How Papua New Guinea’s informal and local economy can get through the COVID-19 crisis


The economic fallout from the coronavirus (COVID-19) is creating havoc across world markets and economies. According to the ratings agency Fitch, Papua New Guinea’s formal economy will be affected, but the story could be different for its informal and local economy.

Farmers at Gerehu Vegetable Markets. Credit: DFA

A report by Fitch claims the COVID-19 pandemic will have a negative impact on Papua New Guinea’s growth outlook in both the short and long term.

‘The immediate effects will likely be felt on exports amid weaker external demand and tumbling commodity prices, which in turn is likely to weigh on confidence and exacerbate shortages of foreign exchange in the local economy,’ it says.

‘Short-term disruption to travel and tourism will also be severe, though this likely have a minor impact on headline growth given the relatively limited size of the country’s tourism sector.’

Fitch has downgraded its forecast for PNG’s economic growth in 2020 to 2.4 per cent, from 3.3 per cent.

International finance

The Fitch Report observes that PNG relies largely on commodity exports, including oil and gas, gold, copper and timber. Prices on all are currently falling.

‘A likely combination of falling prices and weaker external demand in the coming months has prompted us to lower our forecast for export growth in 2020 from 5.5 per cent to 4 per cent.’

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‘If the COVID-19 shock derails these plans we would expect a sharp adjustment in planned investment expenditure with further consequences for short-term growth.’

Fitch says there may also be uncertainties about the concessional finance on which the Marape–Steven government is depending to ease pressures on the budget.

‘Increased global uncertainty and costs associated with the pandemic could also make it harder for the PNG government to raise the K3.8 billion in international financing to fund its planned pro-growth spending in the 2020 budget.

Last month, PNG agreed to an International Monetary Fund (IMF) Staff Monitored Program to support its budgetary reform efforts, ‘a move that was aimed at boosting investor confidence and unlocking more international development funds.’

‘However,’ warns Fitch, ‘If the COVID-19 shock derails these plans we would expect a sharp adjustment in planned investment expenditure with further consequences for short-term growth.’

Oil and gas

The report says that the recent collapse in oil prices, which are down by more than half this year, raises questions about PNG’s ambitious plans to double LNG exports.

‘The recent breakdown in talks between the government and ExxonMobil over the development of the P’nyang gas field already implies delays to the key PNG LNG and Papua LNG projects, and a sustained period of weaker global demand for energy could undermine the viability of these and other long-term LNG projects.’

According to analysts Wood Mackenzie, deep spending cuts across the board in the oil and gas sector are needed to achieve cash-flow neutrality in 2020.

‘We calculate an average spending cut of 57 per cent will be required for our coverage if only upstream spend is targeted,’ a Wood Mackenzie report says. ‘A reduction of 41 per cent would be needed across all spend categories, including dividends, to be cash flow neutral at US$35/bbl.’

As Business Advantage PNG reported last week, Oil Search is slashing investment expenditure in 2020, from a previously planned US$710–845 million (K2.43–2.89 billion) to US$440–530 million (K1.5–1.8 billion). Forecast capital expenditure from April has been reduced to US$200–300 million (K686 million to K1.02 billion) from US$400–500 million (K1.37–1.71 billion).

ExxonMobil, whose shares are trading at 17-year lows, is also reportedly reducing capital costs by 10–12 per cent.

Informal and purely domestic economy

Paradise Foods’ James Rice [right] during a visit to the plant.

The impact on PNG’s informal and purely domestic economy is likely to be far less because of the country’s lack of integration into global capital markets.

Chey Scovell, Chief Executive of the Manufacturers Council of PNG, tells Business Advantage PNG that the bulk of the population is ‘largely sustained through subsistence farming’ and, with good weather, the ground is fertile and the crops are growing.

He says there has also been a push towards import replacement, mainly in Port Moresby. He says a push to improve the agricultural sector ‘has seen the maturation of many contract farmers, who are now able to supply a greater percentage of local demand for fresh produce.

‘We have a dairy that is being fed primarily from local farmers, our chicken suppliers are mainly outgrowers and, so long as we can keep stockfeed coming in, they will be ok.

‘We can our own fish, the fishing boats leave our ports and return to them so are not placing greater risk [on themselves].

‘Hard biscuits, a staple, are a Pacific and PNG thing, so they aren’t really imported that much. And, since the change on tariffs, thankfully we are more than self-sufficient on clean bottled water and beverages.’

Scovell points to Ramu Sugar, which he says is working with BellTek (Brian Bell Chemicals). ‘We have nil stock of hand sanitizer; Ramu will now supply BellTek with ethanol (a byproduct of the sugar mill) so they can make some locally.’

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