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 raw material exports
- Significant shortcomings in terms of governance
- Low literacy rate, lack of skilled labor
- Difficulties in accessing foreign exchange
Growth rebounded in 2019 on higher production and exports of liquefied natural gas, crude oil and gold: these sectors have finally recovered from the February 2018 earthquake. Credit growth and improved access to foreign exchange have also increased private investment. In 2020, growth will slow down, due to lower energy prices. The non-extractive private sector will experience stronger growth, driven by the delayed effects of monetary easing in late 2019 and rising private demand. Growth will be based on agriculture, services and tourism, with manufacturing accounting for only 3% of GDP. However, the expansion could exceed forecasts if planned mining and gas projects get started ahead of schedule: the Papua LNG project with Total and Exxon in particular has received government approval after the contract was renegotiated in order to increase profits for the country. The project will be the largest in ten years and represents USD 10 billion of foreign investment (42.7% of GDP). The final stages of approval are in progress.
Inflation has slowed thanks to moderate credit growth, lower imported inflation, as the currency has remained stable, and supplier prices have fallen. Taking advantage of the room for maneuver opened up by low inflation, the central bank reduced the deposit facility rate in July (25 bps) and again in September (50 bps) to 5.5%. Inflation will remain moderate in 2020: prices from foreign suppliers are expected to remain stable and the economy has spare capacity.
Rising public debt, current account surplus holding steady
The public deficit widened in 2019 as tax credits and breaks granted under project development agreements offset the automatic increase in revenues due to strong growth. Expenditure was planned with overly optimistic expectations of gas revenues, leading to the use of credit and an increase in debt, which has tripled in 7 years. The country will therefore have to pursue a more severe austerity policy than expected in order to stabilize the deficit. Investment, education, health and administrative expenditure will be most affected. Combined with the revenue catch-up in 2020, these measures will enable a small reduction in the public deficit. The debt is held by domestic banks, which are now exposed to sovereign risk. The country is trying to increase the share of its external financing, to reduce the exposure of domestic participants, on the one hand, but also to attract foreign exchange. The issuance this year of USD 500 million in 10-year government bonds has reduced the time required for traders to access foreign exchange. China holds a quarter of the external debt, but leaders are looking for other partners in debt refinancing: an Australian loan of USD 440 million replaced a Chinese loan to refinance the debt at the end of November. The country can count on the support of the AfDB and especially Australia, a traditional partner and leading donor, whose grants accounted for 40% of external financing in 2019.
Papua New Guinea’s current account continued to show a large surplus in 2019, thanks to gas, which accounts for 40% of exports. It is set to improve in 2020: while energy prices may drive down the value of exports, protectionist measures and the postponement of major mining projects will depress imports. Foreign exchange reserves amounted to USD 1.92 billion as at September 26, 2019, or 5.3 months of imports, an acceptable level.
The government is fuelling social unrest
Faced with corruption scandals, growing public discontent and a wave of government resignations, Prime Minister Peter O’Neill was forced to step down in May 2019. His finance minister, James Marape, was elected Prime Minister by the opposition Pangu Pati Party on May 30, 2019. His austerity policy must to take into account the difficult social situation, which triggered riots earlier in 2018. The referendum on the independence of Bougainville Island was held on November 23 in accordance with guarantees made by the Papuan State at the end of the war of independence in March 2000. Voters were offered two alternatives: more autonomy within Papua or complete independence. It is strongly anticipated that they will opt for independence. However, the result of the referendum is not binding, and the national government is expected to refuse to grant independence to the copper-rich island, which would heighten regional tensions.
The business climate has deteriorated: Papua has dropped 12 places in one year in the World Bank’s Doing Business 2020 ranking, and now ranks 120th. Governance indicators also place Papua at the bottom of the Pacific region on corruption, the rule of law and government effectiveness. However, the government has taken steps to improve the business environment and diversify the economy. 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 defending the rights of whistle-blowers are to come.