1. MEDIUM TO LONG TERM PROSPECTS & OUTLOOK
Presentation by: Mr Loi M. Bakani CMG
Governor-Bank of PNG
National Development Forum
18th October 2016
Port Moresby

2. Presentation Parts
Background of current financial and economic issues in PNG
Short Term Issues & Challenges
Medium to Long Term Prospects
Conclusion

3. Robust economic growth track record and potential
Real GDP by contribution (2010–2016E)
Strong GDP growth
Agriculture/Forestry/Fishing
Construction
Wholesale and retail trade
Mining and quarrying
Oil and gas extraction
Others1
(K billion)
CAGR2 2010–2016E: [8.6 ]%
34%
38%
46% 7%
42%
45%
40% 8%
10%
11% 8%
16%
14%
11%
10% 8%
12%
12%
11%
12%
25%
18%
10% 9%
10%
10% 4% 4% 3% 3%
20%
19%
19%
19%
18%
17%
Source: Department of Treasury and Central Bank
Source: Department of Treasury
2016E real GDP growth vs. peers
Real GDP per capita
CAGR2 2010–2016E: [5.6 ]%
Source: PNG and S&P (Jun 2015)
We are currently enjoying our longest period of real GDP growth which is expected to continue in 2015 for 14 consecutive years since 2002
From 2007 to 2014, our average real GDP growth accelerated to 8.0%, more than double the population growth rate, and we expect growth to be at 9.9% in 2015
Based on S&P data, we have one of the highest real GDP growth rates compared to similar rated peers and higher than high growth economies such as China, India and Vietnam
Our GDP is broad based with no sector contributing more than 30%. With full year operations of PNG LNG in 2015, oil & gas extraction will become the largest contributor at 27%
In terms of real GDP per capita, we have experienced an average 8.0% annual growth in the past 6 years, which is a material improvement in the standard of living of the population
Source: Department of Treasury and Central Bank
1 Others include education, human health and social work, electricity, gas and air conditioning, manufacturing, water supply and waste management, finance and insurance, real estate activities, community social, personal services, transport and storage, public administration and defense, information and communication, accommodation and food services, administrative and support services, professional, scientific and technical activities, and other services;
2 CAGR: Compounded Annual Growth Rate

4. Short Term Issues & Challenges
Despite high economic growth, large budget deficits & Kina depreciation of around 36% between 2012 and October 2016, inflation remained low at manageable level.
Exporters should have taken advantage of the kina depreciation & increased production/exports, thus increase FX inflows.
Importers & consumers should have adjusted & resort to domestically produced goods/support local production, thus reduce FX demand.
The Bank has to balance the foreign currency need of the Government, private sector demand and ensure maintenance of adequate level of foreign exchange reserves for the country to maintain confidence in economy.

5. Inflation

6. Kina Exchange Rate

7. Short Term Issues & Challenges
Govt’s plan to continue funding of priority sectors through deficit budget is clear.
With low revenue coming from LNG project and decline in internal revenue from various sources, poses a challenge for budgetary financing for 2016 to 2018
Govt needs to realise budgeted external financing given the fiscal space from low external debt stock & debt servicing
The Government and the Bank are pursuing it.
External financing will provide relief for domestic market as main source of borrowing

8. Short Term Issues & Challenges
Current account surplus did not translate to Forex inflows, as mining & petroleum companies were allowed to keep export earnings in offshore accounts to meet overseas liabilities, under provisions for accelerated depreciation. Allowed under various Development Agreements.
After the debt service and accelerated depreciation provisions for the PNG LNG project are over, capital account will move into surplus, translating into forex inflows through Govt taxes.

9. Balance of Payments

10. Short Term Issues & Challenges
There will be a turn-around in the forex market, Government revenue will increase & growth in economic activity will increase.
Start up of any pipeline projects (LNG & Mining) will provide relief to budget & forex situation and support economic growth.
Recovery in export prices especially for non-mineral commodities will also support increased employment and economic growth.

11. Short Term Issues & Challenges
Good inflows of foreign currencies by exporters
Contributed by the resumption of Ok Tedi mine in March 2016, combined with Lihir's increasing production and exports, & inflows by other mineral companies.
BPNG interventions & increased forex inflows was sufficient to clear geniune import & service payment orders . However, import orders still remain but reduced.
New Foreign Exchange Directives issued on 30th Sept 2016.

12. New Forex Directives
All holders of onshore FCAs have to reapply to BPNG by 28th October 2016
All domestic lending in foreign currency such as trade finance have to be approved by BPNG in line with Regulation 6 of the Foreign Exchange Control Regulations
Spot inflows should only be used to clear spot market orders, & not for forwards and foreign currency trade finance loans
Directives do not mean a change in the Foreign Exchange (FE) Control regime.
All the measures introduced since 2014 are to restore order and ensure a smooth & efficient functioning of the FX market, with transparent price setting and some protection for consumers.

