Interview: Mark Baker
What is your outlook for the banking sector and the broader economy in the near term?
MARK BAKER: It will be critical in the short to medium term to initiate key projects in energy and mining. By 2026, Papua New Guinea is expected to have largely paid off the original liquefied natural gas (LNG) project. With government revenues expected to pick up by mid-2020, the medium to long-term outlook is likely to be very promising. What the country does with those opportunities is especially important. Revenues must be invested in crucial aspects of the economy, including law and order, health, education and infrastructure. The focus must be on enabling those segments to widen the base of the economy and make it more sustainable. PNG had a difficult time when the construction phase of the first LNG project ended as there was little additional economic activity to replace those activities; a repeat of this needs to be prevented. The outlook for the banking sector itself is also positive, as the larger banks based in PNG are familiar with resource projects.
How do you assess PNG’s measures to tackle economic challenges such as the rising kina and fluctuating levels of foreign direct investment (FDI)?
BAKER: PNG’s fiscal problems are a reflection of its small economy, which is dominated by the resources sector. In 2009 when PNG started its first LNG project, its value was more than double the country’s total GDP. Subsequently, we were in the position of a small economy with a large influx of FDI, combined with a rising kina. With FDI disappearing, the currency fell rapidly while import demands held steady, leaving an economy that had grown quickly but did not have the broad structural base to support it.
Although there have been talks about devaluing the kina, this is a complex area and would not necessarily help PNG at this stage, as a result of factors such as the risks associated with imported inflation.
Regardless, PNG’s government has identified new sources of foreign currency to mitigate some of the problems for 2019. Acquiring loans from the World Bank and the Asian Development Bank are important steps, although this won’t solve the underlying problem. Moreover, the successful issuance of the sovereign bond in 2018 cannot be underestimated. It was PNG’s first reach into the global markets at a time when emerging markets were under significant pressure. PNG successfully overcame those challenges through discipline and by building up trust among international investors.
To what extent can the banking sector serve the country’s ambition to diversify its economy?
BAKER: Opportunities for PNG’s banking sector are not limited to extractive industries. A lot of wealth is trapped and needs to be unlocked. The key question from any bank will be “how are you going to pay me back?”. Non-resource sectors and players need to become more bankable. It all comes down to having the appropriate supporting infrastructure to lower costs and to increase the capital flow into local corporations and small and medium-sized enterprises. Manufacturing, agriculture and tourism all have huge potential, but investment prospects are limited by poor infrastructure. Banks are willing to invest in infrastructure projects, but the finance structures in PNG can pose a challenge. Multilateral agencies can play a role by helping PNG find the right risk and cost structures. Diversification opportunities may arise from the installation of a new submarine cable. ICT should be seen as an enabler, since PNG’s economy, like many other emerging markets, has the opportunity to leapfrog. Blockchain technology, for example, could help to make land title claims more reliable and release the value of land. Blockchain can also assist in making it easier to identify people and increase the penetration rate of financial services.
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