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Macroeconomic Update Papua New Guinea

Macroeconomic Update Papua New Guinea. Presentation to: POMCCI Charles Andrews and Aaron Batten Asian Development Bank 25 August 2011. ADB Support for Private Sector Development. PPP policy and implementation Secure transactions Strengthening ICCC Access to finance -- mobile banking.

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Macroeconomic Update Papua New Guinea

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  1. Macroeconomic UpdatePapua New Guinea Presentation to: POMCCI Charles Andrews and Aaron Batten Asian Development Bank 25 August 2011

  2. ADB Support for Private Sector Development • PPP policy and implementation • Secure transactions • Strengthening ICCC • Access to finance -- mobile banking

  3. ADB Support for Private Sector Development • Access to finance -- MFi • Other SOE reform, including CSO policy • Research and analysis and advocacy, eg. 'Challenges of Doing Business in PNG" and "Private Sector Assessment"

  4. PNG Economic Update Business Climate Inflation Outlook Impact of LNG on Business – When and how big? Implications 5

  5. 1. Business Climate Update 6

  6. Twin track global economic performance…

  7. also leading to twin track Pacific economic performance. Real GDP Growth (%)

  8. PNG economy boosted by record terms of trade… World Prices of Key Pacific Commodities (1980-2012p)

  9. …as well as improved fiscal discipline… Government debt by denomination (% of GDP)

  10. …leading to strong economic growth…

  11. …across a variety of sectors. Sources of Real GDP Growth (% p.a)

  12. Looking forward…. • Resurgent commodity prices benefitting PNG • Unlikely to be threatened by current global instability • However, economy is increasingly exposed to a number of vulnerabilities • Inflation • LNG

  13. 2. The Rising Inflation Challenge c 14

  14. Inflation is again on an upwards trend... Growth in CPI Index (Annual % Change) 20 18 16 14 12 10 ? 8 6 4 2 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2011 (e)

  15. Closer to hyper-inflation than official figures suggest… 25 Official CPI Growth 21.7 w/ 16.5% housing price growth 20 w/ 16.5% housing price growth & weighting adjustment 14.5 15 9.0 10 5 0 - 5

  16. BPNG is finally having some success curtailing credit growth... Private sector credit (% GDP)

  17. …and would be assisted by a fiscal surplus this year. Fiscal impact on money supply (Annual budget balance, % GDP)

  18. …and strengthening of the Kina will control imported price pressures.

  19. But BPNG efforts to control the money supply are being hampered… Govt deposits (Million Kina) Govt Share of Commercial Deposits Commercial Bank Accounts BPNG Accounts

  20. …real interest rates are likely to remain negative… Real interest rates (weighted commercial average, %)

  21. Looking forward… • Inflation likely to remain high in next 1-2 years. • Coordinated policy response may help to alleviate some of these pressures. • Urgent review of CPI needed to assess cost of living and assist business in making informed investment choices.

  22. 3. Impact of LNG on Business: When and how big? c 23

  23. Sovereign Wealth Fund arrangements have now been finalized • Key features: • Stabilization Fund, Infrastructure Fund, Savings Fund; • Offshore to prevent excessive exchange rate appreciation; and • Expenditures channeled through budget processes. • What impact will LNG have on business opportunities in PNG?

  24. ‘Myth’ 1 - LNG will double PNG income by 2020 Contribution of LNG to real GDP (Millions Kina)

  25. Once profit repatriation occurs… Destination of LNG Production Value (Millions Kina) 30,000 Impact of LNG on Nominal GDP 25,000 20,000 LNG production value repatriated 15,000 10,000 5,000 LNG production value onshore 0

  26. the impact of LNG on national income will be much smaller. Contribution of LNG to real GDP Growth (Millions Kina)

  27. …whilst payments to private enterprise will likely peak in 2013 Distribution of LNG induced domestic economic activity (Millions Kina) 7,000 6,000 Tax to Government Commercial Payment 5,000 4,000 3,000 2,000 1,000 0

  28. ‘Myth’ 2: LNG solves all of Government’s fiscal challenges Tax and Royalty Revenue from LNG Project (Millions Kina) 2,500 25% increase on 2011 Total Revenue and Grants 2,000 ACIL Tasman (2009) 1,500 2011 Budget (2010) 1,000 Unofficial 500 (2011) 0 2013 2014 2015 2016 2017 2018 2019 2020 Source: ACIL Tasman, 2011 Budget, Treasury Officials. 29

  29. Long run optimism, but significant medium term fiscal challenge. Estimates of Government Revenue (Millions Kina) Decline in concessions Kina, million 18,000 LNG Revenues to Government Stagnant government revenue till 2015 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

  30. Conclusion • Optimistic macroeconomic outlook. • But significant threats emerging. • Inflation • LNG induced expectations • Long term challenge is to ensure future growth does not become siloed in mining

  31. Thank you Q&A Session Contact: abatten@adb.org Website: www.adb.org/pnrm

  32. Business begun hiring again… PNG Formal Sector Employment Index (Quarterly % Change)

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