Business Advantage Papua New Guinea
Economic Update 2019
After years of low growth, the Pacific’s largest economy is looking to benefit from new resources and infrastructure investment—plus a dividend from the hosting of APEC 2018. Andrew Wilkins talks with the country’s business leaders about the the year ahea
2019 may prove to be Papua New Guinea’s breakthrough year. Business Advantage PNG discovers that some big projects are in the offing and the economy is gathering pace.
Two thousand and nineteen may well be the breakthrough year Papua New Guinea business has been patiently waiting for, as the country’s economy shifts gear. As a major exporter of mineral and agricultural commodities, PNG benefitted from a rally in international prices for most of its main exports during 2018. Notwithstanding the fall in liquefied natural gas (LNG) prices in the second half of 2018, record LNG production looks set to lead to a welcome boost to government revenues in 2019.
This accounts—in part—for an encouraging 12 per cent increase in revenues anticipated in PNG’S broadly wellreceived 2019 National Budget, presented by Treasurer Charles Abel at the end of 2018.
Meanwhile, government expenditure is only set to increase by around 9 per cent, mostly in critical areas such as infrastructure, education and health.
‘You certainly have a Treasurer who’s using budget discipline to try and make sure expenditure is appropriate,’ observes Paul Sayer, CEO of PNG’S largest superannuation fund, Nambawan Super.
Indeed, the O’neill-abel Government’s restraint should allow it to wind back its debt-to-gdp ratio from 32.2 per cent in 2018 to 30.8 per cent in 2019 and set the scene for what the International Monetary Fund predicts will be healthy GDP growth of 3.8 per cent in 2019.
APEC dividend
Assuming no external shocks from the somewhat volatile global economy in 2019, PNG also looks set to reap the benefits of hosting the 2018 Asia-pacific Economic Cooperation (APEC) meetings.
While the country hosted a cut-down, ‘Pacific-scale’ APEC 2018 (dwarfed by recent APEC meetings in China and Vietnam, for instance), its debut as an APEC host was still, by some distance, the largest event ever held in the country.
PNG’S achievement in hosting the event was widely applauded. Its capital city also benefitted from major infrastructure improvements in the lead-up to the summit: new and better roads, the upgrade of Jacksons International
Airport, the all-new Star Mountain Plaza (featuring PNG’S first Hilton Hotel), and three new conference venues, including the iconic APEC Haus.
APEC deals
Of greater long-term importance were the deals PNG signed during APEC. Potentially, these will release billions of dollars of new investment into the country over the coming years.
Key among these are the US$1.7 billion Papua New Guinea Electrification Partnership with Australia, Japan, the United States and New Zealand, the aim of which is to extend power to 70 per cent of the country’s population by 2030. PNG also signed a memorandum of understanding on the development of the second LNG project (the Total-led Papua LNG), a US$1.5 billion (K4.88 billion), memorandum of understanding to expand the Chinese Ramu Nico nickel/cobalt mine in Madang Province, and an agreement with the US and Australia to develop the strategic Lombrum naval base on Manus Island.
Geopolitical rivalries seem to be helping PNG. The country suddenly finds itself in the right place at the right time.
The advent of the Us/japan/australia Trilateral Partnership for Infrastructure Investment in the IndoPacific—also announced during APEC—AND PNG’S signing up at the end of 2017 to China’s Belt and Road Initiative, are signs that the capital required to fund PNG’S major infrastructure needs may in the future be more forthcoming.
More gas
After the APEC memorandum of understanding, a final agreement for the Total-led Papua LNG project is expected be struck before the end of the first quarter of 2019.
Based on the Elk-antelope gas fields in Gulf Province, the project will use much of the infrastructure developed for PNG’S first LNG project, the Exxonmobil-led PNG LNG.
‘ Total being the second-largest world private LNG player, we are fully committed to the success of the Papua LNG project, which benefits from a favourable geographical location close to Asian markets,’ said Patrick Pouyanné, Chairman and CEO of Total. His statement would also have encouraged provincial and business interests looking to develop the Ihu Special Economic Zone in Gulf.
With Exxonmobil also looking to expand its PNG LNG project with gas from its P’nyang field, the prospect of five LNG trains instead of two at the LNG Plant in Caution Bay near Port Moresby is looking ever more likely. (For more on PNG’S mining and petroleum sector, see page 26.)
Sovereign bond
Another major international achievement for PNG came to fruition in September 2018, when it successfully completed its inaugural international bond issue of US$500 million
(K1.63 billion). Encouragingly, the issue was over-subscribed, with orders exceeding US$3.3 billion.
As the Governor of PNG’S central bank, Loi Bakani, tells Business Advantage PNG, the move is likely to have significant long-term benefits.
‘It gives the government more capital–raising options in the future. It also raises the benchmark for other corporates in Png—the likes of Kumul Petroleum and Kumul Mining [state-owned nominees for PNG’S forthcoming resources projects] will be looking for equities for the upcoming resources projects.’
