Eco­nomic up­date

The fall in global com­mod­ity prices has had a neg­a­tive im­pact on Pa­pua New Guinea’s econ­omy. How­ever, as An­drew Wilkins dis­cov­ers, ad­just­ments have been made and 2017 looks likely to be a year of prepa­ra­tion for bet­ter times.

Business Advantage Papua New Guinea - - Contents -

Weaker com­mod­ity prices have had a neg­a­tive im­pact on Pa­pua New Guinea’s econ­omy but, as Busi­ness Ad­van­tage PNG dis­cov­ers, ad­just­ments have been made and 2017 looks likely to be a year of prepa­ra­tion for bet­ter times.

After a decade of im­pres­sive eco­nomic growth— dur­ing which it was one of the Asia-pa­cific’s fastest­grow­ing economies—pa­pua New Guinea is now ex­pe­ri­enc­ing a pro­longed pe­riod of more mod­est ex­pan­sion.

The three per cent GDP growth fore­cast for PNG by the Asian De­vel­op­ment Bank for 2017, while still in pos­i­tive ter­ri­tory, is marginally be­hind the In­ter­na­tional Mone­tary Fund’s global growth fore­cast of 3.4 per cent for the year.

Al­though the con­sen­sus among ex­perts is that it will be an­other 12 to 18 months be­fore the econ­omy picks up sub­stan­tially, com­pa­nies are al­ready pre­par­ing them­selves for the next up­turn.

Global fac­tors

The slow­down in the econ­omy, which com­menced in 2015, is at­trib­ut­able mainly to ex­ter­nal fac­tors.

Lower prices for many of the min­eral and agri­cul­tural com­modi­ties PNG ex­ports to the world—in par­tic­u­lar liq­ue­fied nat­u­ral gas (ex­ports of which only com­menced in 2014), gold, cop­per, palm oil and cof­fee—were key, as was the re­sul­tant de­pressed global re­sources sec­tor, which slowed in­vest­ment in PNG’S own min­ing and petroleum in­dus­try.

Lower prices means less in­come, as Bank of Pa­pua New Guinea Gov­er­nor Loi M Bakani out­lined to me dur­ing a tele­vised dis­cus­sion back in Septem­ber 2016:

‘The is­sue that we have in front of us is the lack of for­eign ex­change com­ing in. That is due to the low com­mod­ity prices that we have, low in­vest­ment into Pa­pua New Guinea and a lack of in­crease in ex­ports to bring back the for­eign ex­change.’

In prac­ti­cal terms, this has led to a con­sis­tent back­log of for­eign cur­rency or­ders in PNG over 2016 and into 2017. Busi­nesses have had to wait longer to set­tle their over­seas debts and repa­tri­ate prof­its off­shore.

Flow-on ef­fects

Mean­while, a com­bi­na­tion of lower in­come and lower in­vest­ment has hit the do­mes­tic econ­omy. The 2016 fi­nan­cial year was a tough one for many busi­nesses, with sales down across the board, of­ten by as much as 15 to 20 per cent. Forty per cent of ex­ec­u­tives re­spond­ing to our lat­est PNG 100 CEO Sur­vey re­ported that prof­its were be­low ex­pec­ta­tions, while only five per cent bucked the trend and ac­tu­ally saw prof­its ex­ceed ex­pec­ta­tions. (See page 18 for the full sur­vey re­sults.)

In­evitably, there has been a re­duc­tion in the work­force, as com­pa­nies re­spond to new cir­cum­stances. One in­di­ca­tor of this is the fact that su­per­an­nu­a­tion funds re­ported an in­crease in re­quests from their mem­bers to draw down on their sav­ings dur­ing 2016.

‘It’s go­ing to be a year of con­sol­i­da­tion and get­ting back to basics,’ sug­gests Ravi Singh, Chief Ex­ec­u­tive Of­fi­cer of PNG’S largest re­tailer, CPL Group. ‘Most of our growth, though, has come from out­sta­tions and the High­lands re­gion, be­cause of the strong cof­fee sea­son.’

Peter Langslow, Chief Ex­ec­u­tive Of­fi­cer of Steamships, which op­er­ates a port­fo­lio of busi­nesses in PNG across lo­gis­tics, man­u­fac­tur­ing, hos­pi­tal­ity and prop­erty de­vel­op­ment, has a sim­i­lar story to tell Busi­ness Ad­van­tage PNG:

‘The un­der­ly­ing profit for the group was down by just four per cent Jan­uary to June 2016. Since then, lev­els of busi­ness ac­tiv­ity have re­mained rel­a­tively quiet, and our fo­cus has re­mained on what we do and how well we do it … we have con­tin­ued to look at our ap­proach to the mar­kets and the cus­tomers we serve, and the ef­fi­cien­cies of our op­er­a­tions.’

