ANZ is forecasting that Papua’s currency, the kina, will continue to ease until mid-2018. To correct Papua New Guinea’s financial imbalances and foreign exchange difficulties, there needs to be a program of fiscal consolidation, Cameron Bagrie, the ANZ’s New Zealand Chief Economist, tells Business Advantage PNG.

Kina and Australian dollar versus the US dollar Source: ANZ

In spite of the pressures on the kina, Cameron Bagrie notes that there are some positive economic signs. PNG’s current account, an important indicator of an economy’s health, has gone from being in a deficit of over 50 per cent of GDP in 2012, to a surplus now.

He says there has also been more stability in commodity prices, which has eased pressure on the currency in the short term. ‘It is notable that the kina has traded in a narrow range now for a number of months and shown stability.’

‘According to ANZ forecasts, the kina is projected to decline until mid-2018, before recovering.’

But this has not translated into lifts in foreign reserves or tax revenue, which is contributing to foreign exchange shortages and a backlog of exchange requests.

The problem is further magnified by ‘a reluctance on behalf of exporters to purchase beyond bare minimums’ on expectations of further declines in the currency, Bagrie tells Business Advantage PNG.

According to ANZ forecasts (see graph above), the kina is projected to decline against the US dollar until mid-2018, before recovering.

Micro details

ANZ’s Cameron Bagrie Source: ANZ

Bagrie says to rectify the financial imbalances it is necessary to pay attention to small, but important, details.

‘You have to have your regulatory framework right with regard to attracting capital and retaining capital. You name it, there is a big list of what needs to get done.’

‘The issue with PNG—and it is not just PNG, a lot of countries around the world are like this—is that in a lot of aspects the fiscal credentials are just not strong.’

‘What drives good economic outcomes is good micro-economics. It is about driving the right behavior with good policy.

‘You get the right incentives in front of people and, lo and behold, you get the right outcomes on the other side.

‘The issue with PNG—and it is not just PNG, a lot of countries around the world are like this—is that in a lot of aspects the fiscal credentials are just not strong.

‘It is fine to say on the face of it that the yield (on government bonds) looks tremendously attractive. But the yields are up around those sort of levels for a reason; it’s a reflection of how the market perceives the risks.’

Barrie argues it is necessary to design and articulate ‘a well laid out fiscal consolidation strategy over a five year period.’

Credentials

Bagrie says any international investors assessing PNG financial assets will not just consider the potential currency risk, they will also look at the ‘underlying fiscal credentials and other structural metrics in regard to the numbers that are actually there.’

‘You turn a fiscal ship around not by cutting the guts out of government spending because all that does is drive a deeper downturn.’

‘If you want to create demand (for PNG financial assets), and have a product to market and sell, you have to have the product in the first place and it has to be a marketable product. That means not just looking at current figures but also the market’s perception of where the numbers will be in two or three years out.

‘Then you start to think: “how do you turn a fiscal ship around?” You turn a fiscal ship around not by cutting the guts out of government spending because all that does is drive a deeper downturn.

‘You have got to have a growth-style platform.’

‘You have got to have a fiscal framework in regards to how you allocate spending.  It helps if you can enshrine some sort of fiscal responsibility into the DNA of your authorities.

‘You have to have generally accepted accounting principles so that you know the accounts are a true reflection of what is going on. You have to tighten up the tax system.

‘You have got to have a growth-style platform because if you have got growth coming in the tax revenue’s going to be coming in the door.’