Westpac’s Senior Economist Justin Smirk has been studying Papua New Guinea’s economy for over 20 years. Here, he provides six things businesses should understand about its economy, as we wait for the next wave of resources investment to begin.

Westpac’s Justin Smirk. Credit: BAI/Stefan Daniljchenko

1. The global economy is looking very constructive.

I’m positive in the global outlook and how it will help PNG grow.

COVID was a massive supply shock that everyone misunderstood. We underestimated just how resilient economies would be and then underestimated how fast they would bounce back and how much inflationary pressure it would cause.

The next couple of years is shaping up to be quite reasonable for growth. China’s adding a little bit more – not as much as it did in the past, but it’s still a massive economy: even growing at 5%, it’s getting a solid growth.

So, think more around stable demand growth. That’s a good backdrop for PNG.

2. We’re past the peak of global inflationary pressures.

Globally, we’ve seen inflation come back down. Core inflation in the US now is running at around two per cent.

Inflation could be a little bit more sticky, but the big pulse of inflation is past us.

PNG has its own volatility around inflation and tends to run at a higher level of inflation than the globe. But it didn’t get the same degree of surge in inflation that we saw around the world, and we’re now seeing the impact of disinflation pressures coming through.

3. The transition away from the carbon-based economy is happening: it is real.

We are transitioning away from a carbon-based economy. Every major bank in the world has signed up to reduce the carbon content in their lending books, so what you’re seeing around the world now is investment moving away from carbon-based energy.

But you’re also seeing just how much work needs to be done on current policies. We will not make net zero by 2050. We need far more aggressive policies than what we have currently got. So keep that in the back of your mind: what could develop over time is more aggressive policies than we’ve already got.

Oil consumption peak is still some time off and LNG is a little bit further. Countries like PNG and Australia will still get benefit from the current investments they’ve got in carbon-based energy because the demand will still be there and there’ll be a lack of investment around the world.

4. Resources dominate the PNG mindset but domestic issues are not insignificant

Resources dominate the PNG mindset but please do not forget the domestic economy.

You can see that in PNG’s rebound from COVID. Even though the resources sector was going backwards, PNG almost produced a solid growth cycle in 2020 and 2021 because of domestic demand. Now the [GDP growth] forecasts are around two-and-a-half per cent.

I look at that and I get two messages straight away. One: the underlying stability based around agriculture and domestic production produces stability in the PNG economy and two: two-and-a-half per cent is hardly anything. There’s potential to really improve that growth rate.

5. The kina is a managed currency and overvalued, but the devaluation will be gradual and managed

Yes, it is overvalued and yes, we think it will depreciate, but in a gradual way. The real exchange rate has been appreciating while the nominal exchange rate’s being held steady, just highlighting the degree of undervaluation.

There’s excess kina in the system, so banks don’t offer great deposit rates, nor are you seeing you see interest rates being that high, relatively speaking.

Excess kina has helped spur on domestic investment, because people have got to do something with it, but it’s restricting investment into PNG and it’s definitely restricting imports as well.

Why is it going to be managed? Because a declining kina raises prices. So, we need a lower kina, but we don’t want it too low.

6. FX management has led to a shortage of foreign exchange and an excess of kina

The PNG 100 CEO Survey we did with Business Advantage earlier this year showed that the kina was the number one constraint on businesses in PNG and that is why we need the gradual depreciation over time.

Yes, there is potential for the kina issues to be resolved through the paying down of debt associated with the resources sector. Yes, there’s potential for new projects to bring a lot more foreign dollars into PNG as well.

Both these potentially could restabilise the system and lead to an appreciating kina some way down the track.

But we’ve got to get there and we need the liquidity in the system now to help boost domestic demand and get growth going.

Justin Smirk is Senior Economist at Westpac. This article is based on his presentation to the recent 2023 Business Advantage Papua New Guinea Investment Conference.