Moody's: Solomon Islands' B3 rating balances low government debt, economic concentration, nascent institutions

Moody's Investors Service says that the Solomon Islands' B3 government bond rating balances the country's low government debt and strong donor institutional and financial support, against a disproportionate concentration of economic activity in a few sectors, and nascent political and policy institutions.

Moody's analysis is contained in its just-released report titled "Government of Solomon Islands -- B3 Stable: Annual Credit Analysis". The report examines the sovereign in four categories: economic strength, which is assessed as "very low"; institutional strength "very low (+)"; fiscal strength "high"; and susceptibility to event risk "moderate (+)".

The report constitutes an annual update to investors and is not a rating action .

Moody's report points out that the Solomon Islands' real GDP growth averaged 4.3% over the decade between 2006 and 2015; a result which was above the median for B-rated peers. However, the future of the logging industry -- a key contributor to overall growth -- is uncertain, given rapidly depleting forest cover. As a result, Moody's expects that the country will register GDP growth of 2.7% in 2016 and 2.5% in 2017.

As for government debt levels, at 8.4% of GDP in 2015, the Solomon Islands' debt burden is one of the lowest among the sovereigns that Moody's rates, due to debt relief by key creditors and adherence to legislation that sets a ceiling on the debt ratio and restricts the use of borrowing for recurrent expenditure.

Moody's report explains that the Solomon Islands successfully graduated from an IMF program in 2016, with progress in bolstering its institutional framework. The government also unveiled a new Debt Management Strategy that further refines existing fiscal rules. However, the country will remain reliant on assistance from Australia (Aaa stable) and multilateral institutions for policy support.

The 2017 withdrawal of the Regional Assistance Mission to the Solomon Islands (RAMSI) -- the transnational force that helped restore stability following ethnic tensions during 1998-2003 -- poses domestic security risks. Nevertheless, potential disruptions to law and order are mitigated by the likely continued bilateral engagement with Australia on security issues.

The Solomon Islands' government bond rating will face upward pressure if the country shows: (1) a steady diversification of the economy that improves economic performance; and (2) improvements in its institutional capacity.

Conversely, the following would be credit negative: (1) a reversal of fiscal discipline and consolidation of the debt burden; (2) sharp cuts in aid from donors; (3) a deterioration in its external balance sheet; or (4) a worsening political environment.