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.
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.
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.
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.
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.’
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.’
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.)
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.
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.
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.