Stable commodity prices boost export market in PNG

 

The international position of Papua New Guinea has improved in recent years as the country continues to benefit from a number of positive trends. A stabilisation in commodity prices, strong output from the country’s major projects and an end to the El Niño drought have brought major trade indicators back into line. The lack of dollars and the weak kina have helped as well by boosting exports and lowering imports.

PNG’s balance of trade remains at or near a record high, while the current account has been positive for a number of years following a long period in the red. Prospects are good for keeping the totals at the right levels and also seeing possible improvements in them. New projects – some very large – are in the works, and an important international meeting will be held in Port Moresby in 2018. Lower prices – especially in relation to rent, construction costs and assets – should start to attract investors as soon as it is clear that dollars are available in the market for the repatriation of profits.

Issues in doing business remain, while new issues are starting to come to the fore. Policies, laws and acts that are more economically nationalistic or protectionist in nature are being contemplated and discussed. While some could help cottage industries and local manufacturing, or benefit trade and investment in an indirect way, these efforts worry the international community due to their uncertainty. The election in 2017 heightened these concerns as it brought some long-simmering tensions to the surface, making instability a risk in the near term and increasing policy risk over the longer term. For years, PNG has actively adopted liberal economic principles and has been a regional leader in applying them. This embrace of free trade could face some challenges (see analysis).

Healthy Exports 

Exports have been strong in PNG over the past several years. According to the Bank of PNG, the total rose from PGK2.3bn ($729.1m) in 2015 to PGK2.5bn ($792.5m) in 2016, up from PGK1.6bn ($507.2m) in 2011 and PGK1.3bn ($412.1m) in 2012. A few key sectors have been driving this growth. The country experienced a large increase in agricultural exports, which rose from PGK2.4bn ($760.8m) in 2015 to PGK3.2bn ($1bn) in 2016. Mining exports were also stronger. Gold was at PGK6.8bn ($2.2bn) in 2016, up from PGK5.2bn ($1.7bn) in 2015, while copper hit PGK1bn ($317m) from PGK746.5m ($236.6m), with nickel exports falling slightly. Crude oil exports were up 20% (despite being less than half of exports in 2011) but liquefied natural gas (LNG) exports were down 16% in 2016. Overall, mineral exports were up from PGK1.9bn ($602.3m) in 2015 to PGK2bn ($634m) in 2016. However, since 2012 they have more than doubled, mainly due to the addition of LNG exports in 2014.

Eye On Agriculture 

In the agricultural sector most of the main subcategories performed well as a result of the combination of stability in international prices and a substantial uptick in production because of the end of the 2015-16 drought. Cocoa and copra are at their highest prices in kina terms in several decades (cocoa is more than double the price it was in 2012), coffee is at its highest level since 2011 and palm oil is up year-on-year. Exports of cocoa went from PGK255.7m ($81m) in 2015 to PGK319.5m ($101.3m) in 2016, coffee from PGK393.5m ($124.9m) to PGK571.4m ($181.1m), copra from PGK45m ($14.3m) to PGK80.4m ($25.5m) and palm oil from PGK837.6m ($265.6m) to PGK1bn ($317m).

“Palm oil did quite well in 2016,” says Paul Barker, executive director at the Institute of National Affairs. “Gold exports were at their highest levels.”

The boost in commodity exports was especially evident toward the end of 2016. Agricultural exports jumped from PGK531.9m ($168.6m) in the last quarter of 2015 to PGK977.5m ($309.9m) in the fourth quarter of 2016. In the same period, gold went from PGK1.3bn ($412.1m) to PGK1.7bn ($538.9m) and, significantly, LNG exports climbed from PGK1.6bn ($507.2m) in the third quarter of 2016 to PGK2.3bn ($729.1m) in the final quarter. Overall commodity exports rose to PGK5.7bn ($1.8bn) in the fourth quarter of 2016 from PGK4.5bn ($1.4bn) a year earlier.

Achieving Balance 

As exports have climbed, imports have plummeted. In part, this is a consequence of the lack of dollars since the central bank tightened the trading band in 2014. With little currency to pay for goods purchased internationally, inflows have been reduced to mainly necessities. In addition, the end of the construction phase of the PNG project resulted in a drop in imports in the long term. Imports totalled PGK12.2bn ($4bn) in 2013 and had fallen to PGK5.7bn ($1.8bn) by 2016 (which was down from PGK7bn ($2.2bn) a year earlier).

Most of the decline in imports has been the result of a fall in machinery and transport equipment purchases as the construction phase of PNG LNG came to an end. Imports of fuel and related materials have also dropped by a large degree as a result of the decline in the prices of hydrocarbons globally. Other imports, which include food, live animals, beverages and tobacco, fell mostly due to the collapse of demand domestically because of the slow economy and the shortage of dollars.

The current account moved into surplus in 2014, with the total hitting PGK167.9m ($53.2m) in 2016, but the positive numbers have not benefitted the country as much as they should have. Most of the surpluses have been drained by the payment of dividends to international shareholders in projects in the extractive sector. Thus, despite the strong performance of the trade and current accounts, the country is barely breaking even. The overall balance was positive for the full year in 2016, but only by the amount of PGK30m ($9.5m).

