ANZ economist claims Papua New Guinea on verge of boom

Papua New Guinea is on the verge of a resources boom, according to Kishti Sen, International Economist for the ANZ Banking Group. He told the recent Australia–Papua New Guinea Business Forum that the challenge is to manage the economic cycles.

The ANZ’s Kishti Sen. Source: BAI

‘The recovery is thankfully not far away,’ said Sen. ‘Something big is going to happen in terms of new projects. PNG LNG is close to making a decision on the expansion project.

‘With Papua LNG, some sort of decision on FEED [front-end engineering and design] is likely to be made this year and [there will be a] final decision next year.

‘These are massive projects. With these projects will come very strong growth: Frieda River, Solwara 1. You are looking at a boom that will probably feel like it will never end—but it will, like all mining investments.’

Growth

An ANZ report authored by Sen predicted 2 per cent GDP growth for PNG for this year and next year. This is well below PNG’s long-term average.

‘If you look back in time of about 27 years, you get long average growth of about 4 per cent a year. So 2 per cent is well below, and it means you can’t absorb the increase in the labour force to keep unemployment steady.’

‘PNG could support a manufacturing industry base by having a domestic preservation policy.’

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Sen believes, however, that the weak growth will only be temporary.

‘For the next decade, PNG is setting itself up for very strong growth. It is a good opportunity for the government to secure a broad-based economy once the boom ends, by providing support to the tourism industry.

‘Manufacturing as well: PNG has got an abundant gas supply.

Sen said PNG could support a manufacturing industry base by having a domestic gas preservation policy and ‘avoid the mistake Australia made by not having one.’

Debt

Sen said the limits on government debt restrict what the PNG government can do about the economic slowing.

‘The government wants to live within its means, it has a debt-to-GDP ratio it wants to adhere to. It has to think about the credit rating agencies as well.

‘There are reports of cash flow problems. It is something that needs a solution.’

‘But they know this is not the time for austerity. They have to come in and give some stimulus to move the economy along but they are limited in what they can do.

‘That leaves the economy in the doldrums until the next mining boom happens.’

Kina

Sen said PNG’s current foreign exchange restrictions mean that importers are ‘struggling’.

‘There are reports of cash flow problems. It is something that needs a solution.

‘Investors are willing to invest in Papua New Guinea but if they can’t get their profits out of the country [they will not do it].

‘Agriculture is huge in Papua New Guinea.’

Sen said the kina needs to fall in value. ‘A lot of people talk about the currency: is it a floating exchange rate regime, is it a fixed exchange rate regime, is it a peg?

‘To me, that debate is a distraction from the real issue, which is that the kina is overvalued and it needs to get to its fair value as quickly as possible.

‘Because, once it gets to its fair value, it will help exporters immensely. It will bring more kina into the country, which will help in making business planning decisions, investment. It can kickstart the economy, and help exporters.’

Sen said agriculture is one sector that can benefit from a lower currency. ‘Agriculture is huge in Papua New Guinea.

‘The mining sector gets all the headlines because of the sheer size of it but agriculture actually contributes to GDP about the same as mining. It is a very important sector for Papua New Guinea and, with the lower currency, it increases revenue.’

Tight ship

Sen said Papua New Guinea is a ‘narrow commodity-based economy’ and the challenge for the government is to broaden the economy to get away from cyclical volatility caused by investment booms and busts.

‘What do you do post-mining investment boom? You lean on your trade-exposed exporting and importing competing industries to provide the initial growth.

‘The message [to businesses] would be to run a tight ship, have lean operations, and survive two to three years.

‘Because, once you do, there will be significant returns to be had once the mining recovery starts.’

Comments

  1. Chris Smith says:

    Of course reducing the value of the kina will mean the exporters will get more kina. But what will it be spent on? More imports! Which of course will be more expensive!!

    You have to look at totals. If total money out equals total money in, it matters not what the exchange rate is. All a change in the rate does is distribute the winners and losers differently.

    No?

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