Financial analysts Fitch Solutions is forecasting higher economic growth for Papua New Guinea in 2019. But it says the kina is overvalued, which may pose problems in the future if the the Government’s proposed sovereign bond issue is successful.

PNG’s real GDP growth versus Asia. Source: Fitch Solutions

‘We forecast real GDP growth to come in at 2.8 per cent in 2018 and 3.4 per cent in 2019, versus an estimated 2.5 per cent in 2017,’ says macroeconomic and industry research firm Fitch’s latest assessment of PNG’s economic outlook.

‘While PNG has strong macroeconomic potential due to its vast resource wealth, the near-term growth outlook remains modest.

‘We forecast the kina to depreciate by around 3 per cent per annum against the US dollar’

‘This (GDP growth) is likely to be below the regional average.

Kina

The report says that since mid-April, the kina has ‘only fallen by 2.2 per cent against the US dollar’, despite higher inflation in PNG.

It says the expensive exchange rate has ‘weighed on the competitiveness of PNG’s non-resource exports’ and it is ‘one of the main reasons’ for holding back the country’s efforts at economic diversification.

‘This is unsustainable over the long run and we forecast the kina to depreciate by around 3 per cent per annum against the US dollar.’

‘The climate for international investment may not be conducive.’

The report says a weaker kina would result in an increase in the government’s external debt servicing costs.

‘This would act as a long-term drag on its fiscal health.

‘We forecast PNG’s fiscal deficit as a share of GDP to average 4.4 per cent over the coming decade, versus 4 .0 per cent in the 2010-20 17 period.’

Debt servicing

The Fitch report says the proposed sovereign bond could increase financial stress on the PNG government in the future.

‘While the dollar bond issuance, if successful, would plug the fiscal deficit in the near-term and shore up foreign exchange reserves, we believe that this would likely cause greater pain down the road for the government in the form of debt servicing costs.

‘Global financial conditions and dollar liquidity have tightened considerably since April and May and there had been bouts of risk aversion.’

The report says that the climate for international investment may not be conducive.

‘As a whole, Asian currencies have weakened by more than 6.0 per cent since mid-April, suggesting that riskier assets are losing their appeal for the time being.

‘We believe that PNG is slightly late to the game and will likely face a less conducive environment amid rising global interest rates and risk aversion.’

‘Global financial conditions and dollar liquidity have tightened considerably since April and May and there had been bouts of risk aversion, resulting in capital flight from emerging and frontier markets.

‘In our view, the main reasons for the fragile Emerging Market sentiment are likely due to escalating trade tensions between the US and its trade partners (particularly China), and rising interest rates in the US.

‘Even economies in the region with a much stronger growth outlook than PNG, such as Vietnam, India, and Philippines, have borne the brunt of portfolio outflows.’