Interview: Loi Martin Bakani
Given the strong GDP growth projected for 2015, how much is the kina likely to appreciate?
LOI MARTIN BAKANI: Managing expectations during a period of accelerated growth is always difficult, but experience has taught us to be cautious, as we have been through positive cycles before without seeing any real benefit for the average Papua New Guinean.
Completing the PNG liquefied natural gas (LNG) project ahead of schedule has allowed us to place early shipments in desired markets, but long-term contracts will start only in Q4 2014. As such, the kina will not strengthen until mid-2015. While the currency’s depreciation has negatively affected some segments of the market, it has had a positive impact on others, particularly on exports. The mid-rate value of the kina against the dollar, set by the central bank, has remained the same since October 2013. The currency’s depreciation was in fact caused by speculation, especially by commercial banks, which compete with each other for better rates. This attitude can be reckless, as it affects the whole population. However, when these sorts of market failures occur the central bank does have the right tools at its disposal to bring stability. Indeed, I will not hesitate to introduce all necessary measures, including setting a limit on the spreads if necessary.
Which reforms have been implemented by the central bank to achieve macroeconomic stability?
BAKANI: The government needs to focus on good governance and strive towards economic diversification, especially in the agriculture and non-mineral sectors. Wealth distribution remains our biggest challenge, and we have to move from non-renewable to renewable sources if we want to avoid Dutch disease, which has affected other oil and gas producing nations.
Agriculture has high potential in PNG, but although traditional methods of farming are still valid, the introduction of new technologies could improve yields. Simply bringing raw products to the market is only part of the equation and a concerted effort is needed for downstream processing to create a sustainable future for the renewable resource sector. The government has ambitious and appropriate plans for the 2014 national budget including increased spending on education, health and, particularly, infrastructure, which continues to be at the top of our agenda.
How should the 2014 deficit budget, the largest in PNG’s history, be financed?
BAKANI: This debate has taken central stage for a great part of the year in our domestic affairs, but I believe that a certain level of flexibility is necessary to strike the right balance. Over the last few years it has been important to manage our deficit domestically, in order to show the strength of our system and reassure foreign investors. We have done this by issuing government securities and involving large institutions, such as superannuation funds, as well as individual investors in the process. Over this period our domestic market reached a satisfactory level of maturity following completion of the construction phase of the PNG LNG project. In turn, this justifies the possible launch of an international bond before the end of 2014.
Let us also not forget that 2014 will be the 13th consecutive year of economic growth for PNG. While our debt-to-GDP ratio should not exceed 35%, these figures are only indicative, as they refer to the country’s estimates of GDP for recent years. We are confident in, and would like to see, how the market will respond, as we believe that we could raise between $350m and $500m by means of an international bond.
The recent decision by the government to borrow PGK3bn ($1.22bn) from UBS, in order for the state to purchase a 10.1% stake in Oil Search, also generated a strong response from the public and current administration, as it was carried out outside of the budget. Despite the issues raised, however, we should not hinder the development expectations of an emerging country such as PNG, which unfortunately still lags behind on all of its Millennium Development Goals.
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