What is Papua New Guinea doing to boost the trade balance?

 

In recent years Papua New Guinea’s trade and investment environment has been characterised by government policies aimed at generating wider – and more immediate – fiscal and social benefits from the country’s resource wealth, while simultaneously growing exports and decreasing imports as it develops a broader economic base. Australia remains a key geopolitical partner; however, it faces growing competition from an increasingly assertive China that continues to spread its influence in the South Pacific through trade, investment, loans and aid. As PNG’s economy comes under pressure from the global Covid-19 pandemic, policymakers have tough decisions to make as they seek sustainable financial assistance from development partners while pursuing a longterm shift towards self-sufficiency.

Regulation & Oversight

Government trade and investment policy is driven by the Department of Commerce and Industry. With a mandate focused on promoting diversified, sustainable growth through trade and investment, the department oversees the implementation of government plans in four ministerial agencies: the Investment Promotion Agency (IPA), the Small and Medium Enterprise Corporation (SMEC), the National Institute of Standards and Industrial Technology of PNG (NIST), and the Industrial Centres Development Corporation (ICDC).

The IPA is the first port of call for any investor eyeing opportunities in the country. It offers a broad range of services for foreign and local businesses, including business registration, regulation and certification, investor facilitation, export promotion, and the protection of intellectual property rights. It also regulates capital markets through the Securities Commission of PNG (SECOM), a division of the IPA. The SMEC’s mandate is to support local entrepreneurs and the growth of the small and medium-sized enterprise (SME) segment, with the aim of making the economy more self-sufficient. NIST is the statutory national standards body tasked with devising and enforcing technical standards and addressing technical barriers to trade flows, while the ICDC is charged with nurturing the growth of local manufacturing, including through the establishment of urban industrial centres.

Recent Legislation

For foreign investors, the IPA Act of 1992 is the key piece of legislation governing trade and investment. In recent years there have been a number of attempts to amend or replace this law; however, these endeavours have not been well received by all stakeholders. For example, in February 2019 the former government put the Foreign Investment Regulatory Authority (FIRA) bill before Parliament, but later withdrew it amid criticism regarding the new restrictions on foreign investment and a perceived lack of consultation. The FIRA bill would have fundamentally changed the investment environment. Controversial measures included setting a minimum investment requirement of PGK10m ($2.95m); subjecting applicants to a national benefit test; introducing a three-year sunset period for existing foreign investments in newly reserved sectors for PNG’s businesses; and the introduction of a licence for minority foreign investors in majority PNG-owned companies.

In its place an IPA Amendment Act was proposed that does not include such controversial measures, focusing instead on striking a balance between supporting local micro-, small and medium-sized enterprises and attracting foreign direct investment (FDI). If passed, the act is expected to legislate for more efficient and transparent business licensing and investment approvals. However, as of mid-July 2020 it had yet to be tabled. There has been some pressure from local activists to expedite the parliamentary process and ensure that there is a extensive list of activities reserved for local businesses. It remains to be seen if certain elements of the FIRA bill will be reintroduced.

The guiding principles for trade are outlined in the National Trade Policy 2017-32, which aims to increase exports and raise the competitiveness of domestic SMEs. Since the policy was launched, successive governments have reversed the long-standing policy on tariff reductions and focused on establishing mutually beneficial bilateral trade agreements with regional powers rather than joining multilateral ones. Trade policy is also guided by the Medium-Term Development Plan 2018-22, which targets boosting exports and reducing imports of goods that can be produced locally, such as fruit, vegetables and dairy products.

Trade Performance

Around 86% of exports from the country are generated by extractive industries, principally liquefied natural gas (LNG) and gold. The 2020 national budget projected that total exports were valued at PGK38bn ($11.2bn) in 2019, up from PGK33.7bn ($9.9bn) in 2018 and PGK31.4bn ($9.3bn) in 2017. In 2020 the budget forecast a record total of PGK42.1bn ($12.4bn), but that projection was released prior to the Covid-19 pandemic disrupting commodity markets around the world.

In 2019 an estimated PGK4.1bn ($1.2bn) in exports was generated from agriculture, forestry and fisheries, while the projection for extractive export revenues was PGK33.9bn ($10bn). LNG generated PGK15.8bn ($4.7bn) and gold export earnings were projected at PGK10.8bn ($3.2bn). Aside from extractive industries, the 2020 budget projected that the biggest export revenue earners in 2019 were palm oil with PGK1.2bn ($353.9m), forest products with PGK1.1bn ($324.4m) and coffee with PGK519m ($153.1m).

Given that around 85% of the population is dependent upon agriculture for their livelihoods, the government is keen to nurture the development of value-added agri-business and boost exports of fresh and processed produce. The budget projects that export revenues from agriculture, forestry and fisheries will total PGK6.3bn ($1.9bn) by 2024, whereas extractive exports that year will total PGK44.1bn ($13bn). By nurturing the growth of agri-business, the government is also aiming to reduce the food import bill, and by extension boost foreign exchange liquidity in the local market.

