Treasury Today Country Profiles in association with Citi

Oceania: a sea of potential

Beautiful Te hoho rock at cathedral cover marine reserve in New Zealand

Made up of thousands of islands, Oceania is a region many would consider to be a veritable paradise. But, as many countries within Oceania have never been connected to a continent by land, economic development faces some tough challenges – as do businesses operating there.

With the exception of Australia and New Zealand, Oceania is ranked by the UN as a developing region. Of course, discussion of Oceania would not be complete without mention of the region’s only developed countries, but this article endeavours to focus on the local highlights and Australia and New Zealand’s business connections with the rest of the region.

The collection of island countries has experienced diverse economic development paths. For many of these developing nations, agriculture, fishing and tourism are key industries. Eighty percent of Vanuatu’s population and 70% of Fiji’s works in agriculture, for instance, and canned tuna accounts for 93% of exports in American Samoa. Other major exports from the region include coconut oil, palm oil, coco and sugar, but natural resources of lead, zinc, nickel and gold are also mined on some islands.

There have been some rather interesting exports over the years too. Tuvalu, for instance, hit the international news in 1998 when the country sold its internet suffix (.tv) to a Californian company for an advanced payment of $50m (£33m). As more than half the country’s GDP at the time and with the promise of more revenue to follow, the ten-square-mile island made quite a splash at the start of the internet boom. Such opportunities are not regular for these isolated islands, however.

Indeed, many countries lean on the region’s front-runners Australia and New Zealand – among other donor nations and organisations – for foreign aid. Australia and New Zealand often have arrangements together (in the Cook Islands, Niue and Tokelau, for example) and are typically the largest aid donors. But the political landscape is changing slightly, notes Deva De Silva, Senior Country Officer for IFC in East Asia and the Pacific. “China is also now an important donor and development partner for some of these countries.”

Countries comprising Oceania

Australia, New Zealand and Norfolk Island

Melanesia

Fiji, New Caledonia, Papua New Guinea (PNG), Solomon Islands, Vanuatu

Micronesia

Guam, Kiribati, Marshall Islands, Micronesia (Federated States of), Nauru, Northern Mariana Islands, Palau

Polynesia

American Samoa, Cook Islands, French Polynesia, Niue, Pitcairn, Samoa, Tokelau, Tonga, Tuvalu, Wallis and Futuna Islands

Regional patchwork

The economic landscape of Oceania exhibits not only variation between the region’s developing and developed countries but variation between the island nations themselves. Nauru, for instance, has been forecast impressive growth rates of 10% and 8% for 2014 and 2015 respectively. Although the smallest island country in the world (with a population of approximately 10,086), it is now on the global radar because of infrastructure developments. The Regional Processing Centre (RPC), originally reopened in 2012 for asylum seekers looking for refugee status in Australia currently employs around 200 Nauruans and is set for expansion. Thus, a boost to consumption, expenditure and growth is predicted.

With one of the largest populations in Oceania, PNG is also one of the fastest growing economies in the world with predicted growth rates of 6% for 2014 and 21% for 2015. The bright future for the country’s economy is driven by liquefied natural gas (LNG) exports to Asia. A $19bn LNG plant in PNG’s highlands began production in April last year and is expected to produce 6.9m tons of LNG per feed. With two more gas projects being developed, PNG could become a crucial energy producer for Asia.

“It’s a tough region as the countries are small and all far from global markets. Isolation makes the economies quite weak and poor infrastructure often gets highlighted as the key limitation for private sector growth.”

Deva De Silva, Senior Country Officer, IFC in East Asia and the Pacific

Across the rest of the region, other instances of growth include tourism for the Cook Islands where economic growth has been linked to a 11.2% increase in visitor arrivals between 2011 and 2013. Similarly, Fiji – the only country amongst the pacific island nations not included in the World Bank’s International Development Association (IDA) aiming to help the world’s poorest countries – beat expected number of arrivals in 2012 by over double, with around 600,000 tourists visiting. In fact, Fiji acts as a regional hub and is a focal point for business activity in the Pacific region. Fiji’s international airline, Fiji Airways, operates 400 flights a week throughout the Pacific. The country also offers international shipping services and three international submarine cables land in Fiji.

However, evident of the disparity between island countries, other countries struggle to optimise their potential. Tonga, for instance, is a relatively poor nation with a narrow industry base focused around farming of a limited range of crops and Kiribati experiences problems transporting goods due to its 33 islands being spread over a vast distance.

Developing economies: the challenges

As such, growth for the majority of these developing Pacific countries is no easy task. De Silva explains that “it’s a tough region as the countries are small and all far from global markets. Isolation makes the economies quite weak and poor infrastructure often gets highlighted as the key limitation for private sector growth.” Economic stability is also vulnerable to external shocks – largely due to the nations’ limited resources.

Opportunities for growth are set to expand as more companies and investors see the region’s potential.

One example of this vulnerability is the natural disaster which recently struck Vanuatu. “There was a category five cyclone there in March this year – which is both a tragedy and a logistic challenge for businesses,” explains Michael Murphy, CEO for mobile communications provider, Digicel Pacific. “We managed to get our mobile network back up within five days but I think a lot of people forget that in this region we have very different terrains. Building locations and connectivity into these markets is very challenging and will remain so until the infrastructure starts to improve over a longer period.”

