With macroeconomic growth slumping and domestic demand weakening in the aftermath of a long construction boom, trade and investment in Papua New Guinea have faltered in recent years. Foreign direct investment (FDI) in non-extractive industries has been low, while domestic challenges – notably including the ongoing foreign exchange shortage, import dependency, currency fluctuations, illegal trade activities and an infrastructure deficit – have impacted exporters and the non-oil economy. Exports also suffered as global commodity prices fell, although a recovery in 2017 saw PNG’s trade surplus soar, with rising mineral and agriculture prices expected to support growth in 2018. The government is moving to address structural impediments to trade and investment, launching the National Trade Policy (NTP) 2017-32 and announcing plans to offer new investor incentives. Nevertheless, appetite remains subdued as a result of regulatory obstacles, land acquisition challenges and high operating costs.
However, ongoing geopolitical developments could see the situation change in 2018. China’s footprint in PNG has been growing, particularly in the lead up to the APEC Leaders’ Summit, which will be hosted in PNG for the first time in November 2018. International responses to rising Chinese competition should benefit PNG, with several of the country’s most important bilateral partners moving to shore up their presence in the country in recent times. Future trade ties are likely be steered by the government’s efforts to leverage the competing geopolitical interests to the country’s advantage.
At a Glance
Foreign investment in PNG is regulated by the Investment Promotion Act of 1992, which created the Investment Promotion Authority (IPA) and set out regulations for foreign investors operating in the country. The act stipulated that the IPA holds primary responsibility for approving new non-extractive investment applications. Section 37 of the act includes a guarantee of non-expropriation or nationalisation for foreign investors, while Section 39 provides for dispute resolution between the government and foreign investors at the International Centre for Settlement of Investment Disputes.
Operating under the IPA, the Multilateral Investment Guarantee Agency is responsible for guaranteeing foreign investors against non-commercial risks, as well as offering advisory services to assist in drafting investment policy.
Key investor attractions listed by the IPA include a range of direct and indirect tax incentives for large and small proposals, in addition to trade agreements offering local manufacturers preferred access to export markets, including the EU, Australia and New Zealand. Following amendments to the Companies Act of 1997, which took effect in February 2015, the IPA launched an online business registration service, “Do It Online”. The platform allows companies, groups, foreign enterprises and business names to be registered with the Securities Commission of PNG. Users are also able to conduct searches and obtain company extracts for free.
As part of efforts to support the growth of export-oriented industries, the PNG Chamber of Commerce and Industry offers a range of incentives. For example, there is a 10-year income tax exemption for new businesses in 41 designated development areas, including in the agriculture, construction, hotel, restaurant and manufacturing sectors. There is also a seven-year tax holiday for new exporters. Additionally, profits from value-added manufactured exports – including canned foods, confectionery, dairy products, glass and paper products, and wooden furniture – are exempt from tax for the first four years of operation.
Further investor incentives were addressed in the NTP, which was published in August 2017, introducing several measures that seek to protect the operations of local manufacturers, including import tariffs as well as more selective trade deals.
Although PNG offers abundant natural resources – having oil and gas reserves, copper, silver, timber and fertile agricultural land – FDI inflows into the country have tended to focus on extractive industries, including the country’s first major liquefied natural gas (LNG) project, PNG LNG, which began commercial operations in 2014. The $19bn project was the largest single investment in the country to date, although debate over the project’s real economic benefits continues.
The UN Conference on Trade and Development (UNCTAD) reported that FDI inflows to PNG have plummeted since peaking at $33.5m in 2005, falling to $29.1m in 2010 and $28.2m in 2015. According to data from the World Bank, FDI inflows contracted to -$12.4m in 2016. Outwards investment is also subdued, falling from $6.5m in 2005 to $370,000 in 2010, spiking to $173.8m in 2015, and dropping to just $40,000 in 2016, according to UNCTAD data. The 2015 spike coincides with the year that Bank South Pacific bought Westpac’s operations in the Pacific Islands for A$125m ($96.7m).
Although the macroeconomic slowdown that saw GDP growth decline from 12.5% in 2014 to 2.2% in 2017 is in large part to blame for falling FDI, investors are also facing a challenging business environment that is characterised by limited transportation infrastructure, an ongoing foreign exchange shortage and a number of regulatory challenges.