The sovereign bond also puts a price on PNG sovereign risk for the first time and gives a much-needed boost to a nascent secondary bond market in PNG.
‘The fact that the sovereign bond got away when it did was great timing,’ says ANZ’S Managing Director in PNG, Mark Baker. ‘It’s a really important vote of confidence in the longterm future of PNG.’
Foreign exchange
The influx of funds from the sovereign bond, some smaller intervention capital from the World Bank and the Asian Development Bank, and improved revenues from exports, has seen a gradual improvement in the availability of foreign exchange.
GEOPOLITICAL RIVALRIES SEEM TO BE HELPING PNG, WHICH SUDDENLY FINDS ITSELF IN THE RIGHT PLACE AT THE RIGHT TIME.
In recent years, it has been hard for Png-domiciled foreign companies to repatriate profits. Importers have found it difficult to make payments to overseas suppliers. Matters are slowly improving, however.
‘We plan to bring the market to normalcy in the coming year with those products that we have now … we’re slowly getting there,’ says Governor Bakani.
Tough 2018
2018 was a tough year for PNG’S economy. The modest predictions for about 3 per cent GDP growth were downscaled, in part due to a major earthquake in the country’s Highlands region in February 2018.
This not only caused tragic loss of life; it also caused disruption to some the country’s oil and gas fields, affecting exports of PNG’S major commodity—lng.
Despite admirable recovery efforts, led in many instances by PNG’S business community, 2018 was a quiet one for economic activity, leading the Asian Development Bank to revise its estimate for GDP growth back to just 0.5 per cent.
Many retailers in particular told Business Advantage PNG they felt the pinch in 2018, and they were not alone.
‘The environment has been quite soft for the private sector for quite a few years now,’ observes Michael Scantlebury, Managing Director of Steamships, which has interests in logistics, real estate and hotels. ‘I think the expectation was that 2018 would be a stronger year but it hasn’t really happened.’
‘We always knew we’d have to manage it tightly during the year,’ notes ANZ’S Mark Baker. ‘I think companies adapted well under quite difficult circumstances. We’ve been through a difficult time since 2013—the resilience of Papua New Guinean companies is impressive.’
More development
With APEC now behind it, PNG’S capital Port Moresby looks likely to continue its development.
The Chinese built Noble Center (set to be PNG’S tallest building), stage two of Nambawan Plaza, and Steamships’ K250 million Harbourside South look set to be the next major developments completed in downtown Port Moresby. These projects are preludes to the massive redevelopment of land occupied by Port Moresby’s old port, since relocated to Motukea Island. The redevelopment is being handled by state investment company, Kumul Consolidated Holdings. A public-private partnership is its preferred model.
Elsewhere in the capital, Nambawan Super and Lamana Development’s Rangeview Heights housing and retail development, and phase two of Star Mountain Plaza are set for commencement. Just outside the capital, Port Moresby’s first premium weekend resort, at Loloata Island, will open in 2019.
‘There’s certainly a lot of stock coming on to the market,’ notes Nambawan Super’s Paul Sayer, who observed some softening of rental prices in 2018. If the increased rental demand seen during PNG’S last resources boom is anything to go by, Port Moresby is going to need this stock before too long.
SMES on the move
Progress is not dominated by the big end of town. The rapid development of micro-and-small-to-medium-size enterprises (MSMES) is government policy and there are signs that this sector is on the move.
‘ We’ve seen great strides in the SME space,’ observes Zanie Theron, Managing Partner of KPMG in PNG. ‘In 2016, when the government announced its SME strategy for the next thirty years, they were talking about moving
from 5000 to 500,000 businesses, generating between 6 per cent and 50 per cent of GDP. It seemed like a pipe dream, but if you look at the market activity over the last year, there’s certainly progress.’
The construction of covered marketplaces, where vendors can sell their goods, is one way of formalising the MSME sector. Jim Collings, Country Manager of PNG’S largest provider of fuel, Puma Energy, provides another:
‘From our own model, we’ve moved from owning and running our service stations to a position where all our service stations are run by dealers—all SME operators and 99% PNG citizens. In our LPG (liquefied petroleum gas) market over the last year, we developed a national network of 350 resellers. By the early 2019, it will be 500 plus. These are businesses that were not there yesterday.’
One significant constraint on the growth of MSMES is undoubtedly PNG’S enabling infrastructure. While roads and ports are important, good quality communications and internet are seen as critical drivers: one reason why the digital economy was a major focus at APEC 2018.
There is good news on the horizon for those waiting for improvements to PNG’S hitherto patchy telecommunications infrastructure. By the end of 2019, the international Coral Seas Cable System and the Huaweibuilt local Kumul Submarine Domestic Fibre Cable Network (see page 41) should be complete, paving the way for widespread broadband connectivity in PNG. Most businesses in PNG can’t wait.