Economic Analysis - Significant Rebound In Growth Unlikely But BOP Surplus Encouraging - NOV 2017


BMI View: Papua New Guinea ' s external position appears to be showing signs of stabilisation, which is in line with our view for economic growth to bottom out in 2017 and recover slightly in 2018. However, the PGK is still facing downside pressure and we see little chance of a significant rebound in growth back to high single or double digits levels as commodity prices are likely to recover to pre-2014 heights, and social instability woes are likely to persist which could undermine investor interest.

After a sharp deterioration in Papua New Guinea's (PNG) external position between 2014-2016 as a result of the fall in energy and commodity prices, it appears that things have started to stabilise since the start of the year with the recovery in copper and liquefied natural gas (LNG) prices. That said, we believe that economic growth is still likely to remain subdued over the remainder of 2017 and into 2018 (we forecast real GDP growth to come in at 2.7% in 2017 and 4.3%, respectively) as raw material prices are unlikely to pose significant gains over the coming quarters. Moreover, we continue expect foreign investment into the mining sector to remain lacklustre over the medium-term given the poor business environment and issues with political and social instability.

BOP Flipping To Surplus Suggests Growth Likely To Bottom Out...

According to preliminary data from the Bank of Papua New Guinea (BPNG), the overall balance of payments for the first five months of 2017 flipped into a surplus of PGK113.5mn (USD35.5mn), compared to a deficit of PGK88.0mn in the corresponding period of 2016, and we expect this trend to continue given the recent commodity price recovery. In the January-May period, a surplus in the current account more than offset a deficit in the capital and financial account. The surplus in the current account came from a surplus in the trade account and net income and transfer receipts, which more than offset net service payments. The BOP surplus suggests that PNG's external position and terms of trade have started to improve, and we continue to believe that 2017 will likely mark the bottom of PNG's economic cycle, which will see real GDP growth inch up to 2.7% and 4.3% in 2018, from an estimated 2.5% in 2016.

...But Currency Still Under Downside Pressure

That said, PNG recorded a deficit in the capital and financial account which was due to net outflows in portfolio and other investments, and is likely a reflection of a lack of investor interest, purchase of money market instruments by residents, and a build-up in offshore foreign currency account balances of mining companies. Despite the positive reporting by the central bank, this also belies the fact that foreign reserves fell in the January-May period as the BPNG maintained its currency peg against the US dollar, suggesting that the PGK still faces downward pressure. As of end-July 2017, the level of gross foreign exchange reserves was recorded at USD1,715.7mn, down from USD1792.9mn in January 2017.

Growth Unlikely To Rebound Significantly

We continue to believe that a return to high single or double digits growth levels is likely to be elusive over the coming quarters for two reasons. Firstly, we do not expect commodity prices to recover to pre-2014 levels in the coming years, illustrating our long-held view that we are in the midst of a 'lost decade' for commodity prices, which began in 2013 and will run into the next decade ( see ' BMI Commodity Indices: Core View Through A New Lens ' , July 18 2017).

Secondly, we believe that social instability caused by the high frequency of protests, blockades, and infighting between tribal clans in PNG over royalty payments of resource projects will continue to undermine investor interest. We highlight that the country scores a dismal 43.3 (out 100) in our short-term political risk index score, and is the lowest among countries in the region. In our view, these social unrests are unlikely to abate anytime soon even with the re-election of Prime Minister Peter O'Neill (see ' Social Unrest Woes Likely To Persist Following O ' Neill Victory ' , August 8 2017), and will continue to pose significant project risks and create additional costs for foreign businesses operating in the country. This will not only disrupt production, but could also lead to more delays and cancellations of planned investment into the resource sector ( see ' Political Instability Starting To Undermine Investor Interest ' , March 17 2017).

Macroeconomic Forecasts (Papua New Guinea 2013-2019)
Indicator 2013e 2014e 2015e 2016e 2017f 2018f 2019f
e/f = BMI estimate/forecast. Source: 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 23.4 26.3
GDP per capita, USD 2,847 2,874 2,708 2,631 2,703 2,876 3,166
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 2.28 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 -2.5 -3.1 -3.0 -3.1 -3.2
Budget balance, % of GDP -5.6 -5.5 -4.3 -4.8 -4.2 -4.0 -3.7
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 35.6 34.9
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 16.7 10.9 7.0 4.6 3.0
Total external debt stock, % of GDP 103.6 97.2 80.5 53.1 32.5 19.6 11.5
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