Papua New Guinea: Risk Assessment


Country Risk Rating

B Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.

Business Climate Rating

D The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

Strengths

  • Abundant natural resources: minerals (copper, gold, nickel, cobalt), hydrocarbons (oil, gas), and raw materials (wood, coffee, cocoa, palm oil)
  • Construction of liquefied natural gas production units
  • Foreign investment in raw materials sector
  • Financial support of multilateral institutions

Weaknesses

  • Highly exposed to natural disasters
  • Weak infrastructures
  • Low literacy rate
  • Lack of skilled labor
  • Major governance shortcomings
  • Private sector external debt rising sharply

Current Trends

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Level of activity suffering from commodity prices

There was a strong boost to growth in 2015, the first full year of operation of the liquefied natural gas (LNG) facilities developed by Exxon Mobil. In 2016, there will likely occur a sharp slowing in activity, with LNG exports suffering as a result of the fall in oil and gas prices. In addition, production from the nickel and cobalt mines in the Madang region will equally not be able to help sustain growth, given the low level of metal commodity prices. The poor performances of the mining sector will also be a limiting factor for foreign investments in the industry.

Activity in the non-mining sectors, in particular construction, transport and logistics, is also expected to continue slowing. They are feeling the full impact of the completion of the LNG project which leaves local workers in need of retraining and new jobs, further reducing consumption already suffering from falling agricultural incomes.

Whilst the government intends to use the additional tax revenues generated by LNG exports to finance a number of infrastructure projects, the poor performance of the sector is also certain to limit public expenditure in 2016, despite the government’s stated aim of protecting priority spending, specifically education, healthcare and infrastructures.

The appreciation of the kina will keep inflation under control. However, underlying inflation (excluding products with volatile prices) will remain high, because of the persistence of bottlenecks, due to factors such as the lack of skilled labor and infrastructure shortcomings.

Recovery of the current account balance and narrowing budget deficit

The completion of the LNG project and the start of production have helped boost exports and cut imports. As a result, the current account balance entered into surplus as of 2015 and should stabilize in 2016. The level of imports will remain under control as the country has not yet started the construction of any new production facilities.

As concerns public accounts, there will be an increase in budget revenues thanks to the LNG project operations. The State is a shareholder in the project and will also be paid dividends. The scale of these resources will however prove to be smaller than originally expected due to the impact of lower oil and gas prices on the value of the exports. The government has created a sovereign fund to manage the income generated by the LNG projects, but its governance remains yet to be finalized.

The increase in income should help reduce the budget deficit and public debt, but spending on development will be limited by the fall in oil and gas prices. The budget should, however, remain favorable to the non-mining sectors with, in particular, tax relief for companies in the tourism, agriculture and manufacturing sectors.

Political stability called in question and social tensions remain

The 2012 elections confirmed Peter O’Neill (People’s National Congress) in his post of Prime Minister; he now enjoys the support of his predecessor, Sir Michael Somare. However, legal proceedings are now under way against the Prime Minister, suspected of corruption. An arrest warrant has been issued but its validity is currently being challenged by various authorities in the country.

In October 2015, the Parliament rejected a procedure for a motion of censure against the Prime Minister and he will now remain in power until the elections in 2017.

Meanwhile, social tensions remain strong and are fueled by inequalities and poverty: most of the population lives in rural areas and practices subsistence farming, so the end of work on the LNG project could exacerbate the tensions, if the project workers fail to find other jobs.

Finally, the country still suffers from considerable governance shortcomings.

Source:

Coface (09/2016)
VERY LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK


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