2021 promises to be a year like no other in Papua New Guinea, as business leaders look beyond the COVID-19 crisis to an economy preparing for a major transition. They share their expectations with Andrew Wilkins.

A view from above of Port Moresby’s Vision City Mega Mall. Credit: Aaron Chin

Like the economies of its major trading partners – Japan, Taiwan, Australia, the Philippines and Thailand (although, notably, not China) – Papua New Guinea’s economy contracted in 2020, with the World Bank suggesting real GDP fell by 3.8 percent.

Mitigation measures aimed at addressing the COVID-19 pandemic were undoubtedly a factor in the fall, with COVID-19-related restrictions identified as the number one impediment facing PNG’s top companies in the 2021 Business Advantage/Westpac PNG 100 CEO Survey.

However, there were also contributing factors unique to PNG.

Crises

‘PNG faced three crises – health emergency, economic contraction and political turmoil – at the end of 2020,’ notes Ilyas Sarsenov, the World Bank’s Country Economist for PNG. ‘They will continue impacting the lives of Papua New Guineans in 2021 as well, although on the economic side we will see a rebound in growth in 2021.’

The World Bank is projecting an increase in GDP of 3.5 per cent for 2021 as PNG’s economy bounces back. Two other multilateral agencies have more tentative predictions.

The International Monetary Fund, which has had a staff monitored program embedded in PNG’s Treasury since 2020, is predicting just 1.2 percent growth, while the Asian Development Bank’s forecast is for 2.5 percent, a prediction shared by the country’s central bank.

COVID-19

The national effort to combat the COVID-19 pandemic has largely avoided strict lockdowns, allowing the formal business sector to self-manage mitigation controls under niupela pasin or ‘new normal’ arrangements.

While this has not allowed the country to defeat the pandemic (at the time of writing, the number of COVID-19 cases in the country continues to rise), it has allowed economic activity at all levels to continue.

‘We felt that our customer base weathered the storm,’ says Brett Hooker, Managing Director of Westpac PNG.

‘The signing of a fiscal stability agreement for Papua LNG has put that gas project on track for a final investment decision in 2022.’

In a country that lacks a formal social safety net and a universal health system, this has been seen as critical to the welfare of ordinary Papua New Guineans. As 2021 progresses, measures aimed at reducing population movement and gatherings are being pursued, alongside a donor-supported vaccine rollout.

Sluggish

As well as COVID-19, the country has seen the continuation of recent sluggish economic conditions, which were affecting government revenues pre-COVID and have driven up the government’s budget deficit to an expected K6.6 billion (US$1.88 billion) in 2021.

While PNG’s government, led by Prime Minister James Marape, has been able to borrow to cover that deficit, mostly at low concessional rates, its cashflows have undoubtedly been affected, with flow-on effects. For example, the Business Council of PNG has pointed out the slow pace of the government’s payment of some K1 billion of arrears owed to business.

This has not only affected the government’s landlords and suppliers, but also the income of state-owned enterprises, most notably electricity utility PNG Power.

‘I describe it as a “90 per cent economy”. Superficially, it’s not doing too badly but the fundamentals of the economy remain weak.’

Another symptom of PNG’s languid economy has been ongoing delays in obtaining foreign exchange.

‘The number one concern is still the lack of foreign exchange,’ notes Rio Fiocco, President of PNG’s largest business chamber, the Port Moresby Chamber of Commerce and Industry. ‘We think that situation is going to continue throughout the whole year, particularly until we see the Porgera mine reopen.’

Take Back PNG

Porgera is, of course, one of PNG’s largest gold mines, which closed in March 2020. The government’s decision to end negotiations to extend the lease of the mine – which produced almost 600,000 ounces of gold in 2019 – led to its closure just as the COVID-19 crisis arrived in PNG in 2020.

It has been in ‘care and maintenance’ mode ever since, although a ‘binding framework agreement’ struck between the government and operator Barrick Niugini should see it reopen in late 2021.

In principle, many in business have sympathy for government attempts to improve PNG’s share of its considerable mineral wealth. This sentiment, broadly popular, is at the heart of the ‘Take Back PNG’ agenda which saw Prime Minister Marape come to power in 2019.

However, these attempted reforms have had some unfortunate short-term consequences. The closure of Porgera is one.

The short-term economic impact has been significant. During 2020, Ilyas Sarsenov estimates PNG’s GDP fell some seven percentage points below the growth expected by the World Bank.

