1

PNG survey of developments, 2014-15

Michael Cornish, Rohan Fox, Stephen Howes, Win Nicholas, Albert Prabhakar and Ani Rova

UPNG SBA Division of Economics &ANU Crawford School Development Policy Centre.

2

Structure

• Introduction, context and recent growth performance– Stephen Howes

• Macroeconomic and fiscal – Ani Rova

• Human development and structural reform, and conclusion– Win Nicholas

3

Growth in commodity prices 2000-2020 (2000=100)

Commodity prices have fallen since 2011

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20200

100

200

300

400

500

600

Oil Copper Nickel Palm oil Coffee Logs

Estimate Projections

4

Japanese LNG contract prices (USD/bmmbtu)

Mar-14

May-14Jul-1

4

Sep-14

Nov-14

Jan-15

Mar-15

May-15Jul-1

5

Sep-15

Nov-15

Jan-16

Mar-16

May-16Jul-1

6

Sep-16

Nov-16

Jan-17

Mar-17

May-17Jul-1

7

Sep-17

Nov-17

Jan-18

Mar-18

0

2

4

6

8

10

12

14

16

18

USD

/bm

mbt

u

Actual Projection

LNG prices are also falling

5

GDP and GDP per capita (2012 prices)

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

20132015p

2017p0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

5

10

15

20

25

30

35

40

45

50

GDP per capita (lhs) GDP (rhs)

Kina

Kina

bill

ion

Strong economic growth since 2005

6

Growth in 2014 and 2015

• GDP growth 2015 estimates have shifted down over time: – 20% to 15% to 11%

• GDP growth 2014 estimates have shifted up over time– 6% to 8% to 13%

• This is due to LNG production being brought forward: 2-year growth unchanged (at constant prices).

7

Little growth in agricultural commodity production

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

50

100

150

200

250

Cocoa Coffee Copra Palm oil

Agricultural commodity production (volumes, 2001=100)

8

Annual tourist arrivals (by plane) to PNG

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Tourist arrivals no longer increasing

9

ANZ Q1 2105 business survey

• Sales in Q1 2015 compared to –Q4 2014: net 47% down–Q1 2014: net 37% down

• Sales in Q2 2015 compared to–Q1 2015: net 5% up–Q2 2014: net 30% down

10

Formal sector employment growth (quarterly, year on year)

Employment growth is now negativeM

ar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar

Jun

Sep

Dec

Mar Jun

Sep

Dec

Mar Jun

Sep

Dec

Mar Jun

Sep

Dec

Mar

2008 2009 2010 2011 2012 2013 2014 2015

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

11

Kina vs $US: June 2010 to June 2015

The exchange rate

4033040391

4045240513

4057540634

4069540756

4081740878

4094041000

4106141122

4118341244

4130641365

4142641487

4154841609

4167141730

4179141852

4191341974

4203642095

421560.325

0.345

0.365

0.385

0.405

0.425

0.445

0.465

0.485

0.505

12

Fifteen most resource-dependent economies with floating exchange rates, and PNG

Country%Δ exchange rate 1 Jun 2014-30 Jun

2015

Natural resource rents

as % of GDP

Largest export categories as % of GDP

Brazil -40.15 6.5 Iron ore, oil

Madagascar -33.37 9.8 Textiles, cloves

Ghana -32.88 17.8 Gold, oil

Uganda -28.54 13 Coffee, oil

Norway -27.26 10.9 Oil, LPG

Mexico -21.91 7.7 Automobiles, electronics

Australia -21.77 7.2 Iron ore, coal

Mozambique -21.37 14 Aluminium, coal

S Africa -15.89 6.8 Gold, coal

Chile -15.72 16 Copper, sulphates

Peru -13.82 9.7 Gold, copper

Indonesia -14.40 6.6 Coal, LPG, oil

Zambia -8.54 19.4 Copper, corn

Solomon Islands -7.21 33.3 Timber, gold

Mongolia -7.20 28 Coal, copper

PNG 3.55 31.6 LNG, gold

13

Foreign Exchange Reserves (millions $US)

Falling foreign exchange reserves

14

Inflation 2012-2015 (quarterly, year on year)

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-150

1

2

3

4

5

6

7

%

Inflation may have peaked

15

Fiscal surpluses and deficits in PNG (% GDP) 2000 to 2014

The fiscal balance: from surplus to deficit

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

16

Expenditure has increased very rapidly in recent years, whereas revenue is flat

PNG government revenue and expenditure (K billion, 2014 prices)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20156000

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

Expenditure RevenueRevenue (2015 MYEFO)

K bi

llion

(201

4 p

rices

)

17

Why such a difficult fiscal position?

• Increased interest costs from high borrowing• Low LNG and other commodity prices have

depressed revenue.• Funds taken off-budget (e.g. Oil Search loan)• Other mining projects doing badly.• Non-mining revenue down due to economic

slowdown

18

PNG government revenue and expenditure as per the 2015 budget (K billion, 2014 prices)

A new fiscal strategy is needed

2014 2015 2016 2017 201810000

11000

12000

13000

14000

15000

16000

Expenditure Revenue

K bi

llion

(201

4 pr

ices

)

19

Debt/GDP ratio

Government debt is now on the increase

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0%

10%

20%

30%

40%

50%

60%

70%

80%

20

Human development challenges

• Poverty: 40% in 2010– Unchanged from 1996

• Human Development Index: PNG 157th out of 187 (2013)

• Gender Inequality Index: PNG: 134th out of 148 (2012)

21

Free education and free health

• Free education– Government payments have reached schools– Enrolments have increased– Schools have been over-compensated for the

abolition of fees• Free health– Government payments reach fewer than half of

the health clinics.– 83% of health clinics rely on user fees.

22

Gender equality: areas of progress

• More women in the workforce– proportion of female primary school teachers has

increased from 27 to 55% over the last decade. • New Family Protection Act• Increasing number of programs– to make markets safer for women.– to support women who have been victims of

domestic violence

23

Real exchange rate appreciation means the economy is becoming more costly

2005 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

160

Real exchange rate (2005=100)

24

Road funding has increased, but is at risk

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(f)

2017(f)

2018(f)

0

200

400

600

800

1000

1200

Funding required to address back-log and meet MTDP targets over a five-year period

Total funding available, DoW budget alloca-tions and NRA commited fund-ing

PNG

mill

ion

Kina

(con

stan

t 201

2 pr

ices

)

25

Conclusion

• Macro and fiscal reforms needed to reduce short-term risks– New fiscal strategy, including sensible multi-year

expenditure cuts– Exchange rate depreciation.

• Long-term challenges– Structural and public sector reform to boost

spending effectiveness and SOE performance, and strengthen infrastructure.

26

Thank you