Higher commodity prices are boosting Papua New Guinea’s economy, says ADB economist

Papua New Guinea’s economy is set to grow steadily, according to Edward Faber, Country Economist for the Asian Development Bank. He told the Business Advantage PNG Investment Conference in Brisbane that the economy is benefitting from improving export income.

PNG’s gross domestic product (GDP) was US$23 billion in 2017. Source: ADB

‘We have seen better commodity prices in 2017 and the first half of 2018,’ said Faber.

‘This has been feeding through and helping the economy in terms of the growth and inflows of foreign exchange.

‘Papua New Guinea’s economy has grown in real GDP terms by 68 per cent over the last 10 years’

‘We expect to see significant future growth coming from 2020 onwards with new resource projects and infrastructure development.

‘The fiscal consolidation strategy of the government is on target and the forex backlog has reduced.’

PNG Exports. Source: ADB

Gross domestic product

Faber said PNG’s total GDP in 2017 was US$23 billion.

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‘The largest sector is mining and petroleum, which is 25 per cent of GDP. The non-mining sectors are 75 per cent.

‘Papua New Guinea’s economy has grown in real GDP terms by 68 per cent over the last 10 years which is an average of more than five per cent per annum in real GDP.

‘In 2017, the economy grew by 3 per cent, primarily driven by the mining sector, which is estimated to have grown 10 per cent in 2017.

‘That was due to full-year production at Ok Tedi, enhanced production at the Ramu Nico mine and expanded production from the LNG plant.

‘But the non-mining sector did not show so much growth in the last two years: 0.2 per cent in 2017, and 0.7 per cent the year before that.

Export prices. Source: ADB

Exports

Faber said PNG’s economy is driven by exports, which were US$9.6 billion in 2017, the equivalent of 40 per cent of GDP. Exports in terms of nominal value grew significantly in 2017—by 22 per cent.

‘Hydrocarbons are the largest percentage (of total exports) at 44 per cent. Metals is 36 per cent and agriculture, forestry and marine is 20 per cent.

‘LNG is the largest export at 33 per cent followed by gold, which is 24 per cent.

The largest agriculture export is palm oil.

‘The earthquake earlier this year meant that growth for this year was downgraded from 2.4 per cent to 1 per cent.’

‘Copper, nickel and cobalt all saw expanded output and better prices due to demand from China especially the electric car industry.

‘Gold output was the same but we saw better prices.

‘LNG and condensate [revenue] increased in 2017 due to improved prices and output but crude has been trending downwards.

‘Marine products were higher; forest products were static and agriculture was up due to more palm exports.’

PNG government’s interest costs. Source: ADB

PNG’s future

Faber said the earthquake earlier this year meant that growth for this year was downgraded from 2.4 per cent to 1 per cent.

‘Oil and gas is expected to contract by 4.5 per cent in 2018,’ he said.

‘Originally, fears were that the contraction might be greater than that, but the LNG plant is now operating at greater capacity than before, so they are expecting to recoup up to 80 per cent of the lost production. That is why we can still expect to see a positive growth.’

Faber said the ADB’s latest forecast is 1.8 per cent growth for 2018.

‘There will be a lot of reconstruction going into schools, hospitals, and public sector infrastructure and also private sector mining facilities were damaged and will require reconstruction.’

Faber said GDP growth in 2019 is expected to accelerate to between 3 and 4 per cent due to a rebound in LNG, oil and gold production.

‘Looking ahead to 2020, we then expect the two LNG projects to come on stream and that will be a significant investment and lead to a new growth phase.

‘We also have Wafi-Golpu, which will be a $2.8 billion investment. We also have the China One Belt One Road initiative where they potentially have pledged $3 billion.

‘Wafi will be in an area with a lot of potential for agriculture and they will be putting roads in so it can also help the non-mining sector.’

Inflation

Faber said inflation has been high ‘but not out of line’ with other low- to middle-income countries.

‘We often expect higher inflation for fast growing economies. In 2018, we expect inflation to be in the 5 per cent range.

‘We are seeing some currency depreciation which might lead to inflation; we are seeing tariffs and also some high commodity prices which could have some inflationary pass through.’

Faber said foreign exchange reserves are the equivalent of five months of imports.

PNG’s public debt, which is 32 per cent, is lower than its peers in the Pacific Islands and South East Asia.

Interest costs, however, have risen, and are high compared with peers. He pointed to loans from the ADB and the World Bank as a way to reduce those costs.

Faber added that a sovereign wealth fund is needed to manage the next upwards investment cycle, adding that it will ‘come with social/political risks.’

PNG’s fiscal deficit. Source:ADB

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