As Papua New Guinea enters 2015, changes in the global economy are likely to present major challenges, while local investment in infrastructure continues. Business Advantage PNG looks ahead to consider what 2015 may bring business.

Sir John Guise Stadium in Port Moresby under construction for the XV Pacific Games

In his comments about the September 2014 Quarterly Economic Bulletin last week, Loi M Bakani, Governor of the country’s central bank, warned of inflationary pressures due to a depreciating kina (which has depreciated by 20.4 percent from its high of US$0.4845 in 2012).

The Bank of PNG stepped in to support the weakening kina in June 2014, and impose trading band limits. While increased revenues from LNG exports is expected to reduce the need for such intervention this year, lower global commodity prices suggest that mineral exports may deliver lower revenues to PNG than expected in 2015.

It remains to be seen if these lower prices translate into lower tax revenues for the PNG Government. If they do, the Government may need to choose between cutting back on its expenditure plans or wearing a higher budget deficit.

Mining and petroleum

With the ExxonMobil-led PNG LNG project launching exports in May 2014, eyes will be focused on the next phase of growth in PNG’s petroleum sector in 2015. The Elk-Antelope fields, which are being explored by Total SA and InterOil, are the obvious answer and remain the major hope for PNG’s second LNG project, while Talisman Energy’s gas aggregation project in Western Province continues to progress.

However, concerns remain elsewhere, with Oil Search’s Gera Aopi warning in December that the mining sector was ‘facing one of the worst years in recent times’, with many exploration tenements ‘in the process of being abandoned’.

The concerns for the petroleum industry now also include navigating much lower commodity prices than in previous years, with oil starting 2015 languishing at around US$50 a barrel (the 2015 National Budget assumes a price of US$89 a barrel).

Expect to see lower exploration and development activity as companies opt for reducing operating costs and productivity improvements instead.

On a positive note, the first stage of Morobe Mining Joint Venture’s Wafi-Golpu gold-copper project will move into feasibility this year. Nautilus Minerals has completed negotiations with the PNG Government to put development of the deep-sea Solwara 1 copper-gold project back on track. Both projects shape as much-needed additions to the sector, as the Ok Tedi mine—for years the major source of export revenue for the country—works to overcome operational issues and a reduced ore body.

The PNG Government also continues to review fiscal frameworks for the resources sector, with 2015 also being the year where final amendments to the Mining Act could surface.

Agriculture

After low prices in 2013, export prices for PNG’s agricultural commodities, notably palm oil, coffee and cocoa, rallied somewhat in 2014, although there was still some volatility. A weaker kina is making exports internationally competitive, but can PNG produce enough to maintain revenues?

There are encouraging signs that the cocoa pod borer, which had severely affected cocoa production in some provinces, is now starting to come under control.

State-owned assets

Later than expected, this year should be the year we see the much-anticipated Sovereign Wealth Fund created (after relevant laws were passed before Christmas), and the reorganisation of state-owned assets.

The government plans a restructuring of its interests in oil, gas and mining resources into two separate mining and petroleum companies, Kumul Petroleum Holdings and Kumul Mining Holdings. All other state-owned enterprises are to be absorbed into a third company, Kumul Corporations Holdings.

Infrastructure

The PNG Government has gone into deficit to fund record infrastructure expenditure and, after a slow start, projects are starting to emerge.

With Phase One of the Lae port development complete, the focus will be on the next phase, which is expected to further increase capacity at PNG’s busiest port. Meanwhile, we should expect more details of the relocation of Port Moresby’s port to nearby Motukea Island, and the consequent redevelopment of the current port area for commercial and civil use.

2015 should be the year that new telecommunications wholesaler PNG DataCo starts to come into its own, as it takes over transmission assets from Telikom PNG. Business will be hoping for greater competition among the country’s telcos and a possible reunion of bemobile and Telikom.

As, the current state of emergency suggests, all is not well in the energy sector, although the decision to put all future power generation projects out to tender suggest that there will be significant opportunities for the private sector, as troubled PNG Power looks to improve reliability and capacity in electricity generation. This could also be the year too when we hear of concrete plans to use PNG’s gas reserves for power generation.

In aviation, new domestic airline Link PNG will be one to watch, while the redevelopment of PNG’s key airports is set to continue.

Major events

There are just 170 days until the XV Pacific Games in Port Moresby, and the race to complete essential infrastructure—stadia, airport, roads and accommodation—is under way. 16 September will also mark the 40th anniversary of PNG’s independence, so expect big celebrations.

Meanwhile, planning is under way for Port Moresby’s hosting of the APEC Summit in 2018, with an authority created and a conference centre already under construction. The compliance costs for hosting APEC are significant, so we can expect more announcements on expenditure in the year ahead.

Manufacturing and fisheries

2014 was a ‘lean year’ for manufacturers and 2015 is unlikely to be much better, according to the Manufacturers Council of PNG’s Chief Executive, Chey Scovell. The increase in the minimum wage in mid-2014, plus a weakening kina, put pressure on a sector that has traditionally struggled to be cost-competitive.

Many manufacturers may be seeking an exemption to the additional five percent increase in the minimum wage scheduled for 3 July 2015.

Meanwhile, importers’ under-declaring of the value of imports, particularly at PNG’s smaller ports, isn’t helping matters, according to Scovell. PNG is not only missing out on import duty income; imported goods are cheaper than they should be, making things harder for PNG-made goods.

In fisheries, the management of fish stocks is a critical issue, especially as the onshore processing sector increases in size and PNG becomes more dependent on sizeable, regular supplies of fish, especially tuna.

Forestry

After years of lower income and the fall-out from the government enquiry into the misuse of Special Agricultural Business Leases (SABLs) for illegal logging still ongoing, PNG’s forestry sector could do with some good news.

Fortunately, 2014 was a better year for the sector, with timber prices higher and total export income from round log exports up around 25% for the 12 months ending September 2014, according to Bank of PNG figures.

The prospects for demand and prices in 2015 are considered steady, with supply tightening for some timber types in south-east Asia.

What are you expecting for your business in 2015?

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