A surge in liquefied natural gas (LNG) exports is expected to nearly treble the pace of economic growth in Papua New Guinea in 2015 putting the South Pacific island nation at the top of the league of fast-growing economies and helping it bridge a widening budget deficit.
The government estimates the economy will grow by 15.5% next year, when it unveiled its budget in November. This follows estimates from the World Bank’s East-Asia Pacific Economic Update, published mid-October, that the economy will grow by 20% next year, underpinned by gas exports from its $19bn plant. The bank noted that growth will more than offset the end of LNG-related construction, declines in copper exports, and weak cocoa and coffee production.
The Asian Development Bank (ADB) echoed this sentiment with forecasts of GDP rising by 21% in 2015, up from 6% this year, in its outlook published early December. The growth far outpaces regional peers with the next best performer, the Philippines, expected to post GDP expansion of 6.7%.
However, growth in activity outside the resource extraction sector is likely to remain weak, with non-resource GDP projected to grow by 0.4% in 2014, compared to the 9.2% recorded during the peak of the construction phase in 2012, according to the World Bank. However, growth in the non-mining sector will recover to reach 4% growth in 2015, which will provide modest support to employment growth, it noted.
This prompted calls in December from the IMF for a renewed policy focus on growth in the post-LNG construction in a bid to boost the non-resource sector. It said high priority areas include the delivery of frontline health and education services, including sufficient allocation of critical recurrent expenditure. It also called on the government to introduce its sovereign wealth fund as soon as possible, an idea originally mooted in 2011.
“The fund will be established under the Treasury, although it will be administered by an independent board and subject to its own legislations,” Charles Abel, Minister for National Planning told OBG. “Lately we have refined its structure, how it will filter into the budget and what portion of it will be set aside for future generations.”
Turning around deficits
The first shipment of natural gas from PNG’s liquefied natural gas (PNG LNG) project began in May 2014, and the country is poised to become a major global exporter, with production that will exceed 9trn cu metres of gas over the project’s 30-year lifespan.
The government will start to see a direct impact on its bottom line next year as LNG exports move. After unveiling its budget in November, the government came under fire for its budget deficit extending to around $880m or 5.9% of GDP in 2014 with the deficit expected to run until 2017, largely driven by investment in infrastructure. The 2015 deficit, however, is targeted to decline to 4.4% of GDP thanks to additional mining and petroleum taxes on the back of the LNG gas exports.
However, while LNG shipments are being ramped up, the actual transfer of funds to equity holders – including the state – will not come until well into 2015, according to Peter Graham, the managing director of ExxonMobil PNG, which heads up the country’s main gas production operation. “The first equity payment to partners will be in the later part of 2015,” Graham told a media briefing in late October.
The World Bank estimates that the project is around 80% owned by non-residents, meaning that only a fraction of LNG receipts will be retained in the domestic economy in the short-term.
The revenue stream may also have some of the momentum taken out of it by increasing levels of natural gas coming onto the market, and the rise of shale gas. With a number of gas projects coming on-line in PNG’s backyard, including three in Australia alone in the next year, international prices may come under pressure as Asia moves towards a supply surplus.
At the same time, LNG prices may be subject to risks from oil price fluctuations in the long-term, due to LNG contract prices in Asia typically being linked to the Japan Customs-cleared crude oil price. However, Prime Minister Peter O’Neill told international media in December he was confident PNG would be able to ride out the slump in energy prices and bring national debt back below the legislated cap of 35% of GDP, despite oil price declines exceeding forecast expectations in the recent $6bn budget.