Australia remains by far the largest source of imports, while the US is number two. The US is followed by Singapore and then China. While Australia’s total has fallen in kina terms, it has increased considerably in terms of PNG’s overall imports, rising from 33% in 2013 to 44% in 2016. The largest target for exports is Australia, which bought PGK6.7bn ($2.1m) worth of goods and commodities from PNG in 2016, only slightly more than in 2013. However, other nations are quickly catching up. China bought PGK4bn ($1.3bn) of goods and commodities in 2016, up from PGK1.2bn ($380.4m) in 2013. Exports to Japan have doubled in that same period of time, while exports to Singapore have increased 40-fold.

As the most capital intensive phase of the LNG project came to an end, investment inflows slowed considerably. The trend has been maintained by the weak economy and the country’s dollar shortage, both of which have caused international investors to be wary. While prices are low, opportunities outside of resources are not generating much in the way of commitments. Direct investment fell from $1.9bn in 2012 to an estimated $600m in 2016, according to the IMF. The fund sees direct investment remaining at that level through until 2021. “People are coming in, but they are sceptical about access to foreign exchange,” said Clarence Hoot, acting managing director of the country’s Investment Promotion Authority (IPA).

Reforms & The Registry 

PNG’s economy is generally considered liberal and open. Foreign persons can own 100% of local companies in almost all sectors, including key ones like banking and mining, and the country is free of formal exchange controls. It started with reducing tariffs in 1999 and it now charges rates that are low by international standards. PNG’s mean weighted average tariff is around 2%, below the world average of 2.88%. Investment in PNG is governed by the Free Trade Zone Act, 2000; the Investment Promotion Act, 1992; The Mining Act, 1992; the Fisheries Act, 1994; and the Oil and Gas Act, 1998.

PNG also has a competition law: the Independent Consumer and Competition Commission Act, 2002. The Independent Consumer and Competition Commission was created, taking over from the Price Controller and the Consumer Affairs Council. The act prohibits anti-competitive arrangements, restraint of trade, price fixing, prevention of the entry of a new competitor, resale price maintenance and mergers that would reduce competition in the market. The country has been actively working to improve its investment environment, and a number of positive steps have been taken recently. After years of developing significant international support, the IPA is allowing for online registration and other related activities. Now, name searches can be conducted, notices of intention filed, companies registered and companies incorporated. Foreign enterprises can also apply for the appropriate certificates or for an exemption.

Changes to the Companies Act of 1997 were made in 2014 and were put in effect from 2015. Among other things, the amendments improve creditor protection, provide more guidance on director duties, simplify the processing of shares, improve shareholder protection, simplify company filing and reform the annual filing process. The filing date for annual returns is now linked to the company’s annual meeting, which is more in line with international practice. Furthermore, registrations can be made without a physical signature, and shareholders can now vote by email.

The Personal Property Security Act 2011 became effective in early 2016 and significantly changes the landscape for investors. Under the act, a central registry is created for movable assets (the Personal Property Security Registry). This allows for the recording of asset ownership and the searching of those filings by potential creditors. All this is done online via the IPA portal. The creation of the registry has significantly improved the business environment in the country, according to the World Bank.

A wide range of incentives are also being offered to businesses; 10-year tax holidays are available for specific activities in designated development areas. The activities include: agriculture, manufacturing, construction, transportation, real estate, business services and hotels. Certain goods manufacturers are exempt from income tax on profits for three years. These goods include soap, wooden furniture, clothing, and jewellery. A wage subsidy is available for companies involved in the new production of goods. The subsidy lasts five years and is granted on a declining basis.

However, while the government is in support of the privatisation of its enterprises, and the state sector has been significantly restructured, no movement has been made on a number off key issues. Concerns regarding valuations and assets continue to stand in the way of deals. General economic woes and budget considerations will also continue to weigh on investment and trade. The government does not have the wherewithal to deal with persistent issues regarding ease of doing business, while the lack of dollars, although becoming less dire, remains a problem for most importers. Other concerns include the small and medium-sized enterprises (SMEs) policy, proposed amendments to the Land Act and the Mining Act, and the country’s wavering commitment to free trade. While PNG supports liberal economic principles, certain long-term grievances in society are starting to influence policy.

Time Of Opportunity 

Despite the increasingly strident rhetoric – especially from the opposition – and other issues standing in the way of trade and investment, significant opportunity remains and potential is high. Even some of the more controversial reforms are potentially positive. The emphasis on downstream processing, for example, offers international companies the opportunity to help PNG build entirely new sectors. Under the SME policy, the importation of the relevant knowledge and technology may take on a new sense of urgency as the country’s government works to develop a domestic industrial base from the ground up.

Extracting Potential 

Nevertheless, most of the optimism is related to the resources sector. With PNG LNG working above capacity and widely considered a success, the country has become the focus of significant international interest. Its low lifting costs and sound geopolitical position gives it promise, even in the environment of low but stable commodity prices. It also has a lot to offer otherwise. In terms of the extractive sector, the surface has barely been scratched. Available data is outdated and of low quality, so it is expected that new deposits will be located by those who make the investment in exploration.

