The Papua New Guinea Government has released its Mid-Year Economic and Fiscal Outlook Report and the picture of far from rosy: GDP growth is expected to be weaker, tax revenue is lower than expected and public debt is rising above the legislated limit. However, the country’s continued trade and current account surpluses provide ground for optimism.

PNG’s economic growth. Source: Mid-Year Economic and Financial Outlook

The report, produced by the Department of Treasury, paints a picture of an economy suffering from significant volatility, mainly caused by fluctuations in commodity prices and investment flows in the Liquefied Natural Gas (LNG) sector. To manage the pressures, it says the government will have to ‘maintain fiscal discipline throughout the second half of 2016’ and make further savings to wind back the budget deficit.

The outlook for government finances has worsened in the first half of the year. Tax revenue is expected to be K10.76 billion, 14.9 per cent lower than anticipated in the 2016 National Budget.

Government spending is expected to remain unchanged at K14.76 billion, the report says. Accordingly, the government’s net borrowing (deficit) for the year is expected to be 5.9 per cent of GDP, up from the 3.1 per cent of GDP that was anticipated at the time of the 2016 Budget.

Commodity prices. Source: IMF

This year, the expected debt to GDP ratio is 32.2 per cent: 2.2 per cent above the legislated limit, says the report.

‘The downturn in revenue is primarily due to the effect of drop in world commodity prices and weak domestic economic developments. An expenditure review is necessary in identifying adequate savings through downsizing of lower priority government expenditures.’

Economic growth

Although economic growth was stronger than expected in 2015—growing by 11.8 per cent in 2015 compared with the 2016 Budget’s estimate of 9.9 per cent—this year it is forecast to be only 2.2 per cent. This is partly because, as the impact of the first LNG production is absorbed, growth in that sector is expected to level off.

The agriculture sector is expected to improve as the drought eases. ‘Activities in the other non-mining sectors, especially the manufacturing sector, the wholesale & retail trade sector and the construction sector are estimated to be lower than expected while there are mixed developments in the mining sector,’ the report says.

‘Total employment has declined by 3.8 per cent in the year to March.’

Most businesses are facing challenges ‘in light of current economic conditions’, the report notes. ‘Demand has fallen and activities have moderated due to commodity prices continuing to remain at low levels especially for oil and copper, the adverse effects of the El-Nino, low coffee production and the temporary shutdown of the Ok Tedi mine in 2015.

‘This was further exacerbated by the government’s tight fiscal situation and the foreign exchange issues. As a result of these developments, the total non-mining GDP [growth] has been revised down to 2.6 per cent from the 2016 Budget estimate of 3.4 per cent.’

Employment

PNG’s mining employment (black) and non-mining employment (red). Source: Mid-year Economic and Fiscal Outlook

The report says total employment has declined by 3.8 per cent in the year to March 2016.

Non-mining sector employment fell by 3.8 per cent in the year to March ‘driven by declining employment growth in all business sectors: agriculture, forestry and fisheries (-6.2 per cent), retail (-4.0 per cent), wholesale (-3.5 per cent), manufacturing (-3.4 per cent), financial business & other services (-2.6 per cent), building and construction (-1.9 per cent), and transport (-1.6 per cent).’

Employment growth in the mining sector, however, grew modestly at 1.7 per cent.

Inflation

PNG inflation. Source: Mid-year Economic and Fiscal Outlook

Headline inflation is expected to be 6.6 per cent: higher than the Budget estimate of 5.7 per cent. The report attributes this to the ‘persistent’ depreciation in the kina and ‘anticipations about a gradual recovery in commodity prices, especially crude oil prices’.

The major drivers of March quarter inflation were: Alcoholic Beverages, Tobacco and Betel-nut (up 8.0 per cent), Health (up 7.1 per cent), Household Equipment (up 2.0 per cent) and Transport (up 1.6 per cent). Housing was down 1.4 per cent and there was a slowdown in the prices of Restaurants and Hotels, and Food and Non-Alcoholic Beverages.

Balance of payments

The government finances of PNG are under pressure, but the country continues to run a large trade and current account surplus. In the March quarter, the current account surplus was K4,243 billion, a 0.5 per cent rise on the previous quarter and a 30 per cent rise on the previous corresponding period.

PNG’s Balance of Payments. Source: Mid-year Economic and Fiscal Outlook

The trade account surplus was K4.286 billion for the March quarter, a rise of 34 per cent on the previous quarter.

The income account is expected to be in deficit in 2016 because of the ‘increase in income outflows through dividend payments to overseas shareholders.’

Currency

The ability of the Bank of Papua New Guinea to manage the kina remains under pressure. International reserves were US$1.865.1 billion (K5.23 billion) at the end of the March quarter, a drop of 3.2 per cent on the previous quarter.

PNG’s international reserves. Source: Mid-year Economic and Fiscal Outlook.

‘The Bank of PNG has estimated that by end of 2016 the level of foreign exchange reserves will be US$1.7 billion (K5.183 billion),’ the report says.

Meanwhile, the kina has continued to depreciate. Over the first half of the year, it was down by 10.7 per cent against the US dollar and 8.3 per cent against the Australian dollar.

The kina fell against most currencies except the Russian ruble. The report says it ‘depreciated against the Singapore dollar (-10.1 per cent), Chinese Renminbi (-7.1 per cent), Hong Kong dollar (-10.5 per cent), Philippines Peso (-7.9 per cent), Japanese Yen (-17.5 per cent), New Zealand dollar (-7.7 per cent), Malaysian Ringgit (-5.8 per cent) and Euro (-11.1 per cent).’