable impact for us.
That’s why I kind of feel a bit uneasy when there are a lot of people saying that the economy here is devastated; the implication is that it is devastated because of the slow down of the financial crisis, because as I said, there are no major factories or anything. Unless Yazaki closes down, then I think that would be a big impact. I don’t know how many people are employed there now, but and I can’t see why...
The only reason there has been a slow down, I feel, in the purchasing power of people in the holidays is because I think people are more smarter in their spending habits, I suppose because they’ve constantly been hearing about the financial crisis and they are now preparing themselves for any impact that could happen here and therefore, hopefully they are saving up. No factories have closed down, so the source of revenue is still there. Remittances have increased, so there should be more money coming in from overseas. And tourism revenue has increased so I can’t see us being more adversely affected as other countries.
INTERNATIONAL RESERVES
So coming back to the press release, this is what’s happening and our numbers show that our reserves are still holding up, at $214.5million, which is just slightly up from the previous year.
SO: Can you explain what international reserves are, how they work and how they protect the economy?
Leasi: The foreign reserves are how much money, how much cash in foreign currency that we have overseas. It is the total amount of funds that we have in US dollars, NZ dollars, Australian dollars, in Euro. And the bulk of that is with the Reserve Bank.
SO: So these are investments?
Leasi: Yes.
SO: Just to clarify, when the financial crisis first struck, it was announced that there is no international lending. So there’s no borrowing, only investing?
Leasi: Yes. To clarify that, in NZ for instance, a lot of overseas companies borrow from their financial system. Because all the financial systems, all the financial institutions in the world are globally linked. So what happens is that when a bank in the US for instance, runs out of money because of a sub-prime loan, they will borrow from other banks to help with that.
So when Bank A borrows from Bank B in NZ, and Bank A in the US collapses, that’s going to affect NZ. That’s not the case here. And also the companies like GMC, the big motor vehicle companies in the US, borrows from Bank A in the States for instance, and Bank A runs out of liquidity and borrows from Bank B in NZ, if the automobile company closes down that will affect Bank A, which will affect Bank B, so the ripple affect comes down the chain, from the US. That is how the global financial crisis occurred because everyone borrows from each other. For us here, we don’t have a GMC borrowing from us for instance. We don’t have ANZ in NZ borrowing from us.
ANZ and Westpac here are subsidiaries; they are totally independent banks, operating on their own share capital. Unlike the ANZ in Fiji and ANZ Tonga; they are branches of ANZ in Australia. So therefore, well they don’t have a share capital in Tonga. They all have a main share capital in Melbourne. If Melbourne is affected, then they will be affected.
Coming back to our country, when we said that it’s because we don’t have any major companies borrowing from us, so there is no chance that Toyota folding in NZ affects us here. So the financial system’s exposure here to the ourtside world is minimal. It will be affected when, for instance, ANZ in Melbourne goes belly up, in which case the ANZ Bank will probably ask (because they own a bunch of share capitals here), they will probably want all their reserves.
Because not only do they have a share here, but ANZ here has got a lot of profits which are kept here. Now if ANZ in Australia said to Samoa we want all those reserves to be remitted, then that would be [a problem]. But, that doesn’t mean that we’re going to allow that to go because that would affect us.
SO: So you can choose to take time returning the money?
Leasi: Yes. Our role is to protect the stability and integrity of the country of Samoa foremost. So if ANZ of Melbourne said we want the reserves from here we will say to them that you can’t have all of it. We can allow maybe a million a month for instance, but stagger it so that we don’t impact on us.
But coming back to the reserves, these are all cash, invested by... When somebody comes from NZ and brings a million dollars, they can’t spend that here, they need to convert that to tala. So what they do, they buy the tala from us; they buy the tala from the ANZ. Who then sell us the million dollars, and we give them the tala, they give it to you. So that million NZ dollars then comes to us and we invest it offshore. So 80% of the foreign exchange gets invested by us, the Central Bank of Samoa. We have those in different currencies. The reason why we have them in different currencies is because of the risk; we can’t afford to have it all in US dollars because if the US collapses it’s gone.
SO: So is it all invested in banks or other places as well?
Leasi: Reserve banks; conservatively. Yes we are very conservative. We invest them for the reserve banks, the Reser
ve Bank of Australia ... We do have investments in the commercial banks, AAA rating banks: ANZ is one of them, Westpac is one of them. But we don’t invest in stocks, bonds, buy shares or anything like that. We only invest in treasury bills, (which are the government instruments like the government treasury bills) and in central banks; the Reserve Bank of Australia treasury bills, bank bills. So we invest those in a very conservative manner; because it’s not our money, it’s the country money.
SO: That’s good to know.
Leasi: So we don’t have that. We have 214 million in cash, which is invested offshore.
SO: Have the reserves been stretched of late?
Leasi: No. The reserves as they are, 214 million, covers 4 months of imports. What that means is that because we have imports, say for instance the total value of imports in November last year I think was about 59 million. In October it was 60.4 million.