Im­pact on gov­ern­ment

The down­turn has meant less tax­a­tion and re­sources rev­enue for the na­tional gov­ern­ment, which has been forced to tighten its belt to keep within manda­tory debt-to-gdp ra­tios.

As a con­se­quence, PNG’S Trea­surer Pa­trick Pru­aitch has flagged that the na­tional bud­get for 2017 of just over K11 bil­lion will be a re­duc­tion on the pre­vi­ous year.

Con­sul­tancy firm KPMG es­ti­mates that cap­i­tal ex­pen­di­ture on in­fras­truc­ture is pro­jected at K836 mil­lion, down from the K1.4 bil­lion com­mit­ted in 2016. KPMG be­lieves that there will be a dra­matic 20 per cent cut in health ex­pen­di­ture, and a de­crease of 14 per cent in ed­u­ca­tion spend­ing.

While dras­tic, most ex­perts agree it is the rea­son­able re­sponse in the cir­cum­stances.

‘The gov­ern­ment is ac­tu­ally faced with a dilemma whereby they need to try and bal­ance the bud­get, raise rev­enue be­cause of the rev­enue short­fall, cut ex­pen­di­ture, and at the same time think about how to en­cour­age new in­vest­ment. So, it is a chal­lenge for them,’ ob­serves Syd Yates, Chief Ex­ec­u­tive Of­fi­cer of the Kina Se­cu­ri­ties Lim­ited Group.

‘It was al­ways go­ing to be a chal­leng­ing bud­get be­cause of the macro-eco­nomic cir­cum­stances, and sec­ond be­cause you were de­liv­er­ing in the con­text of an up­com­ing elec­tion,’ agrees Mark Baker, Man­ag­ing Di­rec­tor for ANZ in PNG. ‘They’ve ap­proached it in the way in which we ex­pected.’

‘We can see the gov­ern­ment is be­ing cau­tious about the econ­omy, and I think this is good,’ says Marcelo Minc, Coun­try Di­rec­tor for the Asian De­vel­op­ment Bank in PNG. ‘For us at the ADB, we would like to see the au­thor­i­ties fol­low on this pru­dent fis­cal path to­wards a bal­anced bud­get, so that it’s done in a cal­i­brated way. Pub­lic ex­pen­di­ture is still a very im­por­tant in­vest­ment item; cut­ting it could have an ad­verse ef­fect on the econ­omy.’

In­deed, while some ex­pen­di­ture pro­grams have been cut back, some key gov­ern­ment pro­grams have been pre­served, no­tably sig­na­ture in­fras­truc­ture projects tied in some way to the coun­try’s host­ing of the APEC Eco­nomic Lead­ers’ Meet­ing in Novem­ber 2018—the first time PNG will host this ma­jor re­gional gath­er­ing. Key among these are the re­lo­ca­tion of Port Moresby’s port, the up­grade of the cap­i­tal city’s in­ter­na­tional air­port and sev­eral road con­struc­tion projects. (Turn to page 14 for more on PNG’S de­but as an APEC host.)

Mean­while, leg­isla­tive progress on key ar­eas such as a new Min­ing Act, small busi­ness de­vel­op­ment and land re­form is likely to have to wait un­til after the July 2017 na­tional elec­tions, which will usher in a new five-year term of gov­ern­ment.

Pos­i­tive signs

While the down­turn is by no means over, there is ev­i­dence that the worst may be be­hind PNG. Global com­mod­ity prices ral­lied sig­nif­i­cantly over 2016/17, and the na­tional cur­rency, the kina—which dropped in value by over 30 per cent be­tween July 2014 and May 2016—has since sta­bilised around the US$0.31 mark. Mean­while, the drought of 2015/16, which re­duced ru­ral pro­duc­tiv­ity and tem­po­rar­ily closed the Ok Tedi cop­per mine (one of PNG’S ma­jor earn­ers of for­eign ex­change) has ended.

The Bank of PNG’S Septem­ber 2016 em­ploy­ment fig­ures were up marginally too, sug­gest­ing con­fi­dence may be re­turn­ing to the pri­vate sec­tor. That is cer­tainly what our 2017 PNG 100 CEO Sur­vey sug­gests: over 60 per cent of the coun­try’s largest com­pa­nies are plan­ning to in­crease in­vest­ment in 2017, while 40 per cent are look­ing to ex­pand their work­force.

The for­eign ex­change short­age has also had some pos­i­tive im­pact on lo­cal man­u­fac­tur­ers, en­cour­ag­ing com­pa­nies to buy lo­cally.

