Reliance on commodity prices keeping kina low against US dollar

COMMODITY prices have a big influence on how the kina fares against the United States dollar as it makes up about 90 per cent of Papua New Guinea’s exports, according to a report.
This dependency has resulted in the drop in value of the kina which is expected to persist until early next year, says the ANZ Research FX Insight.
“Papua New Guinea is a narrow commodity-based economy,” it said.
“Mineral, LNG, crude oil and agricultural commodities make up nearly 93 per cent of PNG’s exports.
“Hence, commodity prices generally drive the value of the exchange rate as they have a direct impact on the demand for kina through exporters converting foreign currency returns.
“We plotted a number of commodity price indices, including the ANZ China Commodity against the PGK/USD.
“We also looked at the relationship between the AUD/USD and the kina.
“Our results showed that the kina had the strongest correlation with the AUD/USD.
“This is not surprising as the Australian dollar is often labelled as a ‘commodity’ currency given its strong correlation with commodity prices.”
The report noted foreign direct investment as also having an important influence on the kina, making reference to the high spending during the initial years of the PNG LNG.
“A ramp-up in domestic investment spending on the PNG LNG project over 2011 to 2012 brought US dollars into the country,” it said.
“As a result of this expenditure, the PGK/USD appreciated by 27.4 per cent to a high of US0.4867 in Q3 2012 from US0.3842 Q1 2011.
“This occurred despite the fact that commodity prices were falling during this period, having peaked in early 2011.”
The report said the kina was expected to pick up towards late 2019 onto 2020 on the back of expected investment from the next phase of LNG and other extractive projects.