Cook Islands Ratings Affirmed At #B+/B# On Modest Debt Outlook Remains Stable

Stocks and Financial Services Press Releases Wednesday February 25, 2015 08:50
Islands--25 Feb--Standard & Poor's
RATING ACTION
On Feb. 25, 2015, Standard & Poor's Ratings Services affirmed its 'B+/B'issuer credit ratings on the Cook Islands. The outlook remains stable. TheTransfer & Convertibility assessment remains 'AAA'.
RATIONALE

The ratings affirmation reflects the Cook Islands' moderate per capita incomelevel and modest government debt burden. However, vulnerabilities associatedwith the country's weak policymaking culture and institutional settingsconstrain the ratings. These shortcomings hamper the country's economic growthpotential and leave scope for a weakening in fiscal discipline.

In addition, the Cook Islands economy is vulnerable to the impact of cyclonesand changing tourism preferences on its major revenue earner, the tourismindustry. Further moderating the ratings are the country's lack of monetarypolicy flexibility (reflecting its use of the New Zealand dollar and absence

of a central bank) and data deficiencies that constrain our analysis of theCook Islands' external position.

Income is high compared to that of peers, with GDP per capita estimated atUS$22,200 in the year ended June 30, 2014. We project Cook Islands' real percapita GDP growth will average 2.5% over 2015 to 2017, partly reflectingfurther expected declines in its population. Emigration is high in the Cook

Islands, averaging 1.6% of the population annually during the past 18 years,reflecting Cook Islanders' rights to live and work in New Zealand andAustralia. This labor mobility acts as an important safety valve, though, withcitizens having access to much greater employment opportunities than what is

available in the Cook Islands.

We expect moderate further increases in tourist arrivals to support economicgrowth, with tourism remaining the primary economic activity in the CookIslands. Yet tourism growth may be held back to some extent in the near termby a high exchange rate, which in particular may encourage New Zealanders totravel to some of the Cook Islands' competing holiday destinations in thePacific. While there is no data on the Cook Islands' real effective exchangerate (REER), it is likely closely related to that of New Zealand. NewZealand's REER remains elevated compared to historical levels, despite havingrecently declined from a multi-decade high in 2014.

In our base-case scenario, we project general government debt will rise by anaverage 4.4% of GDP annually over 2015 to 2017, with net debt expected toaverage 23% of GDP over the same period. The government's sizableinfrastructure program currently underway is leading to rising, albeit still

modest, debt levels, thus reducing fiscal buffers somewhat. But the focus onwater, sanitation, and road infrastructure, could increase amenity fortourists and help bolster this key sector of the economy if the private sectorcan capitalize on this. This could then support government revenues.

The concessional and long-term nature of current government borrowings, aswell as the government's low debt level, means that general governmentinterest expenditure to revenues is low: estimated to be 1.6% on averagebetween fiscal years 2015 and 2017. But while government debt remains low, alarge portion of this debt is exposed to foreign currency movements.

We equalize the local currency rating with the foreign currency rating,reflecting the Cook Islands' absence of both monetary policy flexibility and adomestic capital market, and its use of the New Zealand dollar. The transferand convertibility assessment for the Cook Islands is 'AAA', which alsoreflects its use of the New Zealand dollar.

OUTLOOK

The stable outlook balances the Cook Islands' sound economic growth prospectsand low level of government debt, against the challenges it faces inovercoming weak political and institutional settings and fostering more robusteconomic growth.

We would lower the ratings if a weakening in global economic conditionsreduces tourism sector receipts and, in turn, worsens the government'sfinances. A weakened commitment to uphold past fiscal gains through highoperating spending, resulting in its debt burden rising by significantly morethan we currently expect, could also bring pressure on the ratings.

Improvements in the sovereign creditworthiness could come with sustained gainsin policymaking stability and effectiveness, evidenced by the reduction ofsizable data deficiencies, and progress in increasing economic opportunitiesfor residents.


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