‘We have clients who don’t want to go through the has­sle of get­ting the for­eign ex­change,’ says Frank Mcquoid, Chair­man of steel fabricator, Steel In­dus­tries. ‘They know when they come to our com­pany they can pay for their prod­uct in PNG kina.’

Chey Scov­ell, Chief Ex­ec­u­tive of the Man­u­fac­tur­ers

GIVEN THE SOME­TIMES DIRE ECO­NOMIC DE­PIC­TIONS OF PNG FROM MAINLY EX­TER­NAL COM­MEN­TA­TORS, ONE MIGHT REA­SON­ABLY ASK: WHY IS THERE STILL SO MUCH OP­TI­MISM IN BUSI­NESS CIR­CLES ABOUT THE ECON­OMY??

Coun­cil of PNG, agrees that PNG’S cur­rency sit­u­a­tion is cre­at­ing op­por­tu­ni­ties for some lo­cal man­u­fac­tur­ers:

‘A lot of the fast-mov­ing con­sumer goods are where the lo­cal man­u­fac­tur­ers are re­ally go­ing gang­busters—and small­go­ods man­u­fac­tur­ers as well.’

Op­ti­mism

Given the some­times dire eco­nomic de­pic­tions of PNG from (mainly) ex­ter­nal com­men­ta­tors, one might rea­son­ably ask: Why is there still so much op­ti­mism in busi­ness cir­cles about the econ­omy?

The pres­ence of sub­stan­tial min­eral re­serves, re­cov­er­able at glob­ally com­pet­i­tive costs, is un­doubt­edly a ma­jor rea­son.

‘I think PNG’S very well si­t­u­ated to weather an ex­tended low oil and gas price en­vi­ron­ment,’ ob­serves Peter Bot­ten, Man­ag­ing Di­rec­tor of PNG’S largest com­pany, Oil Search. ‘I ac­tu­ally think the cal­i­bra­tion of the oil and gas space [over 2015/16] has been very healthy for the long-term, and will en­sure that only the best projects get sanc­tioned.’

New projects

It is gen­er­ally agreed that one of the best projects is the Pa­pua LNG pro­ject, based around the Elk–an­te­lope gas fields in Gulf Province. The pro­ject will see French su­per-ma­jor To­tal part­ner with Oil Search and—since its ac­qui­si­tion of In­teroil in March 2017—US su­per-ma­jor Exxonmo­bil. Front-end en­gi­neer­ing and de­sign for Pa­pua LNG is ex­pected to start later this year.

‘I think it’s very good to have a num­ber of ma­jor com­pa­nies be­ing brought into the coun­try and hav­ing large or­gan­i­sa­tions will­ing to in­vest. I think that sends a great mes­sage,’ says Bot­ten.

New min­ing projects are also in the off­ing. Of these, Har­mony Gold/newcrest Min­ing’s Wafi-golpu and Panaust’s Frieda River are the most ad­vanced, with both projects lodg­ing ap­pli­ca­tions for min­ing li­cences last year. An ex­ten­sion of the life of PNG’S largest pro­duc­ing mine, Ok Tedi, is also a pos­si­bil­ity.

‘The new projects will be the cat­a­lyst to sig­nif­i­cantly move the dial,’ says Ian Taru­tia, Chief Ex­ec­u­tive Of­fi­cer of su­per­an­nu­a­tion fund, NASFUND, a ma­jor do­mes­tic in­vestor. (See pages 26 to 36 for more on PNG’S re­sources sec­tor.)

In­fras­truc­ture progress

An­other source of op­ti­mism is the progress be­ing made on en­ergy sup­ply. Long con­sid­ered a brake on eco­nomic ac­tiv­ity, there are signs that PNG’S lack of re­li­able elec­tric­ity sup­ply is be­ing se­ri­ously ad­dressed. One div­i­dend of the ex­ist­ing Exxonmo­bil-led PNG LNG pro­ject is the agree­ment to re­lease gas for lo­cal power gen­er­a­tion. Exxonmo­bil is start­ing con­struc­tion of a new 50 MW power plant out­side Port Moresby in early 2017—a move that should en­sure a much more re­li­able power sup­ply to the cap­i­tal in fu­ture.

Progress is be­ing made too in PNG’S man­u­fac­tur­ing hub, Lae, with Dae­woo and Oil Search build­ing power plants. More work is also be­ing done to im­prove trans­mis­sion in the Ramu Grid that ser­vices the city and the Markham Val­ley, a ma­jor agri­cul­tural cen­tre.

