Business outlook weak: ADB

A weak business and investment climate is likely to persist in Papua New Guinea, given ongoing shortages of foreign exchange, a hard stance from the current Government towards foreign investment, and the continuing Covid-19 pandemic, according to the Asian Development Bank 2021 outlook released last week.

THE economy contracted as the Covid-19 reduced demand for exports and brought countrywide lockdowns that impeded commerce and mobility and severely restricted international travel and trade.
Development partners responded with budgetary support, taking comfort from an International Monetary Fund staff-monitored programme scheduled to close in June.
The economy should begin to recover in 2021, although a recent surge in Covid-19 cases threatens this.
Development partners are assisting with budgetary support and the delivery of Covid-19 vaccinations.

Economic performance
The economy shrank by 3.3 per cent in 2020 as it was battered by the Covid-19 pandemic.
PNG declared its first case of the Covid-19 last March 20.
A state of emergency and lockdown ran from March 23 to April 27.
Borders were closed, international and domestic flights suspended, businesses shut and movement of people severely restricted.
A second lockdown was imposed at the end of July for two weeks.
The lockdowns crippled business activity and trade.
Beyond the effect of the lockdowns, international travel to PNG was restricted for most of 2020, severely hampering business travel and inward investment and delaying major infrastructure projects.
In April, at the height of the pandemic, the Government decided not to renew a mining license for Porgera, the country’s second largest gold mine, interrupting production for several months.
Mining and petroleum extraction, which provides close to one-quarter of gross domestic product (GDP), significantly subtracted from GDP growth in 2020.
Within this, mining and quarrying, which typically contributes about 12 per cent of GDP, contracted by an estimated 22 per cent, with the closure of Porgera having the largest impact.
Mining operations were suspended as well at Ok Tedi, a large gold and copper mine, for six weeks because of an outbreak of the Covid-19.
Lihir, the largest gold mine in PNG, performed poorly because of poor ore and unplanned downtime unrelated to the Covid-19.
Meanwhile, oil and gas production expanded, although exploration and investment activities were significantly affected.
Employment in minerals and petroleum as a whole contracted by 30 per cent in the first three quarters of 2020, according to an employment survey of the Bank of PNG, with low oil prices contributing to staff reductions in exploration.
Apart from mining and petroleum, the economy contracted by more than 1 per cent in 2020.
Construction and real estate, transport and storage, accommodation and food services, and manufacturing were all constrained by lockdowns and labour mobility challenges. Transport and storage were estimated to have contracted by 15 per cent or more, as were accommodation and food services.
Construction and real estate were also thought to have contracted for lack of demand from the private sector.
But Government spending on infrastructure provided some cushioning, especially toward the later part of the year.
The agriculture, forestry, and fishing sector, which provides about 16 per cent of GDP, posted marginal growth.
While agricultural production for domestic consumption continued to climb, output of plantations was hit by disrupted international demand and the restrictive environment for labour mobility and trade, as were forestry and fisheries.
Palm oil production is thought to have performed close to 2019 levels, supported by rising prices, particularly in the second half of the year.
Inflation accelerated to 4.9 per cent in 2020, driven by a spike in the second quarter of the year caused primarily by supply constraints under Covid-19 but, also, currency depreciation and a quantitative easing programme.
Healthcare costs soared by 21.5 per cent, hotel and restaurant prices by 12.2 per cent, alcohol and betel nut by 9.7 per cent and transportation by 9.1 per cent.
By contrast, food prices increased by only 1.6 per cent during the year.
BPNG cut its kina facility rate from 5 per cent to 3 per cent last April to support economic activity.
The current account surplus fell from the equivalent of 22.0 per cent of GDP in 2019 to 18.8 per cent in 2020.
Exports contracted by about 18 per cent, while imports contracted even more as businesses scaled back investment and trade orders under the Covid-19.
The fiscal deficit ballooned from the equivalent of 5.0 per cent of GDP in 2019 to 8.1 per cent in 2020 as government revenue contracted and capital expenditure was boosted to support the economy.
Development partners were the main sources of financing.
The ratio of debt to GDP increased to just shy of 50 per cent, requiring an amendment to a fiscal responsibility act to raise the country’s legal debt limit from 45 per cent of GDP to 60 per cent.

