For such a small economy and Vanuatu’s obscure location in this world, very surprisingly, the vatu has performed quite well. Since 1993, the vatu’s exchange trading range in relation to the US-dollar (‘USD’) has fluctuated at its current high valuation (inverse - greatest value) at the 112 VUV compared to it’s lowest valuation reached in year 2001 with an average exchange valuation of 145 VUV level. Will this stability remain and what currency risks are evident? Below is a summary of our findings as researched by BankINTRO.com
POLITICS: Vanuatu was formerly known as New Hebrides - a territory jointly run by the British and the French administrations up until independence in July 1980. The leader of Vanuatu is President Father John Bani with the next election scheduled for 2004. The capital is Port Vila.
ECONOMY: Vanuatu is considered to be that of a third world developing nation status economically as the majority of citizens (65 percent) for the most part survive on subsistence agriculture although great changes are underway. The economy today remains relatively stagnant for the most part as Vanuatu experienced a slowdown in 2001-02 from the fallout of two typhoons that hit the nation in year 2000 and a powerful earthquake in January 2002 coupled with the global economic slowdown in 2001. One of the main disturbing economic trends in the 1990’s was the rise in debt from 15 percent of GDP to the present legal 40 percent of GDP. During the 1990’s, the economy grew at an average pace of 2.5 percent annual growth but this may change with increased growth as Vanuatu now has diversified the economy into new and exciting areas. These new industry segments include a growing profitable industry for Vanuatu is in the area of providing offshore financial services: company incorporations, trusts and bank accounts. National revenue is also derived from merchant marine shipping registry for several countries in the world today. Tourism is a growing industry with 50,000 visitors alone in 1997 as it is a major foreign exchange earner for Vanuatu, the government wishes to increase this industry. Other new industries include the discovery of snow crabs in the waters offshore worth $1 million USD/year.
No proven mineral or oil/energy resources as of yet have been discovered thus relying on imports. Agriculture plays an important role in the economy as major exports for Vanuatu include copra (dried coconut is main export), kava, timber/wood processing, fish and beef. Future potential within the cattle industry ‘beef’ for greater export growth as Vanuatu has cheap production and labor costs. Vanuatu currently receives foreign economic assistance from several countries (Australia, New Zealand) along with other aid donors, this economic support would certainly help hedge any large significant currency risk and help support the vatu’s exchange value since Vanuatu’s national economy is extremely tiny in relation to these wealthy nations. Overall, Vanuatu is a net debtor nation, dividend payments are paid abroad that reflect in a capital account deficit as Vanuatu runs a large trade deficit although government & bank borrowing abroad have helped to close the current account deficit shortfall.
GDP is measured at $280 million USD (2003) as measured by market prices. GDP/Capita at market prices is at $1,200 USD. If purchasing power parity is used, then GDP is close to $560 million USD (2003) with corresponding GDP/Capita at $2,800 USD. Real GDP growth in 1998 was brisk at 6 percent although 1999 was recessionary due to unfavorable weather patterns resulting in a decline of 2.5 percent. Conversely, year 2000 real GDP growth at 3.8 percent and reversed again in 2001 by contracting by 1.2 percent and fell again by 0.3 percent in 2002. Year 2003 GDP growth estimate is at 1 percent and year 2004 at 2.2 percent. CPI inflation is relatively low with year 2001 at 3.2 percent, 2003 at 4 percent, year 2004 estimated at 3.2 percent. Current account deficit for 2002 is at 5.6 percent of GDP, 2001 deficit at 6.6 of GDP significantly better than year 1999 at negative 12.2 percent. On the fiscal accounts, year 2001 was in deficit at 3.75 percent of GDP as was 2002 but narrowing to 1.75 percent with a goal of closing the shortfall of 1 percent. External debt at $70 million USD (2001) and fell to $31 million USD for 2002. Services account for 62 percent of GDP output.
POSITIVE: Vanuatu is starting to receive wealthy global investors attracted to the scenic beauty and exceptional values that currently exist in real estate within the islands - investors are escaping to Vanuatu for a change of lifestyle as well as bringing their capital to the benefit of the country. CONCERN: challenging geographical location for trade, economy vulnerable to typhoons/earthquakes/volcanic acitivity, high infant mortality rate with average life expectancy only 62 years - rapid population growth, fair literacy levels at 53 percent, basic telecommunications although improving.
