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PNG Economic Update A revised outlook for business in 2012 Aaron Batten, Country Economist Port Moresby Resident Mission July 18 th 2012.

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Presentation on theme: "PNG Economic Update A revised outlook for business in 2012 Aaron Batten, Country Economist Port Moresby Resident Mission July 18 th 2012."— Presentation transcript:

1 PNG Economic Update A revised outlook for business in 2012 Aaron Batten, Country Economist Port Moresby Resident Mission July 18 th 2012

2 The state of the economy and its near term outlook

3 Business confidence is riding a wave of optimism… Expected Capital Investment in 2012Profit Expectations for 2012

4 …and the ‘Pacific tiger’ is likely to again exceed growth forecasts…

5 …with surging private sector employment growth so far in 2012.

6 Why has this period of economic growth been so good for business?

7 Growth has supported a wide range of businesses because it has been led by the non-mineral sector… GDP Growth by sector (per cent per annum, average) Employment Growth by Sub-Sector (%, per annum)

8 …but non-mining sector has reached the peak of this economic cycle… GDP Growth by sector (%)

9 …as the FDI funded construction binge winds down… ConstructionTransport and communications GDP Growth by sub-sector (%)

10 …which will change the composition of future growth. (Contributions to growth by sector)

11 What macroeconomic trends will impact on business conditions over the next 2-3 years?

12 Euro instability is unlikely to affect already stagnating commercial lending. (Private sector lending growth, Quarterly, %)(Private sector credit, % GDP)

13 But commodity exports make economies vulnerable. PNG is no exception. (Commodity prices, Monthly, $US)

14 Lower agricultural prices will hurt rural incomes in particular. (Agricultural commodity prices, Monthly, $US)

15 FDI will remain strong in the short term, but may be offset by increasing offshore investment… (Foreign Direct Investment, USD, millions) ,000 1,200 1,400 1,600 1,800 2, Inward FDI-Total (IMF) Inward FDI-from Australia (ABS) Outward FDI-to Australia (ABS)

16 The Kina will stay high but has likely peaked. (Kina exchange rate, FX/Kina)

17 Official inflation has dropped significantly this year… (Official Consumer Price Index growth, Quarterly, %)

18 …but these figures probably exaggerate the real situation. (Official and alternative Consumer Price Index growth, Quarterly, %) Mar-05Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12 Official Adjusted for rents, housing weight and education subsidy

19 What macroeconomic policies should business support?

20 BPNG has been effective in sterilizing large capital inflows... Source: IMF Article IV, 2012

21 …but business should expect a more austere government over the next 2-3 years… (Government Revenue, Kina, millions, constant prices)

22 (Government revenue to GDP, %)..and support government’s need to correct its declining revenue base…

23 (Government revenue, per capita)..to help foster greater levels of public investment ,200 1,600 2,000 LNG contribution by 2028 LNG contribution by 2015 Foreign Aid Domestic Revenue USD per capita

24 Ultimately, non-mineral growth requires a reinvigoration of microeconomic reform. (Critical issues facing business, CEO Survey)

25 The outlook  PNG’s macroeconomic fundamentals remain sound but the next months will see a more moderate rate of economic growth.  More importantly for business, the underlying sources of economic growth are about to change quite significantly.  This will have an impact on business conditions and growth in the non-mineral sector.

26  Eurozone instability and slowing China is lowering commodity prices creating pressure on Government spending. – This will restrict much needed revenue growth but unlikely to jeopardize macroeconomic stability.  The exchange rate has likely peaked whilst short term inflationary pressures are also easing.  As revenues shrink, greater austerity is needed to protect funding for existing assets and prevent another round of inflationary pressures. The outlook

27 Thank you. Thank you. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel Port Moresby Resident Mission Level 13, Deloitte Tower Port Moresby, PNG


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