Economic Analysis - Budget Deficit Likely To Overshoot Government Projections - FEB 2018


BMI View: We believe there is little credibility to PNG ' s 2018 budget figures, but note that the policy proposals are steps in the right direction. We forecast the budget deficit as a share of GDP to come in at 4.7% in 2017 and 4.4% in 2018, versus the government ' s target of 2.5%.

The Papua New Guinean (PNG) economy is still going through tough times and we believe that this will continue to weigh on the fiscal outlook. The budget deficit in 2016 came in at 4.8% of GDP, overshooting the government's 2016 supplementary budget target of 3.1%, and we are expecting a similar story in 2017 and 2018. We forecast PNG's budget deficit as a share of GDP to come in at 4.7% in 2017 and 4.4% in 2018, versus the government's deficit target of 2.5% in the 2017 supplementary budget and 2018 budget, which was the first national budget handed down by the O'Neill administration since its re-election in July.

Revenue-To-GDP On A Downtrend
Papua New Guinea - Budget Deficit And Revenue, % Of GDP
National Sources/BMI

Just a few years ago, PNG had one of the fastest economic growth rates in the region, but the collapse of global commodity prices, a severe drought, and extensive mismanagement of state resources during boom times have all contributed to a dramatic reversal of the country's fortunes. This has weighed on revenue collection, and the government was forced to come up with supplementary budgets each year over the last three years to cope with that, which entails slashing of capital expenditure and limiting recurrent spending to priority areas like education and healthcare. Even then, PNG's fiscal deficit has constantly and significantly overshot the target set by the government.

Budget Projections
2016 Actual 2017 Budget 2017 Supplementary Budget 2018 Budget
Source: BMI, PNG Treasury
Revenue (PGKmn) 10,485.5 11,473.1 10,979.2 12730.7
Expenditure (PGKmn) 13,572.4 13,349.5 12,855.6 14,717.9
Deficit, % Of GDP 4.6 2.5 2.5 2.5
Real GDP Growth, % 2.5 2.8 2.2 2.4

2018 Budget Figures Not Credible...

The 2018 budget was announced in late-November by new Treasurer and Deputy Prime Minister Charles Abel, but similar to previous years, we do not find the revenue and expenditure estimates to be credible. The 2018 revenue is projected to come in at PGK12.7bn, while PGK14.7bn is being earmarked for expenditure, representing a staggering 16.0% and 14.5% increase, respectively, from the 2017 supplementary budget. This would leave a shortfall of almost PGK2.0bn, equating to about 2.5% of GDP. Given our forecast for nominal GDP growth to come in at around 10% in both 2017 and 2018, this would require the government to significantly reverse the downtrend in the tax-to-GDP ratio, which we see as highly unlikely by the end of 2018. Some of the reasons for the declining revenue as a share of GDP include weakness and declining capacity of tax collection agencies, declining production from resource projects, revenue streams being channeled off-books through state-owned enterprises, and tax and compliance avoidance, all of which are unlikely to be resolved overnight.

... But Policy Direction Positive

That said, we note that there are some positives in the budget, particularly with regards to policy direction. According to the budget statement, the 2018 Budget is the first year of the Medium Term Fiscal Strategy (MTFS) 2018 - 2022 which comprises of four pillars: a medium term revenue strategy, a medium term expenditure strategy, a fiscal deficit strategy, and a debt management strategy. The most encouraging point is that the new Treasurer Abel was upfront and recognised that the country is undergoing "a serious revenue crisis" and that the economy is being affected by "foreign currency imbalance, constraints on domestic public expenditure, and the accumulation of significant payment arrears".

Acknowledging the multitude of problems facing the economy is certainly a perquisite to solving them, and Abel has suggested some reform proposals that are steps in the right direction in our view. For instance, the government is placing a substantial emphasis on enhancing tax compliance efforts, while the budget stipulated that the growth in compensation of public employees will be halted in 2018 with the goal to reduce salary expenditure to under 3.3% in 2018.

Macroeconomic Forecasts (Papua New Guinea 2013-2019)
Indicator 2013e 2014e 2015e 2016e 2017f 2018f 2019f
National Sources/BMI
Population, mn 7.59 7.76 7.92 8.08 8.25 8.42 8.59
Nominal GDP, USDbn 20.9 21.5 20.7 20.5 21.5 23.5 26.6
GDP per capita, USD 2,847 2,874 2,708 2,631 2,703 2,891 3,199
Real GDP growth, % y-o-y 4.9 8.4 11.8 2.5 2.7 4.3 6.7
Consumer price inflation, % y-o-y, ave 4.4 4.7 6.5 6.5 6.7 6.2 5.1
Consumer price inflation, % y-o-y, eop 2.9 6.6 6.4 6.6 6.8 5.6 4.5
Exchange rate PGK/USD, ave 2.28 2.54 2.85 3.14 3.28 3.33 3.30
Exchange rate PGK/USD, eop 2.48 2.60 3.10 3.20 3.35 3.30 3.30
Budget balance, PGKbn -2.7 -3.0 -2.8 -3.1 -3.3 -3.4 -3.6
Budget balance, % of GDP -5.6 -5.5 -4.7 -4.8 -4.7 -4.4 -4.1
Goods and services exports, USDbn 6.4 9.1 8.4 8.7 9.1 9.4 10.4
Goods and services imports, USDbn 10.0 6.4 3.4 3.6 3.7 3.8 4.1
Current account balance, USDbn -3.5 2.9 4.8 7.8 8.1 8.3 9.2
Current account balance, % of GDP -16.6 13.4 23.3 37.9 37.5 35.4 34.6
Foreign reserves ex gold, USDbn 2.9 2.3 1.9 1.8 1.9 2.0 2.1
Import cover, months 3.4 4.4 6.5 6.1 6.1 6.2 6.0
Total external debt stock, USDbn 21.6 20.4 20.5 19.7 12.3 7.8 5.0
Total external debt stock, % of GDP 103.6 94.9 99.0 95.9 57.2 33.4 18.8
Crude, NGPL & other liquids prod, 000b/d 31.0 34.2 53.0 56.0 51.5 48.4 49.4
Total net oil exports (crude & products), 000b/d -8.1 -2.0 20.4 14.9 9.6 4.8 3.6
Dry natural gas production, bcm 0.1 4.6 8.9 10.7 10.9 10.9 13.1
Dry natural gas consumption, bcm 0.1 0.1 0.1 0.1 0.1 0.1 0.1