Political Risk Analysis - Aid Flows Unlikely To Be Affected By Refugee Issue - JAN 2018

BMI View: The closure of the Manus Island detention centre has negatively affected Australia-PNG bilateral relations as neither side wishes to take responsibility for the refugees, and we believe that a resolution is unlikely over the near-term. At the same time, many of the asylum seekers have refused to be resettled in PNG for fear of their own safety. That said, we do not expect the ongoing situation to result in a reduction of foreign aid from Australia.

The issue surrounding the resettlement of refugees due to the closure of the controversial Manus Island detention centre in Papua New Guinea (PNG) has resulted in a rise in tensions between PNG and Australia. In our view, the ongoing disagreement about which side bears the responsibility for the refugees is unlikely to have a clear resolution in the near-term, but this should not have a significant bearing on economic development aid from Australia.

Timeline For The PNG Refugee Arrangement

In September 2012, Australia and PNG first signed a Memorandum of Understanding (MoU) which provided the guidelines for the transfer of asylum seekers from Australia to PNG, as part of Australia's Pacific Solution.

Processing began in November 2012 and the MoU was later supplemented by the Regional Resettle Arrangement (RRA) signed in July 2013, providing a comprehensive framework that covers the processing of asylum claims and permanent resettlement of refugees in PNG. Under the RRA, asylum seekers intercepted at sea by Australian authorities will be transferred to PNG and housed at the Manus Island Regional Processing Centre (RPC) until their asylum claims are processed, and the entire programme will be funded by Australia.

In April 2016, however, the PNG Supreme Court ruled that the detention of asylum seekers at the Manus Island RPC was illegal and unconstitutional. The Court held that the treatment of asylum seekers was in violation of their right to personal liberty enshrined in section 42 of the Constitution of PNG. Accordingly, the Court ordered the governments of Australia and PNG to take all necessary steps to cease and prevent the incarceration of asylum seekers at the centre. In compliance with the order, the Manus Island RPC started to allow freer movements to and from the centre in May 2016, including visits to the main town centre and an option to stay at an immigration-run transit centre overnight. Subsequently in March 2017, both the Australian and PNG government committed to fully closing the facility by October 31 2017.

No Clear Resolution In Sight

The closure of the detention facility is likely to remain a thorny issue for both the PNG and Australian government as the latter is not willing to host any of the refugees, while it is safe to assume that when Prime Minister O'Neill agreed to house refugees on behalf of Australia in 2012, he believed that this would only be a temporary arrangement. Indeed, PNG's immigration minister Petrus Thomas said that "PNG has no obligation under the current arrangement to deal with these two cohorts and they remain the responsibility of Australia to pursue third-country options and liaise with respective governments of the non-refugees for their voluntary or involuntary return".

Meanwhile, many of these asylum seekers do not want to resettle in PNG or move to other transit centres for fear of their safety due to past incidents of abuse and death, thus refusing to leave the closed down premise. At the point of writing, hundreds of refugees continue to barricade themselves in the Manus RPC in protest at being forced to leave the premise even though water, food, and power supply have been cut off. Although the stand-off between PNG authorities and protesters is likely to come to an end in a matter of days or weeks, this is unlikely to spell the end of the refugee issue.

Inflows Of ODA To Continue Uninterrupted

We are of the view that concerns that the closure of the Manus Island detention centre would lead to a reduction in Australian foreign aid are overblown and expect inflows of overseas development assistance (ODA) from Australia to continue. PNG has enjoyed cordial bilateral ties with Australia over last decade or so and receives a considerable amount of ODA from its wealthier neighbour, estimated to come in at around AUD564.3mn in 2017/18. We highlight that the ODA programme is a separate programme from that of the RRA, which is contingent upon PNG's hosting of refugees on behalf of Australia. Instead, most of Australia's ODA to PNG is spent on social expenses and long-term capital development commitments, suggesting that inflows are likely to continue.

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 -2.5 -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 35.4 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 20.9 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 19.5 11.4
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