Papua New Guinea Year in Review 2015

Falling energy and mineral prices ramped up pressure on Papua New Guinea’s economy in 2015, prompting a reduction in state spending that is expected to continue into the new year as the government looks to return the budget to a surplus.

Alongside spending cuts of up to 20% in some areas, a $1bn sovereign bond planned for 2016 should help the government address the public debt, which, at 34.7% of GDP, is on track to bypass the legislative ceiling of 35% in 2016. The move is also expected to help shore up the country’s foreign reserves, which have fallen by 50% in the past two years.

While GDP growth is likely to fall short of the 15% projected earlier in the year, the IMF and the PNG government have forecast growth of 9% and 9.9%, respectively, for 2015, well in excess of regional and global averages.

Looking ahead, the government expects the economy to expand by 4.3% in 2016, while the IMF has issued a less robust forecast of 3.1%.

Fiscal tightening

With much of the development work for recent gas and mining projects reaching completion, PNG’s GDP expansion was expected to ease in 2015 on the back of reduced activity across related sectors, such as construction and logistics.

However, the progressive weakening of energy and metal prices throughout the year served to further erode state revenue, and with it, the government’s ability to stimulate growth via public spending. Commenting in mid-November, the IMF said slow growth in the non-resource sector underscored the importance of a renewed policy focus on inclusive growth.

The global commodity slump triggered a 12% contraction in government revenues, as per the supplementary budget for 2015, released in November, compared to earlier predictions of a 10% increase.

According to Patrick Pruaitch, minister for Treasury, energy and mining tax revenues are expected to fall from earlier estimates of PGK1.7bn ($565.3m) to PGK300m ($99.8m) in 2015.

Despite additional revenue-generating measures and a PGK1.38bn ($458.9m) reduction in spending, the revised 2015 budget saw the fiscal deficit rise from PGK2.41bn ($801.3m) to PGK2.49 ($827.9m).

The government aims to narrow the spending gap in the coming year, however, with a PGK2.1bn ($698.3m) deficit projected in the 2016 budget, equivalent to 3.8% of GDP, down from 4.9% in 2015.

Transport, education and administration all saw their allocations cut by 20% or more in the new PGK14.76bn ($4.9bn) budget, as lower commodity prices forced the government to revise its forecasted return to surplus from 2017 to 2020.

Commodity concerns

Commodity-based industries in particular faced external headwinds throughout much of 2015. In addition to weaker global demand, both the mining and agricultural sectors felt the weight of drought conditions caused by the El Niño climate cycle.

Continued water shortages are expected to produce lower crop yields in 2016, while the operators of the Ok Tedi copper mine, which accounted for nearly 25% of government revenue in 2014, were forced to temporarily suspend production in late August due to low water levels in the Fly River, which impeded the transport of goods from the mine.

Lower demand for commodities had a strong effect on the balance of trade, with the weighted average kina-denominated price of exports, excluding liquefied natural gas (LNG), down by 13.7% year-on-year in late November. Mineral exports dropped by 13.3%, while primary product exports, including goods from the agricultural, logging and fisheries sectors, fell by 15.2%.

Taking stock

As in many emerging markets, the kina came under pressure over the year, falling from PGK2.54:$1 at the beginning of 2015 to around PGK3:$1 by late December.

Inflation remained stable over the year, however, as depreciation of the kina was offset by lower energy and commodity prices. The consumer price index stood at around 5.8% as of September, according to the most recent figures from the Bank of PNG, down slightly from the 6.1% recorded at the end of the first quarter of 2015.

In addition to increasing the cost of many imports, a weaker kina will drive up repayment costs on the country’s external debt, which rose from 8.7% of GDP to 12.4% in 2015, as per IMF figures. At present, debt servicing accounts for around 10% of spending under the 2016 budget.                                                                                     

The county’s short-term finances could see an improvement in the coming year, however, as the government moves ahead with plans to launch its first sovereign bond, worth a reported $1bn. According to local press, the bond will be used to pay down and restructure existing public debt, easing pressure on PNG’s foreign reserves.

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