Moreover, ANZ notes several challenges associated with doing business in Oceania’s developing countries: the limited avaliability for overseas businesses to own land in Samoa; the 820 indigenous languages spoken across PNG and the corrupton that can exist within parts of the public service, as well as in PNG’s business environment; and stringent controls over cross-border payments from Fiji are but a few examples.

What needs to done?

Nevertheless, opportunities for growth are set to expand as more companies and investors see the region’s potential. As De Silva explains: “Although they are not always seen as strategic countries, there are donors from across the globe investing in Pacific island countries. It is amazing that some of these countries – even the smallest with only 30-50,000 people – will have up to 40 active donor partners.”

In addition, privatisation of public utilities by many of the governments in Oceania is opening up opportunities for forward thinking companies. Digicel Pacific, for example, has taken on the challenge of establishing operations in the region (described by Murphy as “up mountains and down rivers”), and, according to De Silva, “has absolutely changed the landscape in terms of telephone usage, the efficiencies of telephone usage, the cost of usage and its reach.” The telecoms company now boasts expansion over six pacific countries (Vanuatu, Samoa, PNG, Tonga, Fiji and Nauru), including 4G in two markets.

Before Digicel, each of these six countries had government-owned single monopoly telephone operators which were inefficient, costly and limited to urban areas. Certainly, the dialogue around private sector investment in such areas is increasing and De Silva predicts in the next few years that “we will see the Pacific governments pursuing private sector investment as a priority for economic sustainability and growth.”

A helping hand

South Pacific Business Development (SPBD) is one example of an organisation assisting companies in the region with the identification of opportunity and provision of financial support at the other end of the scale of opportunity. Inspired by the pioneering organisation in microfinance, Grameen Bank, SPBD targets the base of the economic pyramid in four pacific island countries: Samoa, Tonga, Fiji and the Solomon Islands. “The top 20% of the population in the South Pacific have most of the wealth, education and business connections meaning a lot of the existing financial services and development is channelled through them. But if you are going to achieve improvements to the quality of life for the masses, then you need to do it through a vehicle like us,” explains Greg Casagrande, Founder and President of SPBD.

“Due to the small-sized nature of Oceania’s developing economies, there are very few formal waged employment opportunities. SPBD enables individuals to be self-employed, invest in capital equipment and increase their productivity to enhance their income.” By providing training on loan applications, granting those loans without the requirement of collateral and maintaining ongoing business guidance, SPBD “empowers people at the grass roots level through getting them established privately.” That, according to Casagrande, “is what’s sustainable and scale-able.” Indeed, such opportunities help leverage a business environment where the private sector can flourish.

Doing business in Oceania

Problematic for both corporates and entrepreneurs alike, however, is the limited access to finance in Oceania. With the exception of Fiji, in the majority of countries, less than 20% of the population have access to finance. “The banking sector faces the same challenges that a corporate would because of limited access to actual infrastructure,” explains Murphy. Moreover, “traditional banks that demand collateral or formal wages end up excluding 80% of the population from any sort of financing,” says Casagrande.

Reliance on cash is particularly problematic for entrepreneurs as they have to travel long distances to deposit money at distant bank branches. But a new trend has been emerging where banking services can be available at their fingertips using technology. Several initiatives have launched where payments and transfers can be completed using mobile phones – so although consumers and businesses may be geographically remote, they can be connected to their banking provider. Money can then be withdrawn from electronic funds transfer machines or at local shops operating as agents for the banks. Currently, BSP, ANZ and Westpac are all implementing electronic and/or mobile banking platforms.

For larger corporates, research must be undertaken into which banks can support their local needs. ANZ, for example, has a regional operations hub in Fiji’s capital city, Suva, and operates branches with corporate services in many of the island countries.

Looking ahead

The reliance on external support and investment, as discussed earlier in this article, is recognition of the tough conditions that economic and social development face in the small island countries of Oceania going forward. Although the majority of Oceania’s nations are likely to remain aid-dependent for some time, the nature of dependency has the potential to reach a point at which financial assistance could support budget implementation by governments, rather than dominating it.

The reason – change is beginning to occur: “A while back, the governments in the region seemed happy enough to receive aid and manage bilateral relations. In the last five years, however, we have seen a marked improvement in the way governments are engaging with the importance of the private sector,” explains IFC’s De Silva. Pacific governments seek (increasingly so) to build a greater capability to respond to operational and business challenges, attracting investor attention along the way.

Top tips for Oceania’s future

In order to increase the region’s appeal, Casagrande has the following recommendations (or rather, wish list):

  • Maintaining security.

    Ensuring there is peace on the islands is extremely important to their future economic well-being.

  • Increasing skill levels.

    Trying to further enhance educational opportunities for everybody would increase the notably low skill levels in the Pacific Islands.

  • Further disseminate laws.

    Promoting transparency and the effective function of the central banks would improve the attractiveness of the business environment.

  • Investment-friendly tax systems.

    Amongst the pacific island countries, there are some high withholding taxes that can go up to 35%. Building a more attractive tax regime would incentivise investment.

  • Changing property rights.

    Currently, it is difficult to get clean title as a lot of land is communally held. This is a concept many overseas investors find challenging.

  • Improving air connections.

    There is a surprising lack of direct flight connections between the islands. In fact, Tokelau is only accessible by boat twice a month from Samoa and travellers face a 26 hour journey – even in good weather!

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