CEOs have their say on the policy priorities of the PNG government

19 Jun 2019

Patrick Cooke, Asia Regional Editor

Patrick Cooke
Asia Regional Editor
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While the National Executive Council under new Prime Minister James Marape may have received a healthy sprinkling of fresh talent, the latest political leaders at the helm find themselves facing some familiar problems as they attempt to steer Papua New Guinea into its next phase of economic development.

According to the results of the latest OBG Business Barometer: PNG CEO Survey, a significant number of C-suite executives believe that solving the foreign currency shortage should be the number-one priority for the government. 

Some 31% of CEOs who participated in our face-to-face survey between October and June chose this option, which means the result is unchanged from a year earlier, despite the success of the country’s first sovereign bond issuance and concerted efforts by the central bank to improve liquidity in the foreign exchange (FX) market. 

FX restrictions have been in place in PNG since 2014, when the central bank imposed a trading band for the kina. This was an effort to arrest a slide resulting from the completion of the construction phase of the $19bn PNG LNG project, combined with a slump in commodity prices. 

Subsequent debt-servicing obligations for the ExxonMobil-led PNG LNG project have placed further pressure on the financial account and FX reserves, which slumped to PGK5.39bn ($1.6bn) at the end of 2017, leaving the country with five months of import cover. Business leaders have persistently complained that their difficulties sourcing FX have created added administrative costs and left them unable to pay foreign suppliers, constraining expansion plans and undermining productivity in the process. 

Caution in the face of FX doubts

Uncertainty over the availability of FX may have contributed to a relatively cautious investment climate, with 65% of CEOs indicating their firm was likely or very likely to make a significant capital investment in the short term, compared to an average of 75% in our most recent regional survey of four South-east Asian countries.  

Although CEOs remain concerned with the FX shortage, light is finally appearing at the end of the tunnel. With the government raising $500m in its debut sovereign bond issuance, the authorities have begun making progress in clearing the backlog of FX orders. They are supported in this by improved export performance in the extractive industries, which had been impacted by the devastating earthquake in Hela province in February 2018. 

Proactive measures taken by the central bank to boost FX market liquidity include the assumption of full control of the approval of onshore foreign currency accounts to prevent the accumulation of foreign assets in individual or corporate accounts, an end to the prioritisation of foreign currency for strategic sectors and direct interventions in the spot market. As a result, the central bank estimated the backlog in orders for FX had fallen from PGK1.7bn ($515.6m) at the end of 2017 to PGK320m ($97.1m) by February 2019, and business executives will be hoping that progress continues so they can they can feel secure in focusing on big-picture thinking and long-term investment decisions.

However, there has been no indication so far that the authorities intend to end the over-valuation of the kina by allowing much greater exchange rate flexibility, a policy that is supported by development partners including the IMF. Although I have yet to hear the new prime minister make any public pronouncement on the FX situation, he is known to favour policies that generate more economic and social benefits from major extractive projects

Such policies could include requiring extractive firms to hold at least some export earnings in onshore accounts, as well as offering less generous tax concessions in future deals to ensure a steadier flow of tax payments in foreign currency. 

Over the longer term, continued efforts to diversify the economy, lower import dependency and encourage more onshore processing in the agriculture, fisheries and forestry industries should help bring further stability to the FX market.   

Marape’s myriad challenges 

When asked what they believed should be the government’s primary target for the year ahead, CEOs gave a wide range of answers, indicating that there are a number of pressing problems for the new administration to address. 

After solving the FX shortage, the next most popular responses from CEOs were improving health and education (21%), infrastructure development (20%), economic diversification (13%), and improving law and order (13%). 

PNG is something of an outlier among the Asia-Pacific countries covered by OBG. It faces a unique set of difficulties derived from its vast size, mountainous and heavily forested terrain, and low population density. Such conditions pose complex and costly challenges for policymakers wishing to address significant gaps in infrastructure and social services. 

Traditional public-private partnership (PPP) models for transport and power infrastructure development are difficult to implement because low population density limits returns that could be generated through the user-pay principle. 

Advancements in medical and education technology have the potential to address some shortfalls in social services, but widespread digital illiteracy combined with a lack of reliable internet access prevents the extensive use of such innovations in remote regions. While the expected completion of the Coral Sea Cable System by the end of this year will pave the way for the provision of cheaper, faster and more reliable internet services, many communities will not be able to take advantage of the opportunities these offer unless they also have access to a dependable power supply. 

At last year’s APEC Leaders’ Summit held in Port Moresby, Austrlia, the US, Japan and New Zealand pledged to collaborate with PNG to realise the ambitious goal of boosting electrification from less than 15% in 2018 to 70% by 2030. Thus far, however, we have heard scant details about how they will navigate the financial and logistical obstacles to achieving this.

Foreign businesses must support local communities

If PNG is to fulfil its considerable potential, it is important for businesses entering the country to carefully consider not only short-term development costs and long-term export revenue, but also how they can create positive multiplier effects for the communities in which they operate. 

Examples of how this can be achieved include skills transfer, the provision of health and education services, and programmes to promote digital and financial literacy, which can help create new sources of community wealth in the future. 

Such commitments should not be viewed solely as corporate social responsibility initiatives, as they also have the potential to reduce business costs over time. In particular, foreign firms in the extractive industries currently make significant investments in hiring and retaining skilled foreign personnel. If they could draw on deeper reservoirs of local talent, cost savings over the long term would be considerable.

Looking at the results of our survey, when asked to pinpoint the skill most in need among the local workforce, the most popular response by some distance was leadership (59%), reflecting a widespread desire for more local managers to oversee key elements of projects, execute strategy and nurture junior talent. 

Long-term APEC boost

While the remote regions of the country present their own challenges, the capital Port Moresby has benefitted from accelerated infrastructure development in recent years, spurred on by PNG’s chairmanship of APEC in 2018. 

Although there was some domestic criticism related to spending large sums of public money on hosting world leaders in a moment of elevated national debt, 76% of CEOs expected the long-term economic impact of APEC 2018 to be positive or very positive, with only 1% expecting it to have a negative impact. 

Looking to the future, it is hoped that PNG’s year in the APEC spotlight will translate into mutually beneficial trade and investment relationships with the region’s major powers. 

This in turn could help PNG address its not inconsiderable development challenges, in order to capitalise on its wealth of natural resources and promote inclusive and sustainable growth. 

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Asia Papua New Guinea Economy

Patrick Cooke, Asia Regional Editor

Patrick Cooke
Asia Regional Editor
Follow Patrick on Twitter LinkedIn