Economic Analysis
Papua New Guinea

Papua New Guinea

Population 7,718 million
GDP per capita 2744 US$
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Synthesis

major macro economic indicators

   2014 2015 2016 (e) 2017 (f)
GDP growth (%) 7.4 6.6 2.5 3.0
Inflation (yearly average) (%) 5.2 6.0 6.9 7.5
Budget balance (% GDP)  -6.5 -5.1 -5.0 -5.2
Current account balance (% GDP)  -3.0 10.1 7.5 6.1
Public debt (% GDP) 28.1 30.6 34.3 36.5

 

(e) Estimate (f) Forecast

STRENGTHS

  • Abundant natural resources: minerals (copper, gold, nickel, cobalt), oil and gas, and raw materials (wood, coffee, cocoa, palm oil)
  • Construction of liquefied natural gas production facilities
  • Foreign investment in raw materials sector
  • Financial support from multilateral institutions

WEAKNESSES

  • Vulnerability to natural catastrophes
  • Poor infrastructure network
  • High illiteracy rate
  • Shortages of skilled labour
  • Major failings in terms of governance
  • Rapid growth of private sector external indebtedness

RISK ASSESSMENT

Activity expected to stabilise in 2017

After the sharp slowing in 2016 as a result of the fall in raw material prices, with copper, cobalt and liquefied natural gas (LNG) in pole position, activity should stabilise in 2017. Growth will however remain limited because of low mineral and oil and gas prices. As the Exxon Mobil LNG project has reached its production potential, it will no longer be adding further to growth. In addition, the poor performances being recorded by the mining sector will act to discourage further foreign investment in the sector.
On top of this, activity in the non-mining sectors, specifically construction, transport and logistics, are expected to remain depressed. These will suffer as a result of the completion of the LNG project. Finally, the decline in tax receipts because of reduced sales of mining products is expected to slow the implementation of infrastructure projects.
The agricultural sector however should benefit as it recovers from the poor harvests of 2016 and activity should benefit from increased public spending ahead of the elections to be held in June 2017.
Household consumption is however expected to continue to struggle with increased unemployment following the completion of the LNG project developed by Exxon, and rising inflation. The persistence of bottlenecks, such as the lack of skilled labour and poor infrastructure, will continue to push up inflation. The depreciation of the kina is also likely to result in further rises in import prices.

 

Weak raw material prices undermining the macroeconomic fundamentals of the country

The completion of the LNG project and the start of production have helped boost exports and cut imports. The current account balance thus moved into surplus as of 2015. The decline in mining sector export earnings because of falling prices however led to a deterioration in the current account balance in 2016. This situation is likely to continue in 2017. The depreciation of the kina will not benefit exports of manufactured goods which continue to be hindered by the weakness of the country’s infrastructure network. At the same time, imports will remain high with the country dependent on imports for many goods.
In 2016, there was a great deal of downward pressure on the Papua currency as a result of the decline in foreign investments and exports but the depreciation was limited to just 5%. The authorities used the country’s currency reserves to defend the kina in the currency market. This resulted in a 7.5% reduction in these in 2016.
In terms of the public accounts, in 2016 the country experienced a reduction in budget revenues from the oil and gas and mining sectors, and this trend is expected to continue in 2017. The budget deficit should be unchanged, with the government having implemented measures to restrict public expenditure. As the country is unable to issue bonds, it applied in 2016 for financial support from the World Bank (USD 300M) and the Asian Development Bank (USD 300M). The public debt is thus going to increase rapidly in 2017 but will keep within the moderate debt range.

 

Political stability will remain fragile in run up to parliamentary elections in June 2017

The 2012 elections confirmed Peter O’Neill (People’s National Congress) as the Prime Minister. He now has the support of his predecessor, Sir Michael Somare. However, legal proceedings have been started against the Prime Minister, relating to alleged corruption. An arrest warrant has been issued but the validity of this is being contested in the country’s various jurisdictions. In October 2015, the Parliament rejected a procedure for a motion of censure against the Prime Minister and he will now remain in power until the elections in 2017. There are likely to be many more anti-government demonstrations and political stability remains fragile.
In addition, there is serious social discontent, stoked by the levels of inequality and poverty: the majority of the population lives in rural areas and exists on subsistence agriculture. The completion of the LNG project could see increased tensions if the workers from the construction site cannot find jobs. Finally, the country continues to suffer significant deficiencies in terms of governance.

 

Last update: January 2017

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