So this is the average or the actual cost of our imports per month. With this 59 million per month and the reserves that we’ve got, it will take about 4 months, with nothing happening, if we don’t get any money in it will take us 4 months to use up those reserves.
SO: Four months to use up all of the reserves? If nothing else was coming in?
Leasi: Yes.
SO: That seems pretty fast.
Leasi: Yeah, but that’s a big assumption that nothing is going to be coming in. But if we do see that it’s going down too fast, then I think we have ways of slowing it down.
SO: How do you do that?
INTEREST RATES
Leasi: We slow it down by raising interest rates. If we see that there are far too many imports coming in and we’ve got very little foreign exchange, we tighten monetary policy. We tighten monetary policy by raising interest rates, and we tell the banks we want interest rates to go up. By raising interest rates it will be more expensive for people to import goods, so that will slow down imports, and that will slow down the outflow of foreign exchange. So that’s one instrument that we use.
SO: Interest rates, at the moment, have decreased. Why? Is it due to reduced consumer spending or a buffer against...?
Leasi: No. We made the decision in July last year that we want the interest rates to come down...
SO: Before the banks fell in the States.
Leasi: Before the banks fell in the States, yes. The reason we wanted interest rates to come down was because although we saw inflation was still high, a lot of that was imported. So what we said was that even if we continue to raise interest rates because of imports, we’re still going to have high prices, because of the high fuel price that was about $150 per barrel at that time, flour and rice were all high... So we took the option, which is against Reserve bank policy or fundamentals.
Reserve banks usually say, when we have high inflation, you raise the interest rates so that will slow down the demand of people wanting to buy stuff, before we reduce interest rates. We went the other way. We said even though inflation was high, because it was all imported, we want interest rates to go down so that people here can produce far more cheaply. So by producing a lot cheaper we’ll have more commercial, more domestic goods. By having an increase in goods the price will come down. That’s why we made that decision.
It was interesting because I attended a meeting in Washington in September and I told them that’s what we did. They all looked at me and thought I was crazy, but then after that everybody started reducing interest rates, despite the inflation going up. And I said this is what you’ve got to do, you’ve got to be flexible with the way you conduct monetary policy.
INFLATION
SO: Inflation has effectively doubled in a year.
Leasi: 10.4%, yeah.
SO: Why is that so?
Leasi: The inflation is measured as an average, a 12 months average; it’s a rolling average. Because the fuel prices were very high in July last year, that is still passing through, that is still part of the formula.
So whereas the fuel prices have gone down in November and December, that takes awhile to have an effect on the moving average because it’s calculated on the 12 months average. So, for instance, we are in to January now. What happens is the inflation rate will be the average of the rate from February last year, to January this year, so last year will drop off. Whereas if the inflation rate was high in July and August last year, that will still be carried forward on the formula. It’s only when we get down to June for instance, that figure will drop off. So in July we will see the average come down.
Inflation is still high because of the commodity prices worldwide, but they are coming down. What we are going to be doing is revise our numbers from the December figures and should see a decline in inflation; we’re looking down to about 7-8% by the middle of this year.
SO: But not before.
Leasi: Not before.
SO: Which means that the prices of say, rice and flour will remain high?
Leasi: It’s an index of all of the prices: flour, rice, taro, bananas, clothes, transport. So even if the price of flour and rice go down, the average will still be up because of the higher prices of the other commodities. But as we saw with the survey of the Price Control Board, there is competition. It was felt there could be collusion amongst the big wholesalers, but I think it was reported in your paper that the Ministry feels that there is no collusion.
But that’s the thing about this average formula. Whereas one price is down, inflation on it will still be high because of all the others.
Kim: Everyone questions why when petrol has gone down, everything else remains high. Is that the explanation, inflation in relation to the other products and services?
Leasi: Yes inflation is an index. It’s a measure of all the prices of the commodities on the index.
OIL
There’s also a mean time. The formula that is being used by the Treasury department to calculate the price of oil, there’s always a lag of about a month or two. If we have prices overseas going down, usually they allow about a month or two before the local prices go down. That’s to be expected because if the price of oil in Singapore goes down, doesn’t mean that we’re going to get that oil here. The expensive oil is still coming through, so we have to sell that expensive oil at that price. It will take time for the cheaper oil to get here; then we’ll see a reduction in price. So there’s always a lag of about a month or two.
With the transport sector and also the EPC, there’s also another lag because as I said, when they’ve got more expensive stocks, they use those and then they use the cheaper ones. So for people to expect prices to go down here immediately after they go down overseas is unreasonable.
SO: Is it normal for the ships to hold large stocks of fuel?
Leasi: Yeah they have what they call MR, medium range tankers. They come in big tankers because it’s cheaper for them. They usually try to discharge in other countries like Fiji, Samoa and I think American Samoa. They come in, I think, about once every 6 weeks.
SO: So they wouldn’t use all of their fuel in one trip, they can store fuel for several trips.
Leasi: Yes.
SO: So just like the EPC they would be using the more expensive fuel first.
