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PNG economy on right track “Papua New Guinea sure looks different to me,” ANZ’s head of international economics, Amy Auster, commented yesterday at a breakfast briefing for key PNG business executives.When she got on the Air Niugini flight in Brisbane, she was greeted by Asian-looking staff. And on arrival in Port Moresby, the hotel she had stayed in the year before, Crowne Plaza, had been fully booked out. “There were no rooms because so much is happening in Port Moresby,” she mused, noting that while looking out of her executive apartment, a number of cranes could be seen working in the Harbour City area. It almost seemed like she might have been in Macau, the Chinese-controlled territory from which Air Niugini had wet leased its B767 aircraft for its international services. In a generally upbeat presentation, the US-trained economist said that 2008 would see the sixth consecutive year of economic growth in Papua New Guinea for the first time since independence. She was pleasantly surprised on reading PNG’s 2008 Budget papers a fortnight ago to see that this year’s economic growth had been revised from 4.5% to 6.2%. She later received some kudos for having forecast a year ago that PNG would attain 6% growth. In a broad-ranging presentation on global and regional developments, including the overnight interest rate cut by the US Federal Reserve, Ms Auster was able to provide some cautionary advice and warnings to the authorities. She said funds totalling K3.8 billion had been allocated in supplementary budgets but only K860 million, or 22%, had been spent. “You don’t want to flood the economy but it is not ideal to leave funds in the banks. This is a tremendous opportunity to grow the economy through investments.” Ms Auster said government spending as a proportion of gross domestic product had risen strongly from 27% in 2003 to an estimated 37% this year. “Despite bigger spending, there has been a fiscal surplus and Treasury should be congratulated on good management during an election year,” she said. Ms Auster said the government’s recurrent budget had risen by 22% this year with personal emolument taking up 40% of growth and goods and services another 36%, while the development budget only grew by 10%. Inflation, she said, provided a confusing story with the basket of goods not having been changed since 1987 and current data not taking adequate account of fuel price increases with inflation this year having been down rated from 6% to 2%. Bank of PNG will “keep an eye” on inflation through two mechanisms – a slow upward drift in Central Bank bill rates, which are now at 4.5% and will keep rising; and through an acceleration in the value of the kina, which has been rising for three to four months. Ms Auster warned that proposed deregulation of the local currency market that was signalled in September this year and is apparently under review, could potentially have negative impacts. The proposal would open up the local capital market by allowing domestic contracts to be settled in foreign currencies, tending to “dollarise” the economy. “This may be attractive to large companies that don’t have to deal in kina. But if many large companies do this, their collective behaviour will be a problem,” she said, noting that 80% of foreign currency earnings flow to mining and oil companies. “If they don’t convert to kina and only pay taxes that amount to less than K2 billion a year, this will greatly reduce turnover and liquidity and create a significant risk. “Less turnover and liquidity will mean more volatility in the exchange rate and importers will have to hedge their currency exposure and it will be more expensive.” Ms Auster suggested it would be prudent to further investigate these impacts. However, a clear sign of her optimism about PNG’s outlook came with a prediction that ratings agencies, following an upgrade this year, could boost this to a ‘BB’ rating in the next two to three years with an investment grade attainable after the 2012 national elections. Ms Auster said that current data suggested the key area where PNG fell short of an improved rating was in the ratio of investment as a percentage of GDP. This presently amounted to 17.5% versus a 21% target set by ratings agencies, Standard and Poor’s and Moody’s. In her latest ANZ Pacific Quarterly, Ms Auster pointed to recent political upheavals in Timor Leste, Solomon Islands, Fiji and Tonga, but noted: “On the flip side, the passing of relatively smooth and peaceful elections in PNG looks to have been an historic event that may well have ushered in an unprecedented period of political stability.”
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