According to the 2020 budget, in 2019 PNG imported an estimated PGK11.8bn ($3.5bn) in goods, leaving an overall trade surplus of approximately PGK26.2bn ($7.7bn) for the year. This positive performance was aided by higher production of LNG, condensate, gold and copper, as well as strong gold prices. Meanwhile, the current account was projected to end 2019 with a healthy surplus of PGK20.4bn ($6bn), driven by higher export volumes and values of LNG, condensate, gold and copper. This helped to offset declining values in crude oil, nickel, cobalt and many agricultural products, which suffered from both lower prices and diminished volumes. PNG was projected to close out 2019 with a net deficit of around PGK20.4bn ($6bn) in the capital and financial account, reflecting a strong increase in financial capital outflows.

Looking ahead, the economic shock resulting from the Covid-19 pandemic is likely to lead to considerable fiscal and balance of payments challenges in the near term. According to the IMF, lower export revenue resulting from falling prices and global demand look set to result in a balance of payments shortfall equivalent to 4% of GDP, while the budget deficit could widen to over 6% of GDP. To help PNG meet immediate financing needs and also to catalyse support from other development partners, in June 2020 the IMF approved the disbursement of $363.6m to the country under the Rapid Credit Facility.

Australia is PNG’s largest trade partner, ahead of Japan and China, the latter of which has grown in prominence in recent years. According to the Australian Trade and Investment Commission (Austrade), bilateral trade with PNG totalled A$7.5bn ($5.2bn) in FY 2018/19, up 24% from A$6.1bn ($4.2bn) the previous year. PNG imported A$3bn ($2.1bn) worth of Australian goods and services in FY 2018/19, while it exported A$4.5bn ($3.1bn). PNG’s main imports from Australia are crude petroleum, meat, civil engineering equipment and parts, specialised machinery and parts, and wheat. The biggest exports are gold, crude petroleum, silver and platinum.

PNG also maintains trade surpluses with its secondand third-largest trade partners, Japan and China, largely because they are major importers of LNG from the PNG LNG project. Three of PNG LNG’s four clients with long-term contracts are headquartered in these countries: Japan’s Osaka Gas Company and Tokyo Electric Power Company, and China Petroleum and Chemical Corporation (see Energy chapter).

Investment Performance

PNG has several large-scale extractive projects in the pipeline that could generate significant FDI inflows in the coming years. However, due to an uncertain global investment environment and the government’s determination to agree on fiscal arrangements that generate quick returns – and result in clear fiscal and social benefits over the long term – uncertainty remained around proposed mining and energy projects as of July 2020. Moving forwards, the government aims to stimulate investments in so-called sustainable sectors of the economy – namely agriculture, fisheries, tourism and downstream processing. The administration views SMEs as crucial to the growth of such sectors, and in the 2020 budget it allocated PGK200m ($59m) for the development of an incubation centre, the construction of infrastructure in tourism centres and the advancement of industrial areas. In addition to attracting private investment in agriculture, the government intends to play an active commercial role in the sector through the state-owned Kumul Agriculture Limited, which was established in 2018 and is expected to focus on developing medium- and largescale agri-business ventures. Despite this recent focus on investing in new growth engines of the economy, between 2008 and 2017 the most popular sectors for FDI were mining and petroleum, accounting for 25% of total FDI, followed by energy (16%), construction (12%), manufacturing (8%) and hospitality (8%).

According to the UN Conference on Trade and Development, in 2019 PNG attracted $334m in FDI, down slightly from $338m in 2018. Positive FDI performances in 2018 and 2019 contrasted with negative inflows in the preceding years. The uptick in FDI coincided with the country chairing the APEC forum in 2018, which culminated in leaders from some of the world’s richest and most powerful countries – including the US, China, Russia and Japan – meeting in Port Moresby in November of that year. PNG’s year leading APEC resulted in a number of capital projects to upgrade transport and hospitality infrastructure (see Construction & Real Estate chapter), as well as providing policymakers with the chance to showcase the country’s investment potential while strengthening relations with foreign leaders and building regional business and investment networks.

Headwinds

A number of challenges must be addressed in the business environment if PNG is to reach its full investment potential. These include an infrastructure deficit that drains productivity and adds to business costs, skills gaps, land rights ambiguities, and law and order issues. In 2020 PNG slipped 12 places in the World Bank’s ease of doing business index, placing 120th out of 190 countries. Nevertheless, the report highlighted a number of areas where the country has improved, such as ameliorating cross-border trade by establishing an automated Customs data management system.