Leasi: Well we’ve got a lot of tanks at Mulinu’u and I think we’ve got more than a month supply of fuel there, funded with the help of OPEC. If a ship doesn’t come in I think there’s enough to supply us for that long. That’s substantial.
SO: For who exactly?
Leasi: The fuel tanks we have there is for all of Samoa.
SO: So that would be the main explanation for continued high prices. They have stores, the older, more expensive ones have to be used up first, then aside from inflation, as they bring in new and cheaper stock, and the prices will go down.
Leasi: Yes.
SO: Now, as evidenced in Samoa Observer’s Street Talk, the public are still questioning why many goods are still so expensive, particularly rice. The price more than doubled since earlier last year and is of poorer quality. So people are still wondering why that is so. Are the oil reserves related?
Leasi: Well, that’s a factor. They may be trying to deplete their old stocks which were bought at a high price, before the new ones come in. Also the exchange rate. For instance rice from the US should be more expensive now because of the stronger US dollar; you spend more tala to pay for it. As the NZ and the Australian dollar have weakened, it did last month, we should expect imports from those countries to be cheaper because we pay less tala to buy the NZ dollar.
But the market forces and competition is always there. There are a limited number of goods that are subject to price control, other items are all subject to market forces. So if there is a monopoly on a particular item, theoretically they can dictate the price. That’s how the market operates. For example at the fish market on Sunday they were selling a string of fish for $40. They’re normally sold at $30 but it’s all supply and demand. When asked why it’s so expensive the guy said either take it or leave it. Someone else will come along and want to buy the fish.
EXCHANGE RATES & SAFE-HAVENS
SO: You mentioned exchange rates. The report says the US dollar has gone up while the Australia and NZ dollars are down. What caused the US dollar strengthen when they were the first to get into financial trouble?
Leasi: The US dollar is usually regarded as a safe-haven currency.
SO: Can you explain that term, safe-haven?
Leasi: What the markets are saying is that no matter what problems the US face, they are a much more stable country economically than for instance, the European countries. There is little opportunity for the US economy to collapse completely. So even with the war going on in Iraq, which has affected the US economy, they still feel that the US is going to come back. It’s safe to put your money in the US dollar, that’s why they call it a safe-haven currency.
SO: So it lost its safe-haven status yet the value rose.
Leasi: The safe-haven status makes the US dollar go up. You say the US economy was down because of the recession... So naturally the US dollar should go down. But what people are saying is that the economy of China, the economy of India, the economies of Europe are all going down. All economies are in a recession. But in terms of a trade-off they still feel more confident in parking their money with the US, despite the economy being in recession.
Now if there was a country that was not in recession, then people would start investing in it. So given that everybody else is on the same footing you’ve got to start looking at political stability. Markets say that America is more stable politically than any other country.
When an economy is unstable politically, like in Central America for instance, the president can come in and dictate. He can say he’s taking over, we’re going to nationalise all the banks and we’re not going to pay any more debts, and we’re not going to pay any investors their money back, so therefore you lose your money. So that’s the worry that markets have.
When the US went into recession people pulled their money out and went to Japan, to Europe, they went to the UK, but as these economies went into recession they started coming back to the US. That’s when we saw the US dollar strengthening again. The reports now are that the recession is returning and is going to get worse.
So that’s why we call the US a safe-haven currency, it’s all a matter of relativity, who is more safe than the other. The US has always been a country that people are confident in because of politics.
SUPPLY & DEMAND AND THE WEATHER
SO: The report said the higher domestic prices are a result of the dry weather. How have you come to that conclusion?
Leasi: Because of the drier weather there was a very limited amount of produce sold in the market, and because of supply and demand. There was short supply so the demand was greater, which then pushed the prices up.
FINANCIAL STABILITY
Leasi: The other issue [I want to focus on] is the confidence in the financial system. We’ve had enquiries from the major depositors in the country, common corporations (church congregations who have big deposits in the banks) about the risks of their deposits because of the financial crisis.
In Australian and NZ now they have to guarantee a maximum deposit of about a million I think. We have here what we call financial guidelines and regulations in place, which ensure that the banks are safe. We get reports from them on a monthly basis. And if we see that there is a risk element involved in their lending then we bring them in and talk to them and say we need to slow down on your lending. So I can assure you from our latest reports that our banks are safe.
I’ve said that to the corporations. The banks are safe, they’re well capitalised, there’s a lot of liquidity, which means that the banks have at the moment of 15 million tala in their coffers (in their banks) which are available for lending. That’s a lot of money, a lot of liquidity. So any fear that the local community have that the banks are have no money is misplaced.
SO: Or will fail?
Leasi: Or will fail. There’s very little chance of any banks failing. Because as I said, they’ve got a lot of liquidity, they’re well capitalised and interest rates are down. But if they’re not earning at the moment it’s because of that caution. For instance a rental car company: if tourism’s going to slow down they’re going to slow down, so [the banks are] cautious about lending to the rental car businesses. So the caution is there and it’s based on commercial principles, not anything to do with being at risk.
SO: They’re governed by the same principles as at any other time.
Leasi: Yes.
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