PNG placed 109th out of 190 economies surveyed in the World Bank’s “Doing Business 2018” report, the same position it held in 2017. While this is an improvement over its 141st rank in 2014, the latest results highlight the central barriers to market entry that are weighing on investor appetite. PNG’s performance across most of the survey’s indicators improved, but it continues to rank low in enforcing contracts (171st), resolving insolvency (141st), trading across borders (137th), starting a business (129th), registering property (122nd) and dealing with construction permits (117th). However, PNG ranked 42nd in terms of accessing credit, 89th in protecting minority investors and 91st in paying taxes.
Balance of Payments
UNCTAD reported merchandise exports more than doubled from 2005 to 2016, rising from $3.3bn to hit $5.7bn in 2010, and jumping to $8.5bn in 2015, before moderating to $8.2bn in 2016. In 2016 fuels accounted for the bulk of merchandise exports at 30%, followed by ores and metals at 19%, agricultural raw materials at 18%, and manufactured goods at 4%. According to UNCTAD, PNG’s trade in services balance remained in deficit as of 2016, although it has declined in recent years, narrowing from $2.5bn in 2010 to $1.2bn in 2014 and $675m in 2016. Meanwhile, PNG’s merchandise trade surplus increased from $1.5bn in 2005 to $1.8bn in 2010, before reaching $5.6bn in 2015 and $5.8bn in 2016. Data from EU Commission (EUC) shows a similar story, with the commission reporting that the country’s trade deficit narrowed from €2.3bn in 2013 to €238m in 2014, before shifting to a €1bn surplus in 2015, after the country’s first major LNG project began exporting to Asian nations. The EUC reported that PNG’s trade surplus then rose to €1.4bn in 2016 and reached a 10-year high of €1.9bn in 2017.
The country’s central bank, Bank of PNG, reported that the weighted average kina price of PNG exports, excluding LNG, rose by 14% in 2017, supported by currency depreciation and rising global commodity prices. That same year mineral export prices rose by 14.4%, while agricultural, forestry, and marine product exports increased by 12.6%.
As a result, the country’s balance of payments jumped from PGK30m ($9.4m) in 2016 to PGK350m ($109.3m) in 2017, while the current account surplus rose from PGK16.2bn ($5.1bn) in 2016 to PGK19.9bn ($6.2bn) in 2017, supported by export growth.
Major Trade Partners
According to data from the UN, Australia was PNG’s largest trade partner in 2017, with some $2.6bn of imports from Australia, against $1.3n of exports. The other major regional trading partners included Japan, with $2.4bn of imports and $172.6m of exports; Singapore, with which PNG had a trade surplus, exporting $460.9m compared with $233.7m of imports; and Malaysia with $334.4m of exports and $218.6m of imports.
According to the EUC, PNG’s top export markets in 2017 were Australia, Singapore, Japan, China and the EU. The commission reported that Australia led exports in 2017 with €1.2bn of export receipts, accounting for 30.1% of the total, followed by Singapore at €1.1bn, Japan at €886m, China at €712m and the EU at €712m of exports. In terms of imports, Australia stood at €1.4bn in the same year, followed by China at €775m, Singapore at €459m, Malaysia at €366m and the EU at €184m.
Future trade and investment growth will be steered by increased geopolitical competition between PNG’s main trade partners. PNG has joined several multilateral trade agreements in recent decades, including the Melanesian Spearhead Group Trade Agreement (MSGTA), the Pacific Island Countries Trade Agreement (PICTA), the Southern Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA), as well as an interim economic partnership agreement between the EU and African, Caribbean and Pacific countries, which was authorised in July 2009 and ratified by PNG’s parliament in May 2011.
The MSGTA is a free trade agreement (FTA) signed between PNG and the Solomon Islands, Vanuatu and Fiji, allowing tariff-trade with some exemptions between the bloc. PICTA, signed by the 14 member countries of the Pacific Islands Forum (PFI), came into effect in 2007, introducing a temporary movement of natural persons scheme. SPARTECA, meanwhile, was signed in 1980 and provides duty-free market access for PNG and other PFI members. Policymakers of the NTP considered the MSGTA as the most important of PNG’s regional trade agreements. MSGTA members have liberalised trade on products using a “positive list” principle, under which tariffs are eliminated based on the country’s ability to remove them. Other trade agreements are considered secondary, with the Department of Trade, Commerce and Industry reporting that in practice, little trade was made under PICTA and SPARTECA.