13. MEDIUM TO LONG TERM PROSPECTS
NEXT SLIDES

14. Medium to Long Term Prospects
The PNG economy will continue to grow in real terms but at a lower pace (2% to 3%). Inflation projected to be in the range of 6 to 7%.
Clear and direct focus by Govt on developing rural areas, infrastructure, education, health, agriculture, tourism & SME is the right strategy for PNG
The Government is focussing on diversifying the economy to broaden revenue base & to achieve future sustainability of inclusive growth
Large intergrated projects in agriculture sector & SME are encouraged. Good initiatives already led by Government and landowners.
Providing access to innovative technology, financing & markets for agriculture, tourism & SME sectors would increase participation by population

15. Medium to Long Term Prospects
Benefits from past & current investments in priority areas by Govt will be realised
The non-mineral sectors have the potential for inclusive growth and employment opportunities
Need appropriate trade and investment policies to help boost growth in the non-mineral sectors.
Need improvements in public utilities & services sector to facilitate developments in the non-mineral sector
Would reduce reliance on the non-renewable resources sector.

16. Unlocking the vast potential from the agriculture, forestry, and fisheries sectors
Economic backbone for the past 70 years
Huge growth potential with current low export base of K2bn (using only 3% of available agriculture land)
29mm ha of forested land (63% of total land area)
15mm ha rich in timber species
DSP seeks to maximize sustainable benefits and minimize detrimental impact on environment
Largest fisheries zone in South Pacific (2.4mm km)
Harvest approximately 500,000–750,000 tons of fish & shellfish p.a.
National Fisheries Development Plan promotes sustainable fishing and advancement of the sector
Key exports destinations: EU, Japan, Philippines, Taiwan and Thailand
Note: Others forest products include timber, plywood, and woodchips 1%
3.3 1%
10% 5% 5% 1% 1% 7%
2.6
2.4
10%
2.1
2.2 5%
13%
2.0
11% 6%
28%
13%
1.8
13%
40% 4% 3%
15% 4% 9%
16%
11%
14% 2% 3%
22%
24%
12%
21%
10%
23%
19%
15%
Agriculture, forestry and fisheries is Papua New Guinea’s principal economic sector in terms of GDP, contributing 25.3% to total real GDP in 2014, but there is still vast potential for further development
Agriculture plays a vital role in the national economy, sustaining the livelihoods of approximately 81% of the population residing in rural areas
The sector’s principal cash crops for export include coffee, cocoa, palm oil and copra products and there has been foreign investment from the likes of Sime Darby of Malaysia in palm oil
Vast potential remains in agriculture with only 3% of agricultural land being utilized of the 30% that is arable for utilization and the government intends to continue to invest in the development and modernization of the agriculture sector which will enable the majority of the population to participate in the development process and improve their quality of life, both in terms of self sustainability and export of agricultural product
Papua New Guinea has 15 million hectares of land rich in timber species that are acceptable and accessible for logging operations. The forestry sector is dominated by large scale logging activities and contributed 4.4% to total export value in 2014
The Development Strategic Plan (DSP) sets forth forestry policy and planning, to ensure our forest resources are managed to derive maximum sustainable benefits and minimize any detrimental impact to the environment and society
Papua New Guinea has one of the largest fisheries zone (EEZ) in the South Pacific, with an estimated sustainable harvest of between k tons per annum. Tuna is our principal export and covers 90% of all marine product exports
The National Fisheries Development Plan Framework promotes higher value products, international quality standards, sustainable fishing, access to markets and vertical and horizontal linkages within the sector and building of roads/infrastructure which will make land more accessible for exports
44%
45%
50%
51%
51%
32%
48%
95%
95%
95%
99%
99%
99%
99%
Note: Others include rubber, tea, and a very small portion of manufactured goods
Source: Central Bank and Department of Treasury

17. Unlocking to realize Import Substitution
PNG’s annual imports of agricultural products amounts to about K0.2 billion in 2015.
The Government’s plan to grow the domestic agriculture sector through initiatives that includes;
reducing dependence on imports,
diversification and improvement to the infrastructure and
transmission of inputs to farms.
In addition, developing the manufacturing sector (eg: small industrial products) by supporting SMEs is positive.
Over 80% of PNG’s population are involved in subsistence agriculture & import substitution will;
improve the livelihoods of the mass population & provide food security
help relieve PNG of its current FX pressure.
The Current Account of the Balance of Payments was in a surplus in 2014 and will continue for the foreseeable future
Trade activity with the rest of the world increased in 2014, with the commencement of the production and export of LNG. This will continue for the next 30 years
The commencement of the loan repayments by the PNG LNG project in 2014 resulted in the capital and financial account deficit.
As a small open economy PNG’s international reserves are dependent on commodity prices and FDI
International reserves had declined since mid The level of reserves is still comfortable and can cover 10 months of total imports and 15 months of non-mineral imports
The international reserves are expected to increase once the accelerated depreciation ends (around 7years) and PNG LNG will commence payment of taxes (royalties and some dividends are currently paid)
PNG LNG exports are sold to Japan, China, Singapore and Taiwan. