The Bank of Papua New Guinea has released its Quarterly Economic Bulletin for the December 2018 quarter. It shows that exports are booming, inflation growth is slowing, lending is dropping and financial outflows are showing no signs of easing. David James analyses the report and what it means for PNG business.

The Bank of Papua New Guinea reported higher export values of LNG, gold, condensate, coffee, rubber and logs. Credit: ACIAR

The bulletin says that Papua New Guinea’s trade surplus—the positive difference between PNG’s exports and imports—has increased by 11.2 per cent.

‘In the trade account, there was a surplus of K24.46 billion in 2018, compared to a surplus of K21.977 billion in 2017.’

In 2018, according to the central bank, there were higher export values of liquefied natural gas (LNG), gold, condensate, coffee, cocoa, rubber and logs.

‘PNG’s trade surplus alone now equates with about a third of its GDP, making it one of the more successful exporting economies.’

This more than offset lower export values of crude oil, copper, nickel, cobalt, tea, copra, copra oil, palm oil, marine products, refined petroleum products, and other non-mineral exports.

There was also a decline in the value of merchandise imports.

Strong trade performance

PNG’s trade surplus alone now equates with about a third of its GDP (total economy), making it one of the more successful exporting economies.

The surge in the trade surplus meant that the balance of payments (balance between inflows and outflows) improved more than four-fold from a surplus of K350 million last year to K1.85 billion in 2018.

‘The decline in credit to the private sector was broad-based, with notable decreases in loan repayments by the agriculture, forestry and fisheries, building and construction, metals and other mining, wholesale trade, and hotels and restaurants sectors.’

But that strong trade performance, which would usually mean a strong currency and readily available foreign currency, is not having that effect on PNG.

The heavy financial outflows, which have made foreign exchange hard to obtain over the last few years, have continued.

The Quarterly Economic Bulletin says the financial account recorded a deficit of K18.22 billion in 2018—an increase of 8.9 per cent over 2017. These higher net outflows were due to ‘equity withdrawals and build-up in foreign currency account balances of mining, and petroleum and LNG companies.’

The level of foreign exchange reserves, however, has improved.

At the end of December 2018, the foreign exchange reserve was K7.457 billion, which the central bank says is sufficient for 6.7 months of total import cover and 14.8 months of non-mineral import cover. The growth in reserves represents a 36 per cent rise on a year earlier.

Debt, tax and inflation

The financial outflows skewing the PNG economy worsened in 2018 Credit: BAPNG

The bulletin also found that the Government’s budget deficit was 2.5 per cent of the GDP, while its total debt as a percentage of GDP is 31.25 per cent, just below the mandated limit.

The PNG Government has increased both its taxing and spending. At the end of 2018, total tax revenue was K10.475 billion, 14.6 per cent higher than a year earlier.

Total expenditure was K16.134 billion in 2018, 21.1 per cent higher than at the end of 2017.

Inflation, according to the bank, was 4.3 per cent in the December quarter, down from 4.7 per cent at the end of 2017.

The rate of increase in inflation was slowing at the end of last year. In the September quarter of 2018, it rose 1.1 per cent, while in the December quarter it rose 0.8 per cent.

The Bank of PNG warns, however, that inflationary pressures are ‘building up’, so it is keeping interest rates unchanged.

Lending drops

Domestic lending has fallen, suggesting a general mood of austerity, according to the document.

Total domestic credit in the December quarter of 2018 (extended by financial corporations to the private sector, public non-financial corporations and, provincial and local level governments) decreased by K218.0 million to K17.435 million, compared to the previous quarter. This was a drop of 1.2 per cent.

‘The level of employment in the formal private sector increased by 1.5 per cent in the December quarter of 2018, compared to a decline of 0.2 per cent in the September quarter.’

Credit to the private sector fell by K136.5 million and by K81.4 million to the public non-financial corporations.

‘The decline in credit to the private sector was broad-based, with notable decreases in loan repayments by the agriculture, forestry and fisheries, building and construction, metals and other mining, wholesale trade, and hotels and restaurants sectors,’ says the bulletin.

Employment

Credit: Bank of Papua New Guinea

Encouraging patterns in employment were reported. Total employment in 2018 increased by 1.8 per cent, compared with a decline of 3.8 per cent in 2017.

‘The level of employment in the formal private sector increased by 1.5 per cent in the December quarter of 2018, compared to a decline of 0.2 per cent in the September quarter.’

Employment rates, excluding the mineral sector, were down, but the rate of decrease slowed. Non-mineral sector employment declined by 0.9 per cent in 2018, which was an improvement on the decline, a year earlier, of 4.8 per cent.

‘By sector, employment increased in the mineral, construction, retail and financial/business and other services sectors.

‘By region, employment increased in the Highlands, National Capital District and Southern and Momase regions. It decreased in the Islands, and Morobe regions.’

What this Quarterly Economic Bulletin may mean for business

1. The pressures on PNG’s financial system have continued, despite the surging trade surplus. This means foreign exchange pressures will remain, despite the improvement in the central bank’s reserves.

2. Papua New Guinea is really two economies: a booming resources economy, especially LNG and gold, and a domestic economy that has to deal with the volatility that accompanies commodity cycles and the financial activities of oil and gas majors.

3. Inflation and interest rates are stable, but companies are more reluctant to borrow, suggesting a mood of austerity.

4. The Government has improved its collection of tax revenue but expenditure is growing faster and debt is nearing its mandated ceiling. This suggests the government’s ability to provide greater stimulus to the domestic economy will be limited.

5. Imports are falling, suggesting that PNG businesses, when they can, are being forced to source more locally.