Economic Analysis - Neutral Monetary Policy For Now But Risks Remain Tilted To Upside - JUNE 2017


BMI View: Following the Bank of Papua New Guinea ' s decision to keep rates steady at 6.25% and to provide a neutral monetary policy guidance over the next six months, we now forecast the central bank to remain on hold through end-2017 to support the economy. Commodity-driven inflationary pressures are likely to moderate over the course of the year, while PNG's external woes appear to be easing.

In line with our expectations, the Bank of Papua New Guinea (BPNG) left its benchmark Kina Facility Rate (KFR) unchanged at 6.25% in its bi-annual monetary policy statement released on March 31, and indicated that it will maintain a neutral monetary policy stance through September 2017. The decision was made as the central bank noted that balance of payments pressures have eased considerably since H216 and is expected to continue in 2017, while inflation has stabilised. This has prompted us to revise our forecast for the central bank to stand pat on its interest rate decision through end-2017 to support growth, rather than hike its policy rate by 25bps to 6.50% in the latter half of the year as we previously expected. That said, we note that risks to our interest rate forecast remain tilted to the upside given uncertainties regarding the global trade environment, as well as domestic political instability and diverging monetary policy vis-a-vis the US which could revive downside pressure on the kina.

Growth Bottoming Out
Papua New Guinea - Real GDP Growth, %
National Sources/BMI

Supportive Of Growth, But Macroeconomic Stability Remains A Priority

While we forecast Papua New Guinea's (PNG) real GDP growth to bottom out in 2016 and gradually recover over 2017 and 2018 (we forecast real GDP growth to come in at 2.7% in 2017 and 4.3% in 2018), as rising oil prices provide an impetus for new investment in the resource sector, we note that the growth recovery is likely to remain slow and fragile. Over the coming months, political risks surrounding the upcoming general election and social unrest due to the withholding of royalty payments to landowners will likely continue to act as a drag on the economy ( see ' Political Instability Starting To Undermine Investor Interest', March 17 2017). To that end, we expect the BPNG to maintain an accommodative stance to support the economy, but remain watchful of macroeconomic and external developments to ensure macroeconomic stability. This chimes with the central bank's statement that it will "maintain a neutral monetary over the next six months but will continue to closely monitor developments in inflation and other macroeconomic indicators and may adjust its monetary policy stance as necessary".

Commodity-Driven Inflation To Taper Off

While we expect inflationary pressures in PNG to remain elevated over the coming quarters due to the likely increase in government spending associated with the 2017 National Election, and the 2018 APEC meetings, we note that commodity-driven inflation has likely peaked, and will gradually subside in the coming quarters ( see 'Commodity-Driven Inflation Has Peaked', April 5 2017). Consequently, we have notched down our end-2017 inflation forecast to 6.8%, from 7.2% previously, which now falls within the BPNG's inflation ceiling target of 7.0%, but slightly higher than the central bank's projection of 6.5% in 2017 and the end-2016 headline inflation of 6.6%. Nevertheless, this will likely ease the pressure for the central bank to hike rates over the coming months. A tightening of monetary policy could exert downside pressure on real GDP growth, which we estimate already sank to a multi-year low of 2.5% in 2016.

Starting To Stabilise
Papua New Guinea - Foreign Reserves, USDmn
BMI, Bloomberg

External Pressures Starting To Ease

Meanwhile, it appears that Papua New Guinea's external woes have started to ease with the gradual recovery in oil and gas prices, as well as the resumption of operations at OK Tedi and Porgera mines in H216. Although foreign reserves fell from USD1,656mn in September 2016 to USD1,594mn at end-2017 (according to IMF data), the pace of decline has slowed considerably compared to the past few years, and this signals a gradual stabilisation of the country's external position. Over the course of 2017, we expect outflows from the financial account to continue due to the ongoing debt servicing for existing mining and LNG projects in the country, but this will likely be offset by a gradual recovery in commodity prices and higher commodity exports.

Macroeconomic Forecasts (Papua New Guinea 2013-2019)
Indicator 2013e 2014e 2015e 2016e 2017f 2018f 2019f
National Sources/BMI
Population, mn 7.3 7.5 7.6 7.8 7.9 8.1 8.3
Nominal GDP, USDbn 15.1 16.1 17.0 16.9 17.7 19.3 21.6
GDP per capita, USD 2,058 2,145 2,230 2,166 2,226 2,368 2,607
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 5.7 4.5
Consumer price inflation, % y-o-y, eop 2.9 6.6 6.4 6.6 6.8 4.5 4.5
Exchange rate PGK/USD, ave 2.27 2.54 2.85 3.13 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 -3.4 -3.3 -3.6 -3.8 -4.0
Budget balance, % of GDP -7.8 -5.9 -9.1 -6.3 -6.2 -6.0 -5.6
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 5.3 5.5 5.6 6.3
Current account balance, % of GDP -22.9 17.9 28.2 31.4 30.9 29.1 29.2
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 20.9 15.1 10.8 7.7 5.5 3.9
Total external debt stock, % of GDP 143.2 130.2 88.7 64.1 43.2 28.6 18.2
Crude, NGPL & other liquids prod, 000b/d 31.0 34.2 52.7 73.5 75.2 75.2 73.3
Total net oil exports (crude & products), 000b/d -8.1 -2.0 20.0 32.3 33.3 31.5 27.5
Dry natural gas production, bcm 0.1 4.6 8.9 10.7 10.7 10.7 12.8
Dry natural gas consumption, bcm 0.1 0.1 0.1 0.1 0.1 0.1 0.1