Papua New Guinea’s Treasurer Don Polye gave a comprehensive update on the nation’s economic outlook last week, boosting the growth forecast to 6.1 per cent. We asked three analysts how they regard the statement.

The four questions we posed to our panel were:

1.  The GDP forecast looks very strong given what is happening with key commodities prices. Is it mainly due to government spending?
2. Is the growth forecast achievable?
3. The government identifies cost blowouts are a risk to the budget forecasts, are the spending plans too ambitious? What should the government prioritise? It has promised big increases in spending on law and order, infrastructure education and health.
4. Should some of that spending be delayed till 2014 when the LNG receipts start coming in?

Dominic Beange, Investment Fund Manager at Kina Funds Management:

‘We agree that the mining sector will decline. We are surprised by the forecast that the non-mining sector will replace that. Some of the areas such as construction are peaking and are unlikely to contribute much to growth beyond this year.

‘The Treasurer was frank in talking about the challenges in devolution to the regions, about corruption. This has always been our concern: that the estimates will go up for the cost of these major projects.

‘The business community was pleased he was frank that the Budget will be a challenge this year.

‘The government has got grand ambitions, there was always going to be a deficit this year and next. (But) There is a concern that it is easy to underestimate the spending — and the receipt of revenues comes in later than you think. We are worried that they are spending some of those LNG receipts in advance.’

Aaron Batten, country economist, Asian Development Bank:

‘The upward revision to GDP growth is broadly in line with what the ADB projected at the beginning of this year.

‘The economy has been benefiting a great deal from the construction phase of the LNG project and with some small delays there, we have not seen quite as significant a drop-off in activity as originally expected.

‘The government has a lot of big plans on infrastructure, and what the Treasurer said was the expenditure overruns were at the provincial level in wages and salaries. It reflects the difficulty of keeping track of payroll expenditures at decentralised levels of government.

‘A key challenge for higher levels of spending will be implementation, especially around infrastructure projects.

‘There is a revenue gap between when the mining boom eased off and 2015-16 when the LNG revenues kick in and it certainly makes sense for the government to borrow in those interim years. The debt remains well within sustainable limits.’

David Lennox, Senior Analyst, Fat Prophets:

Fat Prophets’ David Lennox

‘‘PNG had 8 percent (GDP) growth in 2012, so this is still a slowdown. I suspect they didn’t expect the mining sector to have such a big contribution in 2013 as it is going to have.

‘The mid-year numbers are more realistic than their original forecasts. It looks like they were very conservative when they set the 2013 forecasts and they were expecting things to be worse than they have turned out to be.

‘The fact that the LNG project has been extended in time has been an advantage to the economy.

‘We are expecting next year to see around 4 percent for GDP growth as the LNG project rolls off.  When we do see the economy definitively start to slow, that is when they would really need to be doing stimulatory activity in terms of spending.’

Key points from the 2013 Mid Year Economic and Fiscal Outlook:

• Gross domestic product (GDP) for 2013 revised up to a forecast of 6.1 percent, from 4 percent in the 2013 budget;
• Better economic growth mainly the result of greater-than-expected stimulus from government spending and from higher production in mining and quarrying, helping to offset lower commodities prices;
• Inflation forecast revised down to 5.6 percent from previous estimate of 8 percent, due to the soft global economy, declining commodity prices and lower import prices from the stronger kina last year;
• Fiscal deficit for 2012-13 revised up slightly to 7.6 percent of GDP from 7.2 percent at budget time;
• Treasurer warns that the final budget outcome will be at risk from ‘cost blow-outs for implementing the key infrastructure projects agreed in the 2013 Budget which did not have robust business plans and costings at the time of the decision’.