Papua New Guinea’s economy finds itself in a hiatus, ahead of what will be a watershed moment its economic history—delivery of its first gas exports. In his annual appraisal of business conditions in the Pacific nation, Andrew Wilkins talks exclusively to
Papua New Guinea’s economy finds itself in a hiatus, ahead of what will be a watershed moment its economic history— delivery of its first gas exports. In his annual appraisal of business conditions in the Pacific nation, Andrew Wilkins talks exclusively to some of PNG’S top executives.
Over the past decade, Papua New Guinea has achieved, and continues to achieve, economic growth that would be the envy of most countries. However, its economy enters 2014 in a hiatus, with the construction of the massive US$19 billion Exxonmobil-led PNG LNG gas project now in its final stages.
The revenues from this project, which has been the major driver of economic growth over the past four years, will transform the country, delivering an expected 21.2% leap in gross domestic product in 2015 alone.
Until then, however, business is having to live with reduced economy activity.
‘Growth has been astounding in the last five years,’ affirms Garry Tunstall, Chief Executive Officer of Papua New Guinea’s largest superannuation fund, Nambawan Super. ‘That has really been about the PNG LNG project largely, and the infrastructure that’s required to support it, as well as other investors then seeing the opportunity to develop and build commercial and residential property.
‘I think the country still will grow, but we have seen an easing of support for residential housing prices and rentals. We’ve seen commercial rents starting to ease off a bit too.’
‘Everyone has been benefitting from super-normal profits over the last three-to-four years. It does revert to a norm, but that norm is still higher than many other countries in the region,’ says Robin Fleming, Chief Executive Officer of PNG’S largest bank, BSP.
Wayne Dorgan, Managing Director of PNG’S largest insurer, Pacific MMI Insurance, agrees:
‘There’s been a contraction, but we’re still well ahead of where we were … nevertheless, our budgets for the next 12 to 36 months will be conservative.’
As well as a downturn in construction activity, lower yields and prices for soft commodities such as coffee, cocoa and palm oil have affected PNG’S dominant rural economy, reducing retail revenues by 20% or more in some instances.
While some of the impact of lower commodity prices was ameliorated in the second half of 2013 by a rapid depreciation of the kina, that in turn has put pressure on PNG’S manufacturers, who have found themselves paying more for imported inputs.
Following Prime Minister Peter O’neill’s 2013 ‘year of implementation’, 2014—to repeat a phrase used by David Purcell, outgoing Chief Executive Officer at Ela Motors—will be a ‘year of consolidation’.
Buoyed by its great LNG expectations, the PNG Government has stepped in to keep the economy ticking over.
In November 2013, PNG’S Treasurer Don Polye announced the country’s largest-ever budget of K15.1 billion (US$5.93 billion). At the same time, he announced a second successive budget deficit.
‘It maintains the momentum of the 2013 budget, focusing on
infrastructure, health, law and order, education and the districts [sub-provincial areas],’ notes Paul Barker, Executive Director of industry think-tank, the Institute of National Affairs. Neither is the deficit considered foolhardy in business circles. ‘It’s a reasonable, normal thing to do,’ observes Richard Borysiewicz, Group General Manager of BSP Capital, the stockbroking and funds management arm of Bank of South Pacific.
‘The total size of the deficit is K2.3 billion (US$1.02 billion), which is about 5.9% of GDP,’ notes Aaron Batten, the Asian Development Bank’s Country Economist for PNG. ‘I think they’ve done quite a commendable job to keep spending at that level, which is generally sustainable by PNG standards.’
The holy grail of infrastructure
Infrastructure is seen as central to the country’s future development and finally there appears to be at least some money to pay for it. Around K2.7 billion (US$1.06 billion) has been budgeted for infrastructure in 2014, and plans have been announced to create an Infrastructure Development Authority to oversee its development.
With Business Advantage International’s annual PNG 100 CEO Survey (see page 10) indicating that under-performing state-owned utilities are the number one challenge facing PNG’S largest businesses, reform in this area is clearly well overdue and welcome.
Of course, public money alone can’t be expected to finance all of the country’s infrastructure needs, and PNG’S institutional investors say they would relish the opportunity to invest further in the infrastructure sector.
certainty and the capacity to exercise control which need to be in place to enable the private sector to take risk and participate beyond being a supplier or contractor or lender relying on the State’s credit—the whole architecture needs to be worked out. Infrastructure is a complex asset class.’
Stubbings believes investment will flow once the right certainty and control fundamentals are in place, and sees PNG’S state-owned enterprises as attractive opportunities for private sector involvement.
In early 2014, the government flagged the partial privatisation of national airline Air Niugini to help finance an upgrade of its fleet. Meanwhile, state electricity company PNG Power is actively partnering with private sector power suppliers to augment its own energy output. The Government has also re-capitalised mobile telecommunications company Bemobile.
The improvement in the way state enterprises are being run, under more experienced and qualified boards, has been noticed.
‘State-owned enterprises are actually getting cleaned up,’ observes Pacific MMI’S Wayne Dorgan. ‘These businesses will start operating as businesses.’
Some unease about reforms
The political stability that followed the election of the broadly pro-business O’neill Government in August 2012 was generally welcomed.
While the Government has taken steps through legislation to ensure that political stability is maintained, it has also initiated a number of reviews of important existing legislation—notably, PNG’S long-standing Mining Act and the taxation system.
While such reviews inevitably engender at least some feelings of uncertainty (business is also steeling itself for the results of a review of PNG’S minimum wage), the reviews are taking place against a background of government dealings with investors, which have created what one senior mining industry source has called ‘a feeling of unease’.