Economic prospects
Growth is forecast at 2.5 per cent in 2021 and 3.0 per cent in 2022 as the economy slowly recovers.
However, the economic environment will remain challenging, with real GDP not expected to match 2019 levels until 2022.
A weak business and investment climate was likely to persist, given ongoing shortages of foreign exchange a hard stance from the current government toward foreign investment, and the continuing Covid-19 pandemic.
The Government plans to support growth through fiscal spending.
An International Monetary Fund staff-monitored programme, under which the Government is tasked with achieving measurable reform goals, is set to conclude next month.
The programme’s success would sustain PNG access to financial support from development partners.
Politics will remain fluid, however, and could threaten progress on important reforms.
Rising commodity prices may help to accelerate recovery faster than anticipated.
Mine and quarry production should increase in 2021 and 2022 as favorable international metal prices spur production.
The Porgera gold mine was also expected to reopen following an agreement reached between the operator and the Government.
Lihir and Ok Tedi are both expected to expand gold production in 2021 after a challenging year in 2020.
Oil and gas production is expected to plateau, but two major mineral and petroleum investments on the horizon have potential to drive significant growth: the Wafi Golpu gold and copper mine and Papua LNG project, both multibillion-dollar projects.
Papua LNG is expected to proceed to front-end engineering and design in 2021.
The agriculture, forestry, and fisheries sector is expected to grow by over 3 per cent in 2021, but this is largely because of low production in 2020.
Transport and storage, hotels and accommodation, and construction should also rebound as conditions improve.
Capital expenditure in the 2021 national budget is set to expand by 16.9 per cent in 2021 and a further 9.7 per cent in 2022.
The resulting stimulus will support growth and local businesses, but effective execution will depend on support from development partners.
Inflation is projected to persist as the kina continues to depreciate.
A second round of quantitative easing is expected in 2021, which should increase the money supply, with consequent inflationary impact.
Unlike in advanced economies, quantitative easing in PNG is used primarily for deficit financing, as central bank purchases of government securities on the secondary market create headroom for banks and other institutions to purchase new government securities on the primary market.
The current account surplus will expand in 2021, following rising commodity prices, and is expected to settle slightly lower thereafter in 2022 as imports pick up with improving economic conditions.
However, foreign exchange shortages will persist as an over-valued kina continues to deter foreign investment and the foreign exchange inflows it would bring.
The budget deficit is projected equal to 7.3 per cent of GDP in 2021 and 5.3 per cent in 2022.
These wide deficits reflect the government’s strategy to stimulate the economy, largely though the capital budget.
The deficit is to be financed by a mix of external and domestic sources.
Concessional loans from development partners will be the main source of external financing.
Planned reforms, if implemented, will allow foreign investors to buy domestic securities.

Policy challenge – reforming State-owned enterprises
Most essential services in PNG are provided through State-owned enterprises (SOEs), including energy, water supply, telecommunications, ports, and air transport.
The financial performance of SOEs has been poor. Kumul Consolidated Holdings, the Government-owned holding company for nine SOEs in the non-resource sector, reported a net loss of K335 million in 2018 and K237 million in 2019.
Consolidated SOE debt was estimated at K5.8 billion as of March 2019, of which K2.1 billion was commercial debt.
Given the important and often monopolistic roles that SOEs play in service delivery, their continued weak performance makes services expensive, inefficient and low quality, and the economy less competitive.
Poorly performing SOEs drag on the Government’s fiscal position, and SOE debt is a contingent liability on the state.
Assessing the performance of SOEs in PNG is difficult, partly because of inadequate audited financial information.
Additionally, most SOEs do not prepare statements of corporate intent or systematically develop key performance indicators.
The boards and management of many SOEs lack qualified and experienced personnel, and some directors have been appointed through opaque processes.
Women are underrepresented on SOE boards.
Many SOEs face particular financial constraints that affect their performance.
PNG Power, for example, bears a high debt burden and has not systematically pursued commercially attractive opportunities.
Air Niugini has struggled in the past because it operates flight routes that are not commercially viable.
Two better performers have been PNG Post and Motor Vehicle Insurance Ltd.
Recognising SOE reform as being of central importance, the Government approved in November 2019 a blueprint for a comprehensive SOE reform programme that lays out reforms to be undertaken across the sector from 2019 to 2022.
The current administration emphasises the need for SOEs to be accountable, financially sustainable, and to return dividends to consolidated revenue.
While progress has been slowed by the Covid-19, the Government remains committed to SOE reform.