Papua New Guinea’s currency, the kina, has fallen over the last year; many are predicting it will go lower. Business Advantage PNG talks exclusively to two analysts about where the currency is headed and how it will affect business conditions.

Economist Paul Flanagan

Paul Flanagan, Director of Indo-Pacific Public Policy and Economics Pty Ltd and a former senior advisor to the PNG Treasury, says the kina will need to fall in value by 40 per cent if it is to become competitive.

‘It really needs to get back to those levels where the PNG economy was doing better in terms of engaging with the world economy—that period in the mid-2000s,’ he tells Business Advantage PNG.

‘A good measure of international competitiveness is the real effective exchange rate [see graph below], and that would mean about a 40 per cent adjustment still ahead.’

‘The availability of foreign exchange is affected by many factors other than the exchange rate.’

David Kelso, Managing Director of local foreign exchange dealer Moni Plus, likewise anticipates a sharp drop in the level of the kina.

‘If left to market forces, which is presently not the case, the kina could plateau somewhere between 0.15 and 0.19 against the US dollar—certainly in the ‘teens.

The kina has fallen by 8.5 per cent against the Australian dollar over the last month. Kelso expects this depreciation to continue. ‘If the Australian dollar goes where they all predict—to 0.65 against the US dollar in the medium-to-long-term—it could see the kina somewhere between 0.24 and 0.29 (against the $A).’

Foreign exchange access

Flanagan says the availability of foreign exchange is affected by many factors other than the exchange rate.

‘In terms of when investors decide to bring more of their funds on shore and boost investment; that probably depends on broader issues than the kina’s value.

‘I think that is more about business confidence, which is probably more linked to government policies and the positions of international ratings agencies.

‘Liquidity will be an issue for some time.’

‘It will be very interesting to see what Moody’s comes out with in its ratings review in May. It is hard to read between the lines as it being anything other than a downgrade of the rating. I think that is why the Sovereign Bond issue has been slowed down.’

MoniPlus Managing Director, David Kelso

Kelso says there are some positive indicators affecting foreign exchange availability. But he believes there are many obstacles to overcome.

‘I believe liquidity will be an issue for some time. If the International Finance Corporation (IFC) loan and the Sovereign Bond issue become reality, it will certainly relieve the backlog [of foreign exchange orders] to some extent. However, this is only temporary.

‘Look for building relationships with local suppliers because they will become cheaper relative to imports.’

‘Ok Tedi coming back into production will assist also, but significant inflows from the LNG project are not expected for three-to-four years.

‘We need a turn around in commodity prices to allow the emergence of new sources of foreign exchange: Total’s Papua LNG, Wafi-Golpu copper/gold, Frieda River. These are all projects that are unlikely to happen before late 2017.’

Business ramifications

How will the predicted currency and foreign exchange trends affect business conditions?
Flanagan says he remains an optimist about the country’s economic future, but believes businesses will have to adjust to new conditions.

PNG’s competitiveness shown by the real effective exchange rate. Source: Paul Flanagan

‘The key to PNG is always building relationships. On the assumption that there is a continuing move towards a more competitive exchange rate, there will be more business opportunities in increasing domestic supply of goods and services.

‘For example, what S P Bewery’s Managing Director Stan Joyce is doing to locate more cassava starch for local beer production is a positive thing. It is also clever politics. So, look for building relationships with local suppliers because they will become cheaper relative to imports.

‘Having a reduced rate would certainly assist exporters and some emerging resource projects.’

‘Business will need to start adjusting to the possibility of a more internationally competitive exchange rate. The other thing that businesses need to do is become more active in promoting economic policies that are good for long-term growth.’

Kelso believes the strength of the kina is posing problems in the export sector.

‘This is, and has been for some 18 months, severely affecting exporters. Whilst the inflated rate is assisting importers—although now they are struggling to get orders covered—one would question whether the country can afford these imports? Having a reduced rate would certainly assist exporters and some emerging resource projects.

‘This will surely affect interest rates, as is currently being seen.’

‘However, it would be inflationary and affect the majority of consumers. This may cause some businesses to become less viable and seek cheaper imports from cheaper destinations.

‘We are also experiencing a rise in domestic interest rates and a significant reduction in kina liquidity.  This will surely affect interest rates, as is currently being seen.

‘This will in turn put further pressure on businesses.’