‘If we consider the Porgera impact, it was 1.5 per cent out of that seven per cent,’ he tells Business Advantage PNG.

New resources projects

Steamship’s Rupert Bray.

Another result of the ‘Take Back PNG’ agenda has been a slowdown in the expected pace of several promising new resources projects, as the Marape government has sought to negotiate the best deal from developers and do due diligence on existing agreements.

Put together, the Total-led Papua LNG project, ExxonMobil’s P’nyang gas project and Newcrest Mining’s Wafi-Golpu copper and gold project represent a potential investment of around US$20 billion. For most businesses in PNG, they can’t happen soon enough.

The signing of a fiscal stability agreement for Papua LNG in February 2021 has put PNG’s second gas project on track for a final investment decision in 2022.

However, anxiety about the pace of these major projects and the fate of Porgera has caused some political unrest, which the Marape government has so far survived. With National Elections due in July 2022, the onus will be on the government to deliver on the expectations it has set for improved fiscal management, regulatory reform (including new regulatory regimes for mining, petroleum and foreign investment), and these new resources projects.

‘I describe it as a “90 per cent economy”. Superficially, it’s not doing too badly but the fundamentals of the economy remain weak,’ summarises Rupert Bray, Managing Director of Steamships Trading Company Ltd, the diversified group of that includes property, logistics and hospitality subsidiaries.

‘We still have the same underlying challenges of a very sluggish economy that we’ve had for the past decade, and that has been exacerbated first and foremost by delays in project approvals; secondly, by the decision over Porgera and lastly, and least significantly, by COVID-19.’

Trade

As an exporter of key mineral and agricultural commodities, PNG experienced both reduced global demand and lower prices for its goods during 2020. Indeed, volumes through PNG’s two major international ports, Lae and Motukea (outside Port Moresby) were down by two per cent and 15 per cent respectively in 2020, although domestic coastal shipping volumes remained stable.

‘The volumes are a function of the global environment,’ observes Robert Maxwell, Chief Executive Officer of ICTSI, which operates the two ports under a 25-year concession granted by state-owned PNG Ports Ltd.

‘Our projections for 2021 are for volumes to be a little bit up on 2020 – it’s a lot more positive now.’

Profits and growth

Artist impression of the new Airways Residencies. Credit: Airways Residencies

While 60 per cent of respondents to the PNG 100 CEO Survey reported lower profits than expected in 2020, the picture was by no means universally one of disappointment.

The financial services sector, agriculture and retail were three areas that performed ahead of the overall economy in 2020.

‘From a trading perspective, 2020 was one of our best years ever,’ Cameron MacKellar, CEO of the Brian Bell retail group, told Business Advantage PNG. ‘We are expecting growth, so we are fairly bullish with our numbers.’

Notably, much of the Brian Bell Group’s 2021 capital investment will be in PNG’s populous but remote Highlands’s region, in agricultural centres such as Mt Hagen and Goroka.

Steamships was one of a number of businesses that performed marginally more strongly in 2020 than they did in 2019. PNG’s banks also held up reasonably well, in spite of having to make greater provision for bad loans.

In his March 2021 Monetary Policy Statement, Bank of PNG Governor Loi Bakani said he expected higher activity in the Agriculture/Fisheries/Forestry and mineral sectors as well as a general pickup for most other businesses for the year.

PNG’s two largest superannuation funds, Nambawan Super and Nasfund, also both delivered positive returns to their members and fund growth in 2020.

While private sector-focused Nasfund reported increased member withdrawals due to economic hardship, Paul Sayer, Chief Executive Officer at PNG’s largest fund, Nambawan Super, says an anticipated rush by his members did not eventuate.

‘I would have expected that the outflows would have been higher than the previous year, but in actual fact, they weren’t. That’s a positive,’ he tells Business Advantage PNG.

Both super funds continue to be major drivers of longer-term domestic investment. Nambawan Super’s Rangeview Heights retail and residential development will open in Waigani in 2021, and the construction of a new head office is at the planning stages.

Other notable construction projects include Airways Residences’ 24-apartment expansion set for completion this year, the Valkyrie Estate residential development at 8-Mile and Steamships’ Harbourside South development in Port Moresby Town, set for completion in 2022.

‘If you’re going to pick a time to invest, then when things are down is probably a better time,’ observes Sayer.

Andrew Wilkins is Publishing Director at Business Advantage International. This article was first published in the 2021 edition of Business Advantage Papua New Guinea, PNG’s annual business and investment guide, published this month.