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ECONOMIC UPDATE: PNG CHANGES GEAR

Papua New Guinea’s economy is now emerging from a period of hiatus following the completion of its massive liquefied gas project. Andrew Wilkins talks exclusively to some of PNG’s top executives to find out their views on the economy.

In May 2014, Papua New Guinea achieved what some thought it would never do—it joined the exclusive club of liquefied natural gas-exporting countries.

The US$19 billion ExxonMobil-led PNG LNG project, which achieved financial completion in early 2015 and is now bringing much-needed revenue to the country, has not only put PNG into the top 15 LNG producers worldwide; it has put this fast-growing economy of just six million people firmly on the global map for business.

The completion of the project has had significant consequences.

Not only are there more LNG projects in the pipeline, with French ‘super major’ Total SA and Spain’s Repsol now in PNG, but the construction over several years of such a large, world-class gas development has lifted capabilities and skills across the economy.

‘We’re being encouraged that more and more people from the ANZ Group want to come to PNG,’ says Mark Baker, Managing Director of ANZ’s PNG operation. ‘PNG is seen in a positive sense for people … who are mid-career, who want to make a difference and want to get that exposure in a developing market.’
Great expectations

PNG’s success has also, of course, raised expectations—both of what such large GDP growth, projected to be around 15.5% for 2015, can deliver to the people of PNG (85% of whom live outside the formal economy) and also from a business sector keen to see some of the impediments to growth addressed by government.

As our annual survey of PNG’s leading CEOs indicates (to be published next week), there are still many constraints to growth in PNG’s economy, and many of these—unreliable utilities, law and order problems, lack of government capacity and red tape—fall under the remit of government.

The construction phase of the PNG LNG project, which was given understandable priority by government, accentuated some of these issues. Now construction is complete, resources are being directed to where they are badly needed.

The largest National Budget in PNG’s history was delivered by Treasurer Patrick Pruaitch at the end of 2014, with expenditure on infrastructure, education, health, and law and order now accounting for 50% of all expenditure.

Improved infrastructure will have a transformative effect on PNG’s typically high-cost business environment.

‘If we can get the infrastructure development right—whether it’s PNG Power with more effective, reliable and lower cost energy, or the ports for our international trade, or the highways—it will create the opportunity for our manufacturing sector to start being more competitive and increase their own investment in their plant infrastructure,’ notes Robin Fleming, Chief Executive Officer of Bank of South Pacific, PNG’s largest bank.

Progress in infrastructure

While the efficient disbursement of government funds remains a challenge, there are undoubted signs of progress.
The completion of the landmark development of PNG’s busiest commercial port in Lae at the end of 2014, completed with funding from the Asian Development Bank, will greatly relieve port congestion, while the government has embraced reform in both power generation and telecommunications, which should encourage greater private sector involvement and reduced costs for business.

Resources sector

While such investment is badly needed, it comes at a time when government revenues are falling. According to the Asian Development Bank’s December 2014 Pacific Economic Monitor, mining and petroleum taxes were down 32% on projections in 2014, while consumption tax was down by 36%.

Like many resources-rich economies, PNG was affected by lower prices for its major mineral exports—gas, gold, silver and copper. The drop in prices has caused the operators of PNG’s mines rein in costs, with consequences for the domestic economy, while exploration has largely come to halt. Two notable prospects continue to make progress, however: the Wafi-Golpu project in Morobe Province and Nautilus Minerals’ deep sea mining project in the Bismarck Sea.

The prospects for PNG’s gas sector look more positive, with Total SA and Talisman Energy (the subject of a takeover from Repsol) both pursuing projects, and a third train looking increasingly likely for the PNG LNG Project.

Managing revenues

While lower revenues and higher expenditure mean PNG’s Government is now set to run a deficit budget until at least 2017, the general view is that the windfall from the PNG LNG project, set to be around K1.8 billion in 2015 alone, will soften the blow, especially if the Government is able to finalise the creation of its ‘onshore managed, offshore invested’ Sovereign Wealth Fund.

‘It’s one of the most effective mechanisms being used in a lot of countries for trying to quarantine the Budget from cyclical trends and inflationary and Dutch Disease implications from major export earnings,’ Paul Barker, Executive Director of industry-funded think-tank, the Institute of National Affairs, tells Business Advantage PNG.

New paradigm

In the meantime, business has been getting used to a new paradigm. The times of year-on-year, double-digit revenue growth are over for the time being, and 2014 was clearly a year of consolidation for many businesses.

‘We all expected after the LNG that things would drop off,’ notes Wayne Dorgan, Managing Director of Pacific MMI Insurance. ‘There was obviously a lot of activity going on … and now the LNG build has been completed, the economy’s sort of dropped back, although I wouldn’t say drastically.’

‘My observation is that Papua New Guinea has a tendency to change gears without using a clutch,’ suggests Stan Joyce, Chief Executive Officer of S P Brewery, PNG’s largest brewer. ‘I think my view is that some people got caught.
While that might have meant some lay-offs in 2014, 2015 is again looking positive.

‘We are expanding,’ confirms Mahesh Patel, Chairman of the CPL Group, PNG’s largest retailer. ‘We’re not going to slow down because we know it’s going to turn. Now, when is the million dollar question, because over 30 years I’ve been through this cycle three or four times.’

Currency fluctuations

Managing business revenues has been made more challenging by falls in the value of PNG’s currency, the kina, against its major trading currency, the US dollar, and moves by the country’s central bank to manage that fall.

In June 2014, the Bank of Papua New Guinea set a higher value for the kina and also mandated a fixed trading band for the kina against the US dollar, effectively controlling the margins being made on foreign exchange transactions. The kina has continued fall since against the US dollar (although rising against the Australian dollar over the same period), but more slowly and without excessive volatility.

While this was seen as temporary measure—necessary until dollar revenues from the PNG LNG project start flowing—it was still in place in March 2015 and has undoubtedly had an impact.

‘It is a problem for many businesses in getting sufficient foreign currency to pay suppliers and get goods off the wharves,’ Greg Pawson, President of the Australia–Papua New Guinea Business Council, told Business Advantage PNG in March 2015.

Non-mineral commodities

A weaker kina has made PNG’s vital agricultural commodities—palm oil, coffee and cocoa—somewhat more cost competitive internationally. Indeed, provisional Bank of PNG figures suggest the value of PNG’s agricultural imports increased year-on-year by 18% in the 12 months to 30 September 2014—an encouraging sign for rural producers, who still form the backbone of PNG’s economy.

Marine exports also increased sharply in the September 2014 quarter—up 30% on the corresponding period in the previous year. This is a sector experiencing genuine growth in onshore value-adding, provided issues of long-term sustainability in the Pacific fishery can be addressed.

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