Moody's: Solomon Islands' credit profile supported by low government debt burden

Moody's Investors Service says that the Solomon Islands' (B3 stable) credit profile is supported by a very low government debt burden and high debt affordability, as well as technical and financial support from donors and international organisations which enhance government funding and, to some extent, institutional capacity.

Looking ahead, we expect investments in mining and electricity, including the Tina River Hydropower project and Gold Ridge Mine, and an undersea cable project to support real GDP growth of around 3% through to 2021, which will help to partly offset a structural decline in logging output.

Moody's analysis is contained in its just-released annual credit analysis, "Government of the Solomon Islands -- B3 Stable." It elaborates on the sovereign's credit profile in terms of "Very Low" economic strength, "Very Low (+)" institutional strength, "High (+)" fiscal strength, and "Moderate (-)" susceptibility to event risk. These are the four main analytic factors in Moody's Sovereign Bond Rating Methodology. The report constitutes an annual update to investors and is not a rating action.

Moody's notes that the Solomon Islands has a narrow economic base, that depends on depleting forestry resources. This, and very low institutional strength, exacerbates the sovereign's vulnerability to sudden shocks. The country is exposed to shocks such as natural disasters and climate change. And resilience to such shocks is low because of the country's very low incomes and weak infrastructure.

However, these characteristics are somewhat mitigated by low government debt levels that provide some room for government spending if necessary, and the potential for physical assistance and financial support from international partners.

Moody's forecasts government debt to increase to about 12% of GDP by the end of 2018 from 10% in 2017 to fund key development projects. The government's debt burden will remain among the lowest of all rated sovereigns with consistent adherence to legislation that sets a ceiling on the debt/GDP ratio and precludes the use of borrowing to fund recurrent expenditure.

Despite a very low government debt burden, fiscal space is limited and liquidity risk has risen. Wide fiscal deficits in 2016 and 2017 have resulted in a significant draw down in the government's cash reserves, eroding fiscal buffers and limiting the sovereign's fiscal flexibility.

The stable outlook indicates risks to the Solomon Islands' rating are balanced. The rating could be upgraded as a result of steady diversification of the economy away from the logging sector; or significant strengthening in institutional capacity.

The rating could be downgraded if there is a reversal in fiscal discipline and debt consolidation, leading to a lasting erosion in government cash reserves, and/or sharp cuts in aid from donors; or a worsening political environment that hinders policymaking and leads to lower financial and technical support from international partners, or a deterioration in the external balance sheet that would deplete foreign-exchange reserves and increased balance of payments risks.