The PNG Government’s decision to review the 2015 Budget has been welcomed, while another prominent economist suggests further foreign investment can be attracted by improved policy settings.

Treasury Secretary Dairi Vele

The PNG Government’s move, announced by Treasury Secretary Dairi Vele,  follows credit ratings agency, Moody’s, changing PNG’s sovereign credit rating to a ‘negative’ outlook, after the fall in energy and other commodities prices, royalties, dividends, and the profitability of associated companies.

Vele pointed out that Moody’s has maintained the country’s B1 foreign currency rating, saying it was a positive outcome in the face of the drastic fall in global commodity prices that has impacted on many countries.

‘We in Papua New Guinea are not immune to the world pricing landscape and have commenced the process of reviewing where we are and what we need to amend to achieve the growth, stability and prosperity that we have enjoyed over the last 14 years,’ Vele said in a statement.

External issues

‘The second reason given for Moody’s shift to a negative outlook,’ says  Economist Paul Flanagan, ‘was PNG’s weakened external payments position and increased external vulnerability.’

‘It will need to deal with the immediate revenue shortfalls, as well as map out a path over 2016 and 2017 on how key government programs can continue without damaging deficit levels.’

Foreign currency reserves have halved over the last two years, says Flanagan, and Moody’s estimates ‘that the stock of short-term external debt by residual maturity—incorporating both private and public sector debt—now surpasses the level of foreign currency reserves’.

Economist Paul Flanagan

‘The start of 2015 (so with PNG LNG shipments well underway) has been very worrying,’ says Flanagan.

‘There were balance of payments deficits of K319 million in January and a K266 million in February. The budget deficit for the first quarter of 2015 was over K2 billion—nearly fifty times higher than the average deficit for the first quarter over the previous 12 years and already over four per cent of GDP.

‘This pattern cannot be repeated in future quarters without serious problems emerging. A Supplementary Budget will be very important for re-establishing credibility.

‘… the challenges include PNG’s budget position, weak commodity prices and the exchange rate.’

‘It will need to deal with the immediate revenue shortfalls, as well as map out a path over 2016 and 2017 on how key government programs can continue without damaging deficit levels.

‘Politically, this will be difficult but necessary,’ warns Flanagan.

Exchange rate controls

Flanagan also called for the Kina to be returned to market rates, warning if it is not, and if there are no Budgetary cuts, ‘then PNG’s economic problems will worsen’.

‘Reports of foreign exchange rationing and government cash flow problems will intensify,’ he says.

‘In the medium term, we could see the emergence of high interest rates and inflation, and the depletion of PNG’s foreign exchange reserves.’

Foreign investment

Meanwhile, Deloitte Access Economics economist Stephen Smith has told a business meeting in Port Moresby that PNG faced challenges in attracting more foreign direct investment into the country.

‘But it’s important to diversify. We can’t be reliant only on the resources sector and we can’t be reliant on a single project.’

Deloitte’s Stephen Smith

He told the Port Moresby Chamber of Commerce and Industry that the challenges include PNG’s budget position, weak commodity prices and exchange rate policies.

He said while the PNG LNG project was a great achievement and would provide some important dividends for PNG going forward, more investment was required.

‘Room for improvement’

Smith said a 2014 Fraser Institute survey showed PNG was the jurisdiction with ‘the most room for improvement’ in establishing regulatory and taxation policies conducive to attracting mining investment.

But, he said, the global economy is also presenting opportunities for PNG, if key challenges can be overcome. Rising incomes and the emergence of a larger middle-class, especially in Asia, presents good opportunities for emerging economies like PNG, in mining, agribusiness and tourism.

‘It’s important to diversify. We can’t be reliant only on the resources sector and we can’t be reliant on a single project.’

‘Think about the changes in the global economy over the last two decades and the continuing change over the next two decades. It is about rising incomes, changing in preferences, demographic change, growing middle class,’ he said.

Paul Flanagan is a Visiting Fellow at the Policy Development Centre, based at the Australian National University, Canberra. His full analysis can be found here.