In addition, the country has also signed a number of bilateral agreements with Australia, including the PNG-Australia Trade and Commercial Relations Agreement, the Agreement for the Promotion and Protection of Investments, a double-taxation agreement and the Torres Strait Treaty.
According to the NTP, the interim economic partnership agreement is the only recent trade deal that has provided enhanced, secure market access for PNG’s products. Under the improved rules of origin for processed fishery products, the deal has allowed PNG to export canned skipjack and yellowfin tuna to the EU. The plan noted that the agreement has also supported significant FDI inflows into the energy sector.
This likely refers to the country’s second major LNG project, Papua LNG, that is being developed in partnership with France’s Total, PNG’s Oil Search and US oil giant ExxonMobil, which also spearheaded the PNG LNG project. Total had originally planned to develop its own separate LNG project, but shifts in the global oil and gas market along with subdued oil prices pushed the company to partner with ExxonMobil and Oil Search under an agreement to integrate the project into PNG LNG’s existing facilities, which include two LNG trains.
In February 2018 the three companies announced plans to add three new trains to PNG LNG, which is planned to boost production by some 8m tonnes per annum. Two of the trains will be supplied by Total’s Elk-Antelope fields, with the third supplied by ExxonMobil’s P’nyang field. The project budget has not been made public, and while Papua LNG’s price tag is unlikely to exceed PNG LNG’s $19bn budget, it will still entail billions of dollars of new investment, further bolstering the EU trade ties that have already expanded considerably in recent years.
EU Trade Growth
The interim economic partnership allows for duty-free exports to the EU, which was PNG’s fifth-largest trading partner in 2017, with some €1.1bn of trade volumes recorded. Imports from the EU jumped from €507m in 2009 to hit a 10-year high of €898m in 2017, although EU-bound exports have outpaced imports. The EUC reported that PNG’s trade surplus with the EU rose from €386m in 2009 to hit €519m in 2012 and €735m in 2017.
Palm oil, which has long been one of the country’s main exports, accounts for a significant share of export receipts to the EU. In 2017 the animal and vegetable fats and oils category of exports rose by 26.9% to €519m, representing 57.8% of the total. This could be problematic, as the EU voted in April 2017 to prohibit sales of biofuels made by vegetable oils, with the bloc’s total palm oil imports falling by 10% in 2017 to hit 6.5m metric tonnes. The growing anti-palm oil movement across Europe has already seen UK retailer Iceland ban palm oil from its own-brand products in April 2018, with industry observers speculating that other European players may follow suit.
The country’s trading relationship with the EU could face further external headwinds as a result of the UK’s vote in favour of Brexit in June 2016. PNG is a member of the Commonwealth, and some have estimated that the UK accounts for the bulk of its EU-bound exports. Indeed, the bilateral trade between the two nations totalled some $500m in 2016. As such, Brexit has raised questions about the future of PNG-EU trade after the UK formally exits the bloc, though a number of UK officials have moved to reassure stakeholders in PNG. In May 2018 Mark Field, state minister for the UK’s Foreign Commonwealth Office, told Prime Minister Peter O’Neill that PNG “would not be disadvantaged” by Brexit, reporting that PNG-UK trade would continue without any interruption. Prime Minister O’Neill, for his part, announced that forthcoming incentives in the agriculture and tourism sectors would incentivise UK investment in these industries, with measures expected to include tax breaks.
Although Brexit has clouded the outlook, EU stakeholders continue to make inroads into PNG. The NTP was funded and developed by the EU under a pair of trade-related assistance programmes (see analysis). In May 2016 the European Investment Bank (EIB) signed a $58.4m agreement for bridge rehabilitation work, which was its first project in the country in 21 years. The EIB then announced it had been given a mandate to expand infrastructure investments in the Pacific region in August 2017. The EIB’s infrastructure works in PNG will focus on building and restoring roads, bridges, power plants, and water and sanitation utilities, with an emphasis on long-term projects that have an economic life of 20 to 25 years. With an “AAA” rating, the EIB can offer lower interest rates and lending in US dollars, which is an important consideration given PNG’s ongoing foreign exchange issues. In addition, projects that attempt to address climate change will also be subsidised.
