Business Advantage Papua New Guinea

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.

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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.’ 

 ??  ?? 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...
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...
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Lae, PNG’S second city
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