BANKING SYSTEM: the vatu is managed by the Reserve Bank of Vanuatu as the nation has a high level of foreign exchange reserves in relation to GDP, reserves are in the range of $38 million USD (2002) equivalent to 6 months worth of import coverage. Considered as a least developed nation, the OECD (Organization for Economic Cooperation and Development) has accused Vanuatu for ‘harmful tax competition’. Accordingly in 2002, Vanuatu has responded by adopting BASEL policies of ‘know your customer’ guidelines. In September 2003, further legislation for international banks doing business in Vanuatu include new policies for the institution to have physical presence and have management in place within Vanuatu. Presently, there are 24 international offshore banks registered that are subject to the direct supervision of the Reserve Bank of Vanuatu. To date alone during year 2003, 10 banks have had their banking licenses revoked. Domestic banks include 4 banks of which 2 are from Australia, 1 European, 1 Vanuatu - National Bank of Vanuatu. Reserve Bank repo rate is currently at 6.5 percent, lending rates are in the range at 11.75 percent (September 2003).
REGIONAL ANALYSIS: Fiji, Solomon Islands, Australia, Indonesia
Increased political instability has taken hold over the last few years in nearby Fiji and Solomon Islands mainly attributed to ethnic tensions. Vanuatu does not have these ethnic divisions as 92 percent of Vanuatu’s population is of indigenous Melanesian. Vanuatu is also fortunate to be located fairly close to both New Zealand and Australia of which both nations are wealthy stable first world economies and aid donors to Vanuatu. Surprisingly, Indonesia is Vanuatu’s largest export market while Japan is its largest import partner.
KNOWLEDGE: Vanuatu is a growing offshore tax haven with no personal income tax, no tax on company profits, the government relies heavily on value added tax ‘VAT’ for imports and on alcohol & cigarette taxes. Vanuatu is now under the radar screen of many including Australian billionaire businessman Kerry Packer venturing into online gambling casinos based in Vanuatu to avoid predatory Australian regulation. Other Australian online gambling casinos have accordingly followed. With respect to offshore financial services now a growing and profitable industry in Vanuatu similar to many other smaller countries in the world today, the Caribbean region for example. Vanuatu has caught the eye of the OECD by being previously blacklisted for the foreign concern to this growing offshore banking industry. In addition, allegations of money laundering have tarnished Vanuatu’s image as an offshore banking centre. Accordingly, Vanuatu has responded with the government implementing new regulations to maintain tighter control over the industry to abide to policies set out in the OECD’s ‘Harmful Tax Initiative’ in order to avoid sanctions for non-compliance. See BANKING SYSTEM above for further details.
CURRENCY: ISO Symbol ‘VUV’, Vanuatu Vatu. At time of review on December 11, 2003, the vatu was valued at 112.17 VUV to 1 US-dollar (‘USD’). The vatu has been appreciating steadily since 2001 when the vatu hit its 10-year low average exchange rate to the USD. Since 2001, the vatu has appreciated by almost 25 percent to the USD and 20 percent when compared to year 2002. The lion’s share of the vatu appreciation to the USD has taken place over the last year reflecting the significant decline in the USD against a large number of currencies including the Euroland euro.
CURRENCY HISTORY: throughout the 1990’s, history of relative exchange rate stability considering the massive currency disruptions experienced to the north in Southeast Asia in 1997-98. Frequent exchange pressures were reflected in the changing economic conditions of the time, most notably in mid-1998 following withdrawals of retirement savings from the Vanuatu National Provident Fund (VNPF). In late 1999-early 2000, the vatu depreciated as the currency weights to an undisclosed basket of currencies was changed of which the vatu was pegged. Historical exchange valuations for the vatu include year 1993 at 121.58 VUV to 1 USD, 1994 at 116.41, 1995 at 112.11, 1996 at 111.72, 1997 at 115.9, year 1998 at 127.52, 1999 at 129.07, year 2000 at 137.64, 2001 at 145.31 and year 2002 at 139.19.
CURRENCY FORECAST: remains favorable for the vatu. The inherint significant currency risk for such a tiny economy for Vanuatu is any unexpected significant short-term currency risk derived from natural disasters such as a typhoon or earthquake which may impede further difficulties in the balance of payments accounts.
UPDATED: December 11, 2003