The government has recognised the need to address some key barriers to investment and is taking measures accordingly. For example, one of the priority initiatives announced in the 2020 budget is Connect PNG, which aims to create opportunities for tourism, agriculture and fisheries through improved telecommunications and transport infrastructure. In 2020 public investment of PGK300m ($88.5m) was earmarked for Connect PNG, with this figure set to rise to PGK2bn ($589.9m) by 2024. The government aims to complement this with an additional PGK2bn ($589.9m) from donors. A key goal of the initiative is to develop an undivided road network on the mainland and to improve the quality of existing roads.

Elsewhere, the government has acknowledged that a multi-sectoral approach is required to improve law and order if its policy objectives for economic development are to be realised. “Policymakers need to create an environment for sustainable economic development, where economies of scale are achievable. That means land tenure, reliable infrastructure, a solid supply chain, better security and citizens ready for productive employment.” Chey Scovell, CEO of the Manufacturers Council of PNG, told OBG. “For example, half or more of produce can be lost while being transported because of inadequate infrastructure.”

China Rising

Although Australia remains the country’s top trade partner, in recent years it has been replaced by China as the number one source of FDI. According to the IPA, PNG’s top-five FDI source countries are China, Australia, Malaysia, the Philippines and Singapore. In terms of investment from China, in 2019 real estate proved the most popular sector for inflows. This was followed by construction, financial services, and wholesale and retail.

In June 2018 Chinese investment prospects in PNG received a boost when then-Prime Minister Peter O’Neill became the first leader of a Pacific Island state to formally sign up to the Belt and Road Initiative (BRI), China’s flagship programme for international infrastructure development that will boost trade connectivity and financial ties with signatory countries around the world. Although there is currently no official list or definition of what constitutes a BRI project, in reality almost any China-backed infrastructure project can find itself bracketed under the BRI if it takes place in a signatory country. In PNG, three projects in particular have been placed under the BRI umbrella: a $3.5bn high-priority economic road project involving several Chinese contractors; a $330m agricultural industrial park in the Eastern Highlands; and the $32m Goroka water supply project.

While China has consistently maintained that the BRI is designed to create mutually beneficial opportunities for all participating countries, some critics are wary that it can be used as a form of debt trap diplomacy whereby signatories are left with unsustainable loans for projects not necessarily in their national interest. If developing countries become increasingly indebted to China, there is some concern that this may be leveraged to further its geopolitical ambitions. According to an analysis of PNG’s 2018 budget, China held 85.8% of the country’s bilateral debt and 23.7% of its total external debt.

Capital Markets

PNG has a relatively small stock exchange that nevertheless provides an important avenue for capital raising and investment inflows. In July 2019 the bourse changed its name from the Port Moresby Stock Exchange to PNGX Markets (PNGX). This followed a change in ownership, when Bank South Pacific sold its 62.5% share to Australian firm Pacific Capital Markets Development in December 2018. As of July 2020 some 13 companies were listed on the PNGX across the aviation, banking, finance, industrial, mining, and oil and gas sectors. Total market capitalisation at that time was PGK54.4bn ($16.1bn). Some companies are dual listed on the PNGX and the Australian Securities Exchange, including Oil Search – the country’s largest oil and gas exploration firm – which has a market capitalisation of A$4.7bn ($3.3bn).

On average, PNGX turns over approximately PGK200,000 ($59,000) per day, but its new owners are cautiously optimistic about the prospects for deepening the markets and stimulating more trade. To this end, in December 2019 PNGX signed a memorandum of understanding with Fiji’s South Pacific Stock Exchange, paving the way for dual listings, cross-border trading arrangements, and mutual recognition and access of stockbrokers to each country’s markets. PNGX is also able to issue international investors with the identifier required to invest in a particular security, which should ease access for overseas funds. Looking ahead, senior management has signalled its intent to launch a secondary market for government and corporate debt securities, and is carrying out discussions with Bank of PNG and the Treasury. “The idea is to create a multiplier effect on liquidity. An active trading market will encourage more investment and trading,” David Lawrence, chairman of PNGX, told OBG.

Elsewhere, in November 2019 six new indices were introduced, which give investors an indication of how the market is evolving and provide benchmarks to measure equity performance. Looking forwards, the SECOM is expected to separate from the IPA and establish itself as an independent, standalone regulator for the capital markets.

Outlook

Following uncertainty created by the US-China trade war, the global trade and investment environment has been further clouded by Covid-19 in 2020. Nevertheless, PNG has rich potential, thanks to its untapped natural resources and strategic proximity to the high-growth markets of Asia. In the short term strategic diplomacy is required to ensure that any external assistance PNG receives to cover budgetary shortfalls are not attached to unsustainable obligations. As regional powers such as Australia and China continue to compete for influence in the South Pacific, PNG may be able to leverage their competing aims to its advantage. In the coming years policymakers will have to consider how to balance the desire for a greater national share of resource revenues with the need to remain attractive to international investors at a time when they are re-evaluating the cost effectiveness of planned projects around the world.

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The Report: Papua New Guinea 2020

Trade & Investment chapter from The Report: Papua New Guinea 2020

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