Other areas, for example, agriculture, fisheries, forestry, manufacturing and tourism, are also being targeted and are considered promising, despite the lack of investment and development.

Papua LNG is generating the most interest of the country’s future projects. Like its predecessor, this investment will involve a significant amount of infrastructure, including an LNG processing facility and pipelines. Front-end engineering and design is due to begin in 2017, while the final investment decision will be made in 2018 or 2019. Construction will begin in 2019 at the earliest and production is expected to start in 2022 or 2023. While the price of LNG is low, Total PNG is forging ahead, partly to take advantage of the lower construction costs.

The amount of funding that will be required is still unclear, although recent comments from the company place the figure at about $10bn, which is approximately 25% below previous estimates. It could be even lower if PNG LNG works together with Papua LNG and shares facilities. PNG LNG has been discussing an expansion, and that could run as high as $9bn, but this would be lower if cooperation is worked out with Papua LNG. The total consolidated saving is estimated to be as much as $5bn if the two projects collaborate.

While LNG receives considerable attention, mining is also of great importance to investment in the country. Each project may be smaller than the huge LNG buildouts, but there is considerably more activity in terms of the number of projects. It is also a dynamic and diverse sub-category, with a wide range of minerals being exploited in many different ways. The country currently has over 200 active mining licences.

The Frieda River project, which could hold the world’s largest undeveloped reserves of copper, is proceeding well. The total budget is estimated to be $3.6bn, up from the previous $2.3bn, due in part to higher than expected potential. Production is expected to begin in 2024. The first stage of the Wafi-Golpu copper and gold mine is expected to be up and running by 2020. Investment for this part of the project is set at $2.3bn, and it is expected to have a productive life of 27 years.

In 2011 Canada’s Nautilus Minerals received a licence to mine copper on the seabed between New Ireland and New Britain in the Bismark Sea. The site is known as Solawara 1. It is a controversial plan due to potential for environmental damage and the fact that so little is known about the impact of mining so deep under the sea. Furthermore, the company behind the project is low on capital. Nevertheless, Solawara 1 is going ahead. The plan is to begin mining in 2018 or 2019.

Outside of resources, there are several other ongoing projects, including the $3.8bn investment in industrial parks in West Sepik Province by Chinese investors. The zone will focus on the processing of local products and the manufacturing of building materials.

Pacific Hosting 

In recent years PNG has hosted a number of high-profile international events. The list includes: the Pacific Games; the Pacific Islands Forum Leaders’ Meeting; the African, Caribbean and Pacific Group of States Meeting; and the FIFA Women’s Under-20 World Cup. The ability to successfully hold such complex and important gatherings and competitions demonstrates high-level capabilities and reflects well on the country and its administration. It is argued that the events will help with driving international investment both directly and indirectly.

The next event – APEC Leaders’ Summit to be held in Port Moresby November 2018 – is at a different level in terms of prestige and economics. It will require the building of transformational infrastructure that will have an immediate and postitive impact on the country: APEC Haus. A PGK120m ($38m) structure to be built on reclaimed land at Ela Beach, APEC Haus will be a landmark facility that is expected to change the dynamics and boost the image of PNG’s capital city. In addition, new roads will be constructed and new business and luxury hotels will be built, including a Hilton. The total number of high-end hotel rooms in the city will jump to almost 3000.

Bougainville 

The development of the Autonomous Region of Bougainville is significant for the investment environment. After years of neglect due to conflict, the area is now opening to the world and making its significant resources available. Bougainville has had an investment bureau in place since 2014 and is encouraging participation in a wide range of sectors, including agriculture, tourism, fisheries and mining. With the independence referendum set for 2019, the authorities are particularly eager to ramp up the economy.

The autonomous region has had control over its mining sector since 2008, and a mining act for the region was enacted in 2015. In May 2017 the local government lifted the moratorium on mining and exploration, and the areas of Tore, Isina and Jaba were opened. The Bougainville Mining Registrar started accepting applications from May 2017.

The Panguna copper mine, which was at the centre of the Bougainville crisis, may be opened again. This time, the company will seek to better engage all stakeholders in the development of the site. Rio Tinto owned 53.8% of the mine, but agreed to hand over the stake in equal parts to the governments of PNG and Bougainville. The national government said it would transfer an additional 17.4% to the government of the autonomous region. The authorities in Bougainville are supporting the reopening of the mine.

Outlook 

After a number of challenging years, PNG is starting to hit its equilibrium point again. It is largely through the period of hard adjustments, and now some balance has returned. Long-planned projects are progressing as new areas of opportunity are being explored. No quick changes are expected.

Papua LNG is likely to spend less than PNG LNG, while other projects are expected to advance slowly. Few major investments are planned outside of resources, and the long sought after manufacturing base is still not in the works. However, if the country stays on course the environment will continue to improve, and the desired investments – ones that will replace more imports and possibly result in exports – will come.

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The Report: Papua New Guinea 2017

Trade & Investment chapter from The Report: Papua New Guinea 2017

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