Credit report warns of issues

Monday April 30, 2018 Written by Published in Economy
American financial services company, Standard & Poor’s sees the Cook Islands’ close relationship with New Zealand as a plus. Pictured is prime minister Henry Puna, New Zealand prime minister Jacinda Ardern and deputy prime minister Winston Peters, during their visit to the Cook Islands last month. American financial services company, Standard & Poor’s sees the Cook Islands’ close relationship with New Zealand as a plus. Pictured is prime minister Henry Puna, New Zealand prime minister Jacinda Ardern and deputy prime minister Winston Peters, during their visit to the Cook Islands last month.

The Cook Islands’ narrow economic base plus the country’s infrastructure shortcomings, an absence of monetary policy flexibility, and information deficiencies, particularly in the external accounts, could weaken the country’s credit quality.

This was revealed in a research conducted by American financial services company, Standard & Poor’s, which gave the Cook Islands a “B+/B” sovereign credit rating on the back of sound tourism prospects and donor support.

However, the internationally renowned company said the rating could come under pressure over the next 12 months if there was a weakening in the government’s commitment to uphold past fiscal gains through changes to economic or fiscal policies. This would result in weaker fiscal balances, and the country’s debt burden rising by significantly more than currently expected, a report said.

In February this year, the Standard & Poor’s said the ratings given the Cook Islands reflected the vulnerabilities associated with its weak institutional settings, limited monetary policy flexibility and a narrow economic base that suffers from heavy emigration, and limited external data.

These factors, the report said, were partly offset by the government’s supportive relationship and high labour mobility with the highly-rated New Zealand.

They were also balanced against the country’s use of the New Zealand dollar, the sound outlook for its key tourism sector, low borrowings, financial and technical assistance from donor agencies, and the country’s insulated financial system.

The report said vulnerabilities associated with the country’s weak policymaking culture and institutional settings were a key ratings constraint.

The Cook Islands’ political framework had historically been fragmented and susceptible to policy shifts driven by populist sentiments that have hampered previous development and reform efforts, it said.

However, the report said the Cook Islands also benefited from a close and comprehensive political, economic, defence, and foreign policy relationship with New Zealand.

“The country’s monetary policy flexibility is diminished because of its use of the New Zealand dollar and absence of a central bank. This arrangement means it forfeits monetary independence which is an important lever for promoting economic and financial stability,” the report said.

“That said, its use of the New Zealand dollar has enabled the Cook Islands to benefit from lower inflation than its peers.”

Standard & Poor’s said there was a lack of transparency in the activities of statutory authorities and other government-owned or government-controlled entities, contributing to the Cook Islands’ off-balance-sheet liabilities.

“Inadequate coverage and timeliness of statistical releases is a key factor that restricts a robust analysis of its economic, external, and financial system performance.

“The Cook Islands is not a member of the United Nations or International Monetary Fund, and is not included in major international economic and social surveys such as the United Nations Development Index, and this also limits opportunities for comparison with the Cook Islands’ peers.”

However, the report said the stable outlook balanced the Cook Islands’ tourism sector prospects and supportive relationship with New Zealand and donor agencies with the challenges it faces in overcoming weak political and institutional settings and infrastructure shortcomings to raise the prospects of the population.

“There is little prospect for improvements in creditworthiness over the next 12 months without sustained gains in policymaking stability and effectiveness, evidenced by the closing of sizable data deficiencies, a strengthening of the government’s fiscal position, and progress in opening up the economy to create opportunities for residents to stem the population decline.”

Standard & Poor’s is the world’s leading index provider and the foremost source of independent credit ratings.

It has been providing financial market intelligence to decision-makers for more than 150 years.

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