Political Risk Analysis - Political Instability Starting To Undermine Investor Interest - MAY 2017


BMI View: The increase in number of protests , blockades, and inter-clan rivalry in PNG poses downside risks to its economic growth recovery. Although the country boasts lucrative investment opportunities in the LNG sector, we highlight that the heightened political risks are starting to deter investors, possibly leading to more delays and cancellations of planned investment projects.

We believe that the increase in frequency of protests, blockades, and infighting between tribal clans in Papua New Guinea (PNG) over royalty payments of resource projects pose downside risks to our economic growth forecast of 2.7% for 2017, and our view for the economy to pick up pace thereafter. We highlight that the country already 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, 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. We will be looking to downgrade PNG's real GDP growth forecast and short-term political risk index score if the situation escalates and lead to more investors pulling out.

Lowest In The Region
South East Asia - Short-Term Political Risk Index Score, Out Of 100
BMI

Austerity Measures And Economic Hardships Leading To Increased Social Tensions

Over the last few years, PNG has witnessed a rise in social tensions and dissent towards Prime Minister Peter O'Neill's administration which has been shrouded in corruption allegations ( see ' Political Upheaval To Continue In The Run-Up To 2017 Elections, August 26 2016). This was largely a result of sweeping austerity measures implemented by the government - whose income has been hard-hit by the decline in global commodity prices since mid-2014 - which has exacerbated the economic hardships felt by the masses. The situation was made worse when many landowners felt that none of the promised benefits from the Liquefied Natural Gas (LNG) projects, under the Umbrella Benefits Sharing Agreement (UBSA), aiming at improving their income and living standard has been realised.

Highlands Protest A Result Of Overdue Royalties And Land Rights

This dissent culminated into the mass protest of August 2016, when landowners threatened to shut down gas fields and pipelines in the New Guinea Highlands region of Hela province - where part of the USD19.0bn LNG project jointly owned by ExxonMobil, Oil Search, and Santos lies - if the government did not pay up overdue royalties in seven days ( see 'Local Dispute Potential Barrier To LNG Growth', August 11 2016). The project extracts natural gas from the Highlands region, where it is processed before being sent via approximately 700km of pipeline to a plant near the country's capital Port Moresby. The gas is then liquefied and transferred into ships before being sold abroad. Construction for the facility began in 2010, and the first gas shipment was made in May 2014, but no royalty payment has been made yet at the time of writing.

In response to these threats, the government decided in December 2016 to deploy 300 police and military personnel to the Highlands region to protect the LNG project and to quell tribal fighting. Inter clan-rivalry has been a common occurence in Hela province where the population comprises more than a hundred different tribal clans with a history of conflicts over land rights. However, the fighting appears to have intensified in recent months as tribes vie for more parcels of land which will provide royalties to landowners. Although peace has reportedly returned to the province for the time being following the military deployment, we note that this will not solve the root cause of the problem. In many ways, tribal fighting has persisted in Hela Province due to the lack of economic development and public services.

Delay Tactics Can Only Work For So Long

In addition to the August protest, it was reported in a related incident that more than a thousand villagers took to the streets in February 2017 to protest against the government which has yet to pay royalties to landowners for where the LNG plant belonging to ExxonMobi l near Port Moresby is sitting. Similarly, these villagers had threatened to shut down the plant unless the government paid up the royalties. The government responded by saying that the delay was due to disputes about the identification of landowners from the gas fields and that payment of the royalties was expected by the end of March if a process to formally recognise rightful landowners can be concluded. So far, the protest has been largely peaceful and no casualties were reported, but we warn that violence could erupt if the government is not able to resolve the issue over the coming months.

High Rewards Insufficient To Retain Foreign Investor Interest

Although the high-rewards associated with PNG's LNG sector means that the country will likely remain the subject of intense interest among a host of international oil companies, we note that the high risks involved have undermined the attractiveness of investing in the country's resource sector and will continue to do so over the coming months. In January 2017, Oil Search and ExxonMobil surrendered one of their prospective licenses (PPLs) for a block known as PPL277 in the country, citing difficulties with exploration in the Highlands region and other factors. The pair had paid USD15.0mn in 2012 for the license and had offered further payments to landowners and the PNG government based on the success of their exploration efforts.

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 16.8 16.7 17.6 19.1 21.5
GDP per capita, USD 2,058 2,145 2,195 2,137 2,204 2,350 2,586
Real GDP growth, % y-o-y 4.9 8.4 10.1 2.5 2.7 4.4 6.6
Consumer price inflation, % y-o-y, ave 4.4 4.7 6.5 6.7 7.1 5.9 4.5
Consumer price inflation, % y-o-y, eop 2.9 6.6 6.4 7.0 7.2 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 -6.3 -6.0 -5.7
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 5.3 5.5 5.6 6.3
Current account balance, % of GDP -22.9 17.9 28.7 31.8 31.2 29.4 29.5
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 7.6 5.4 3.9
Total external debt stock, % of GDP 143.2 130.2 90.1 64.6 43.1 28.4 18.0
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