Papua New Guinea: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources: ores (copper, gold, nickel, cobalt), hydrocarbons (oil, gas) and agricultural products (wood, coffee, cocoa, palm oil)
- Financial support from multilateral institutions
- Construction of liquefied natural gas production units
- Highly exposed to natural disasters
- Weak infrastructure network
- Economy dependent on commodities exports
- Significant shortcomings in terms of governance
- Low literacy rate, lack of skilled labor
- Difficulties in accessing foreign exchange
Investment projects in the energy sector might be postponed
The economy contracted in 2020 due to the COVID-19 crisis. Papua New Guinea declared a state of emergency on 24 March, resulting in the closure of schools, universities and non-essential public services, and a ban on all domestic and international flights. Economic and commercial activities resumed after the measures were eased. Energy production was maintained, with 90% of liquefied natural gas (80% of energy exports) sold under long-term contracts. Companies were therefore able to produce at full capacity, but the value of exports decreased due to lower energy prices. Furthermore, the risk that energy investment projects could be postponed is increasing. The decline in world prices linked to the weaker demand outlook and the trend to prioritize renewables over fossil fuels among major global groups in the sector may influence investment decisions. In particular, the Papua LNG project with Total and Exxon was approved by the authorities in September 2019, after the contract was renegotiated to increase profits for the country. The project will be the largest in ten years and represents USD 10 billion in foreign investment (42.7% of GDP). The final stages of approval are underway. In the face of economic uncertainty and a decline in activity in the first half of 2020, many companies in the non-mineral sector also reduced their payroll and put investments on hold.
The central bank's response to stimulate economic activity included cutting the Kina facility rate (KFR) from 5% to 3% in March 2020 and lowering the cash reserve requirement. It also introduced a quantitative easing program that resulted in a liquidity injection equivalent to 1.7% of GDP into the banking system.
After decelerating in 2020, inflation should accelerate in 2021 due to the recovery-related increase in domestic demand, higher food prices and the depreciation of the kina between March and October 2020, after it appreciated in early 2020, which will have delayed effects on inflation in 2021.
Rising government debt, current account surplus maintained
The public deficit is widening, as the COVID-19 crisis led to an increase in health and welfare spending as well as a decline in government revenue in 2020. Moreover, over-optimistic expectations of gas revenues, as well as tax credits and benefits granted under project development agreements, have fuelled recourse to credit and an increase in debt, which has tripled in seven years. The debt is held by domestic banks, which are now more exposed to sovereign risk. The country is trying to boost the share of its external financing, to reduce the exposure of domestic participants, on the one hand, but also to attract foreign exchange. China holds a quarter of the external debt, but leaders are looking for other partners, notably Australia, which granted a loan of AUD 140 million in November 2020. The IMF approved USD 363.6 million in emergency financing to help Papua New Guinea deal with the COVID-19 crisis.
Papua New Guinea's current account continued to show a large surplus, driven by gas, which accounts for 40% of exports. The postponement of major mining projects will depress imports and offset the decline in energy prices and thus exports. Foreign exchange reserves stood at USD 2.14 billion in August 2020, or 5.5 months of imports, an acceptable level.
A government facing new challenges
The government of James Marape, from the opposition party, will have to tackle many challenges stemming from the COVID-19 crisis and the question of independence for the Bougainville region.
The result (98% in favor of independence) of the November 2019 non-binding referendum on this autonomous region has led to negotiations between the government and the province. Ishmael Toroama, a former secessionist military commander, was elected President of Bougainville in August 2020. He has proposed a two- to three-year timetable to resolve the issue of the province's independence. The government is reluctant to grant independence by fear of losing the province's wealth (copper reserves).
The business climate is deteriorating. Governance indicators also place Papua at the bottom of the Pacific region regarding corruption (137th out of 180 according to Transparency International), the rule of law and government effectiveness. However, the government has taken steps to improve the business environment. In particular, an SME credit insurer has been created, a new tax regime for SMEs is planned, and reforms of state-owned enterprises are underway. An anti-corruption commission has been established, and laws protecting whistle-blowers’ rights are to come.