Global and domestic factors have combined to slow Papua New Guinea’s economy. However, as Andrew Wilkins discovers, the Pacific nation’s business leaders are still confident about its future prospects.

Parliament Haus in Port Moresby  Source: Business Advantage International

The Pacific’s largest economy is still in a hiatus, and the slump has been more prolonged than many expected. GDP growth is expected to be modest in 2016—around 3.1 per cent, according to International Monetary Fund projections.

Global oil and gas prices have tumbled since the PNG LNG project started exporting.

The primary driver behind PNG’s previous record growth—the construction of the US$19 billion (K59 billion) ExxonMobil-led PNG LNG gas project—was straightforward enough to identify. But there are multiple reasons for the subsequent downturn.

Global factors

Global oil and gas prices have tumbled since the PNG LNG project started exporting, ahead of schedule, in May 2014. In spite of impressive production levels, income to the project’s venture partners—including the PNG State—has been significantly lower than budgeted.

PNG’s minerals-reliant economy has also taken a hit from major falls in international prices for gold, silver, copper and nickel.

Steamships’ new Harbourside development Source: Business Advantage International

Such falls have affected investment in PNG’s mining and petroleum sector. Mining exploration expenditure fell by K37 million to K323 million from K360 million in 2014, according to the 2015 annual report of the PNG Mineral Resources Authority. All existing mines in PNG have sought to reduce costs.

Income from the country’s major agricultural exports was affected by global price falls. Palm oil prices fell throughout 2015, as did coffee. Cocoa prices proved volatile and round log exports to China have been affected by reduced demand.

PNG’s economy has also been affected by a more local phenomenon: drought. The El Niño weather pattern, prevalent in 2015, led to reduced rainfall, especially in PNG’s breadbasket, the Highlands.

Production of both food staples and cash crops fell in the second half of 2015, affecting an estimated two million Papua New Guineans. The drought has had other effects, too. It reduced the production of hydro-electricity, which caused two of PNG’s major mines, Ok Tedi and Porgera, to close temporarily. Ok Tedi has now been re-opened.

Managing the cycle

Commodity prices are cyclical. When they rise again, PNG has several strong resources projects in the pipeline. These include: a second major LNG project, Papua LNG, which will be led by France’s Total SA; the Wafi-Golpu gold project in Morobe Province, which will be jointly run by Harmony Gold and Newcrest Mining and is potentially a 50-year mine; and Pan Aust’s Frieda River copper-gold project.

‘The services sector in particular has grown.’

‘When the cycle comes round, PNG is better placed that the last downturn [1997 to 2002],’ notes Greg Anderson, Executive Director of the PNG Chamber of Mines and Petroleum. ‘The difference now is we have an LNG industry and PNG is seen as No.1 globally in terms of attractiveness for future LNG construction.’

Broadening the economy

Further confidence can be derived from the steady growth of PNG’s non-resources sector, which is projected to grow by 3.8 per cent—more than overall GDP—during 2016.

‘The services sector in particular has grown’ says David Conn, Chief Executive Officer of the Port Moresby Chamber of Commerce and Industry, the country’s largest business chamber.

‘It was fairly healthy in those areas servicing the mining sector already,’ says Conn. ‘Clearly, with a new gas industry coming in it has improved. The basic services are here in PNG—the accounting firms, the logistics suppliers—but in terms of services for business I think we’ve still got an area of the economy to grow in that regard. It will happen.’

A growing middle class has resulted in the development of a strong retail sector in PNG.

Kumul Consolidated Holdings’ Chairman Paul Nerau  Source: Stephen Rae

Paul Nerau, the Chairman of the state’s Kumul Consolidated Holdings (the state entity which controls PNG’s state-owned enterprises) has flagged an interest in diversifying into agriculture and tourism—two areas where PNG has considerable natural advantages.

Retail and manufacturing

A growing middle class has resulted in the development of a strong retail sector in PNG, both for staples and consumer goods.

The resilience of the retail sector suggests that PNG is becoming a more robust economy. ‘Despite all the doom and gloom about the world commodity prices, the El Niño etc, CPL is surging ahead with its expansion plans and growth in the country and is confident about PNG, and has faith in the country and its people,’ says Mahesh Patel, Chairman of the country’s leader retailer, CPL Group.

The number of foreign companies investing in PNG grew to 3794 in 2015, a massive increase on the 303 firms that had a presence in the country in 2004.

The weakness of the kina has also presented an opportunity for PNG’s manufacturers. Michael Kingston, Chief Executive Officer of K K Kingston, reckons that the currency movements have favoured local providers.

‘A number of our customers have been saying that in relation to foreign currency, local supply is looking more appealing to them and they are looking to prioritise scarce available foreign currency. And that means an opportunity for local producers, like ourselves, to pick up additional business.’

Foreign investment

The National Convention Centre will host major events at APEC 2018 Source: Business Advantage International

In recent years, the sources of foreign investment have greatly diversified. In particular, there has been regional diversification.