‘If all goes as ex­pected, the power sup­ply in Lae will be more reg­u­lar and re­li­able,’ ob­serves Lae Cham­ber of Com­merce Pres­i­dent Alan Mclay. ‘This will be a fur­ther at­trac­tion for in­dus­tries to re­lo­cate here.’

Busi­ness will be hop­ing the re­cently an­nounced re­or­gan­i­sa­tion of state-owned telecom­mu­ni­ca­tions com­pa­nies (see page 39) will con­tinue the long-term trend to­wards cheaper and more re­li­able phone and in­ter­net.

Hous­ing growth

In­vest­ment in hous­ing is also on the rise—an in­di­ca­tor of PNG’S ris­ing mid­dle class (an­other sign is the plethora of new restau­rants open­ing in the cap­i­tal—see page 53). While most hous­ing de­vel­op­ments so far have been in Port Moresby, there are hous­ing de­vel­op­ments in Lae in the pipe­line as well.

‘There is de­mand all around the coun­try,’ ob­serves Robin Flem­ing, Chief Ex­ec­u­tive Of­fi­cer of PNG’S largest bank, Bank South Pa­cific, which at the time of writ­ing is con­sid­er­ing a sec­ondary list­ing on the Aus­tralian Se­cu­ri­ties Ex­change. ‘Hous­ing loans have prob­a­bly grown by about 40 to 50 per cent; maybe a lit­tle bit more.’

Cer­tainly, the coun­try’s banks have no short­age of funds to lend, for hous­ing or busi­ness.

‘The mar­ket’s liq­uid, there is a sur­plus of kina and we need to lend,’ says Greg Paw­son, Gen­eral Man­ager of West­pac Pa­cific.

There is gen­eral agree­ment that PNG needs to fo­cus more on its nat­u­ral strengths in agri­cul­ture, which is still the sec­tor in which most Pa­pua New Guineans work, of­ten as small­hold­ers.

‘It’s also time to think about in­vest­ments in the non­re­sources sec­tor, so that you are broad­en­ing the driv­ers for growth,’ says the ADB’S Minc. The bank re­cently an­nounced the Sus­tain­able High­lands High­way In­vest­ment Pro­gram to re­store, main­tain and up­grade a 450 km stretch of this ma­jor sup­ply route for PNG’S farm­ers.

Things are look­ing up for cof­fee pro­duc­ers. Last year was the strong­est cof­fee crop since 2011, ac­cord­ing to pro­vi­sional Bank of PNG ex­port fig­ures. Prices have also im­proved over the past year. Mean­while, palm oil prices are at 12-month highs and pro­duc­tion has been main­tained. Pi­o­neer in­vestors, such as New Bri­tain Palm Oil (owned by Malaysia’s Sime Darby) and Is­rael’s In­no­va­tive Agro, have shown that larger scale agribusi­ness can flour­ish in PNG. But enor­mous un­tapped po­ten­tial re­mains.

To­wards 2018

Al­though PNG is still in the down­ward phase of the eco­nomic cy­cle, busi­ness lead­ers re­main pos­i­tive about the longer term prospects for the econ­omy.

‘We are still medium term bullish on PNG and what PNG pro­duces, par­tic­u­larly from the hard com­mod­ity point of view,’ says ANZ’S Mark Baker.

‘Steamships re­mains con­fi­dent of a re­cov­ery in the econ­omy and busi­ness en­vi­ron­ment in PNG,’ says Steamships’ Peter Langslow. ‘We’re look­ing for­ward to 2018, which will cer­tainly be a big year, with APEC at the end of the year co­in­cid­ing with Steamships’ 100th an­niver­sary.’

Also con­fi­dent is James Lau, Man­ag­ing Di­rec­tor of the di­ver­si­fied Rim­bunan Hi­jau Group, which has in­ter­ests in forestry, prop­erty and re­tail:

‘PNG’S APEC year in 2018 pro­vides PNG with the op­por­tu­nity to mar­ket it­self to the rest of the world as a promis­ing in­vest­ment des­ti­na­tion,’ he says. ‘More for­eign direct in­vest­ment will re­sult in greater em­ploy­ment op­por­tu­ni­ties for Pa­pua New Guineans, and build the case for greater in­vest­ment in in­fras­truc­ture and ed­u­ca­tion.’ 

Lae, PNG’S sec­ond city

Pa­cific Palms Prop­erty’s Har­bour­side de­vel­op­ment in down­town Port Moresby is a land­mark real es­tate de­vel­op­ment for the cap­i­tal’s CBD. Fea­tur­ing sev­eral pop­u­lar restau­rants and high-end of­fice space, in­clud­ing Port Moresby’s first ser­viced of­fices, the site has her­alded the re-de­vel­op­ment of the CBD’S fore­shore.

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