Economists have cut forecasts for Papua New Guinea’s 2020 GDP growth but there is a consensus that the slowing will only prove to be temporary. David James explores three new views of PNG’s economy in 2020 and beyond.

Fitch Solutions forecast for GDP growth in PNG. Credit: Fitch Solutions

A Fitch Solutions report says that ‘fiscal and political headwinds’ are likely to weigh on economic activity over the coming quarters. GDP growth is forecast to be 3.3 per cent in 2020 – down from Fitch’s previous forecast of 3.9 per cent and below 4.2 per cent growth in 2019.

The group’s outlook for the PNG economy remains broadly positive, however.

‘Our core long-term outlook for robust growth remains in place, underpinned by a sharp rise in production and exports from new LNG projects,’ it says.

‘The government expects a far more favourable deal with ExxonMobil (whose partner in the Papua LNG project is Total) over the planned extension of the P’nyang gas field.’

Fitch Solutions, a subsidiary of Fitch Group, attributes the short-term weakness to four key factors:

• Increased budget constraints
• Political uncertainty related to the change of government
• The upcoming independence referendum in Bougainville in November
• Potential delays to key LNG and mining projects

Weathering risks

Fitch’s view tallies with the World Bank’s report East Asia and Pacific Economic Update, October 2019: Weathering Growing Risks, which forecasts PNG’s GDP growth at between 3.1 and 3.5 per cent in 2020–2021.

The World Bank says that in 2019–21, agriculture, forestry, fishery and services are expected to grow by 3 per cent a year and manufacturing will grow by 3.5 per cent.

Forecast for 2019, 2020 and 2021. Credit: Word Bank

Fitch Solutions says the K1.5 billion cuts that Treasurer Ian Ling-Stuckey announced in the recent Supplementary Budget – which includes a 70 per cent reduction in planned non-wage recurrent expenditure and around K800 million in development spending – will have the effect of depressing domestic growth.

‘We expect tighter restrictions on government expenditure over the coming year at least, limiting the potential to push ahead with pro-growth infrastructure upgrades,’ says Fitch Solution’s report.

Delays

The Fitch Solutions report claims Marape’s government is seeking better terms on contracts signed by the previous government. There is also uncertainty about the government’s proposed revision of the resource extraction laws.

‘The government expects a far more favourable deal with ExxonMobil (whose partner in the Papua LNG project is Total) over the planned extension of the P’nyang gas field.

‘The cycle will shift. An upturn in construction is not far away.’

‘Though we expect the two projects to go ahead, further delays, while terms are negotiated, could push back the Final Investment Decision (FID) in one or both developments, delaying investment inflows and the start of production. There are similar risks of delays to production in the Wafi-Golpu gold mine.’

There is a growing expectation that a gas agreement with the PNG Government for P’nyang could be finalised as early as the end of November. Oil Search’s Peter Botten last week told investors that it is ‘targeted to be signed before year end’.

Structural deficit

Recent visitor to PNG, ANZ’s International Economist Kishti Sen, says that PNG’s current weak domestic demand is typical of a ‘narrowly commodity-based economy’ in which ‘headline’ (aggregate) growth has been mainly driven by oil and gas exports.

‘PNG can have a structural change to a broad-based economy from the second half of [the] next decade.’

He says that country has developed a ‘structural budget deficit’ and government revenues will only improve when new resource projects start. ‘The cycle will shift. An upturn in construction is not far away.’

Businesses have had a ‘tough operating environment’ – for the last five years, Sen comments. Delays in negotiating resource projects are also contributing to weaker domestic demand and weaker employment. But he believes the medium-term prospects remain sound.

‘PNG can have a structural change to a broad-based economy from the second half of [the] next decade.

‘The challenge now is to build the industries that could take advantage of a lower currency. The country has a once–in–a–generation opportunity to secure its long-term future.’

What this may mean for business

1. Demand growth in the domestic economy is likely to be weak over the next year.
2. The government has a structural budget deficit, leaving it with limited room to stimulate the economy.
3. Because the PNG economy is susceptible to commodity cycles, businesses have to know how to contract or expand effectively to adjust to the volatility.
4. Large resource projects increase aggregate (headline) GDP, but the long-term challenge is to create a more broad-based economy.