In April 2018 the government of PNG announced plans to issue $500m of 10-year eurobonds before the end of the year (see Economy chapter), with rising competition between the UK and EU offering considerable financing opportunities for the government. Moving forward, the NTP advocates pursuing bilateral, regional and sub-regional trade agreements with actors offering cost advantages for products of strategic interest, as well as ensuring reliable market access through the negotiation of trade deals sanctioned by the World Trade Organisation.
Under this mandate, PNG is unlikely to sign on to the latest iteration of the Pacific Agreement on Closer Economic Relations (PACER), an umbrella agreement that set a framework for trade negotiations between Pacific economies, Australia and New Zealand in August 2001. As the original agreement did not contain any major trade liberalisation provisions, negotiations for PACER Plus, an FTA between PACER signatories, kicked off in May 2005. The original PACER was signed by all members of the Pacific Islands Forum, which includes PNG.
PACER Plus was signed in June 2017 by Australia, New Zealand and eight Pacific Island countries, from which PNG and Fiji were notably absent. The government of PNG has repeatedly stated that it will not sign PACER Plus, most recently when Charles Abel, deputy prime minister and treasurer, reiterated the country’s position upon unveiling the NTP in August 2017. Indeed, the discussions about PACER Plus have been controversial from the beginning, with many criticising the agreement for being unbalanced in favour of Australia and New Zealand.
The size of many of the Pacific Island signatories is such that these states are unable to achieve the economies of scale necessary to develop robust export industries, and any trade agreement is unlikely to solve scale constraints. Stringent border quarantine measures in the region also stand as a challenge to agricultural trade growth.
Although PACER Plus is unlikely to undermine the industries of Pacific Island countries, most of these markets have limited domestic demand due to their population sizes and average incomes. However, PNG already enjoys tariff-free access to Australia and New Zealand across a number of sectors, so signing the PACER Plus agreement may not bring further benefits to PNG’s local exporters.
While Australia and New Zealand have advocated for PACER Plus as a comprehensive development agreement – since the agreement includes provisions for development assistance, foreign investment and “aid for trade” provisions – the final agreement did not feature a chapter on labour mobility, which remains an important consideration for many companies that operate in PNG. According to some industry figures, much of the local workforce lacks the required skill sets, which means that many competitive companies are in need of expats.
Investment provisions under the agreement would also be unlikely to make a real impact, as it does not tackle the major barriers to investment in most Pacific Island countries, such as outdated legal systems, low confidence in regulatory frameworks and land acquisition challenges, while import tariff reductions make an outsized impact on government revenue generation. In this regard, following publication of the NTP, the government of PNG announced it would scale back the scheme for reducing tariffs on imports that was first introduced in the late 1990s, instead moving to hike duties on chicken, sugar and petrol, among other products (see analysis).
A deal that could be more to PNG’s favour is a proposed FTA with China that was announced in April 2018. This came after Rimbink Pato, PNG’s minister of foreign affairs and immigration, visited Beijing, and less than a week after two Chinese-funded projects – the Port Moresby International Convention Centre and a new six-lane highway – were inaugurated. Although few details have been published, China’s FTA website now lists PNG and Fiji as “under consideration” for an agreement, and local media has reported that Chinese President Xi Jinping will likely sign the FTA during his visit to PNG for the 2018 APEC Leaders’ Summit that will be held in November (see analysis).
The announcement highlights rising regional competition between China, Australia and other Western powers. A number of important stakeholders, including the Business Council of PNG, have welcomed a potential FTA, with Douveri Henao, executive director of the council, telling media that an FTA with China would improve supply and value chains, and offer PNG improved access to a major export market. According to EUC figures, PNG’s trade surplus with China totalled €45m in 2017.
Although PNG’s macroeconomic slowdown, challenging business climate and falling global commodity prices have weighed on trade and investment in recent years, the country continues to offer high-potential opportunities to manufacturing investors. Moreover, the NTP is expected to foster domestic industry and support export earnings.
Perhaps more importantly, the authorities are increasingly moving to seek favourable trade deals by balancing competing Chinese, Australian and other Western interests against one another, a situation that will be thrown into sharp focus during the November 2018 APEC Leaders’ Summit (see analysis).
In addition to raising PNG’s international profile and highlighting new trade and investment opportunities in the country, APEC could also see the country make a high-profile shift towards China as a favoured bilateral partner, a strategic move that could have profound consequences for its traditional allies.
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