According to PNG Investment Promotion Authority figures, the number of foreign companies investing in PNG grew to 3794 in 2015, a massive increase on the 303 firms that had a presence in the country in 2004. Notably, some 55 per cent of these companies were from Asia, illustrating a move away from PNG’s traditional source of investment and trade, Australia (which is still the largest).

During the slowdown, the economy has been relying on government investment to keep things ticking over.

‘If you look at Westpac’s top 50 clients, two-thirds of them now are domiciled out of Singapore,’ notes Greg Pawson, Westpac’s General Manager Pacific Banking. ‘So there’s been a big shift from Australia to Singapore in the control of subsidiaries of those companies that are in PNG. There’s obviously quite a significant trade corridor that’s opened up between Asia, PNG and, to a lesser extent, Fiji.’

Government investment

During the slowdown, the economy has been relying on government investment to keep things ticking over.

Ian Tarutia, Chief Executive Officer of superannuation fund Nasfund, observes that government investment ‘has been funding all major economic activity in the past year, while the private sector has downsized.’

The sharp falls in government revenues during 2015 have inevitably led to a more constrained National Budget for 2016.

The PNG government has increased expenditure on health and education, and has set out a welcome program of investment in infrastructure development. This includes the relocation of the capital Port Moresby’s port and the extension of the busiest port in Lae.

Mendi to Kandep road under construction. Credit kandepmyhome.blogspot.com

The government is aiming to improve electricity generation and transmission, develop a national fibre optic cable network, increase road construction, and intensify urban improvement ahead of Port Moresby’s hosting of the 2018 APEC Economic Leaders Meeting.

Meanwhile, stimulus measures to drive much-needed housing construction are already bearing fruit, particularly in Port Moresby.

‘If the government doesn’t have money, that affects the whole economy. Much of this investment is going ahead, but the sharp falls in government revenues during 2015 have inevitably led to a more constrained National Budget for 2016. The O’Neill government is endeavouring to return to surplus by 2020, while still protecting key development priorities.

‘If the government doesn’t have money, that affects the whole economy.’

The government, which must face national elections in mid-2017, has taken other measures to stabilise its finances in the longer term. It is cutting expenditure judiciously and its 2016 National Budget contains a commitment to return to surplus by 2020.

‘If the government doesn’t have money, that affects the whole economy,’ observes Tarutia.

The Sovereign Wealth Fund

The enabling legislation for PNG’s own Sovereign Wealth Fund (SWF) was finally passed by Parliament in 2015, clearing the way for the ‘offshore invested, onshore managed’ fund. This has been devised to help PNG stave off the ‘Dutch disease’ (excessive volatility) experienced by some other resource-rich developing countries.

Availability of foreign currency for exchange purposes, most especially US dollars, has been a major problem.

Dividends from state-owned enterprises—including Kumul Petroleum, which holds the nation’s 16.57% stake in the PNG LNG project—will, at first, be paid into the SWF’s Stabilisation Fund, and thereafter, when revenues permit, into a longer-term Savings Fund.

Currency pressures

Availability of foreign currency for exchange purposes, especially US dollars, has been a major problem for business since the country’s central bank imposed a trading band for the kina in July 2014. At end of 2015, there was an estimated K1.2 billion of advance orders waiting to be converted.

To alleviate pressure on the currency in the short-term, the PNG Government has been seeking to establish a US$1 billion Sovereign Bond to help it restructure its domestic debt portfolio.

The negative factors might have been expected to dent business sentiment, but that is not the case.

Robin Fleming, CEO of the country’s largest bank, Bank South Pacific, describes the proposed bond as ‘a critical piece of financial infrastructure and it becomes more so with the passage of time’.

‘If it is able to broaden the investor base beyond just Papua New Guinea, it would enable the Government, from a debt perspective, to alleviate any concerns of another deficit budget in 2016,’ he says.

Business confident

The pressures on the economy might have been expected to dent business sentiment, but that is not the case. Instead, business leaders are hopeful, a sign that the economy is maturing and becoming more resilient.

PNG’s business leaders are displaying confidence that the current downturn, while not without its challenges, will be short-lived.

‘I’m confident the government cashflow will be addressed over the next year and funding will come through.’

Business Advantage International’s annual survey of the CEOs of PNG’s largest companies (to be published on 20 April) indicates that 76 per cent are planning to increase, or at least maintain, their current levels of investment in PNG. Only 10 per cent are planning to reduce their workforce this year.

‘The RH Group continues to see PNG as an attractive investment destination and we increased our business activities throughout 2015,’ Chief Executive Officer James Lau tells Business Advantage PNG.

‘I’m confident the government cashflow will be addressed over the next year and funding will come through,’ agrees Ian Tarutia. ‘The Elk-Antelope project [Papua LNG] will kick-start another wave of economic activity.’

This article was first published in the 10th anniversary edition of Business Advantage Papua New Guinea, PNG’s annual business and investment guide, which is published this month. Andrew Wilkins is Publishing Director at Business Advantage International.