Papua New Guinea’s currency, the kina, has lost around eight percent of its value against the US dollar over the past 12 months. What does this mean for business?

The depreciation of Papua New Guinea’s currency, the kina, is likely to contribute to a much higher inflation outcome for 2013, but it will give only a modest boost to the nation’s exporters, according analysis from ANZ.

The kina has lost as much as eight percent over the past year against the US dollar. According to ANZ’s Singapore-based Economist Daniel Wilson, this is mainly due to PNG’s large and growing current account deficit and broader strength in the US currency.

‘We have seen the peak of the construction boom for the PNG LNG [liquefied natural gas] project. While this is happening, the government is starting to boost growth with a large fiscal deficit as well,’ Wilson told Business Advantage PNG. ‘That has to be funded offshore, reducing demand for the kina.’

Meanwhile, in the past month the kina has actually improved against the Australian dollar. The Aussie has suffered its own sudden decline from historically high levels against the US dollar as investors shy away from riskier assets on signs of improvement in the sluggish US economy.

As the value of the kina weakens against the US dollar, says Wilson, imported goods such as capital equipment will cost more, thus boosting inflation. This analysis is supported by Bank of Papua New Guinea’s March Monetary Policy Statement, which predicted annual headline inflation at 5.5% for 2013, up from last year’s modest 1.6% rate.

Central bank intervention

The central bank has intervened over the past few months to support the kina and smooth its decline.

Papua New Guinea’s exporters are unlikely to see much benefit from the softer currency because export volumes for the nation’s commodities are dictated by global demand.

‘The central bank does not want to absolutely stop the exchange rate shift, which is going to happen through inevitable funds flows. But it does want to smooth the decline,’ Dominic Beange, Investment Fund Manager at Kina Funds Management told Business Advantage PNG.

‘There has been a retreat from mining investment around the world, it has been sudden and we are not immune from that. The fund inflow from mining projects will be less than it has been.’

Trading in the unit has been volatile, with the kina down 6.6 percent since the start of January to just under $0.44, according to market rates provided by ANZ.

Limited benefit for exporters

Generally, a weaker currency works to make a nation’s exports cheaper on global markets. However, the ANZ’s Wilson says Papua New Guinea’s exporters are unlikely to see much benefit from the softer currency because export volumes for the nation’s commodities are dictated by global demand.

‘A lot of the exports from PNG are dependent on external demand and are very heavily commodities-focused. So actual volumes of shipments … can be rather static,’ he said.

When global commodities prices were high–as gold, crude oil and copper prices have been over the past few years–PNG’s exports of those goods actually declined, according to Bank of PNG quarterly data. ANZ analysts believe that domestic fundamentals such as supply constraints were one reason for this.

LNG-led rebound expected

While PNG’s widening current account deficit is putting pressure on the kina this year, Wilson expects that, as the country’s export receipts surge next year with revenues from the US$19 billion LNG project, the depreciation in the currency will ease and the kina will rebound later in 2014.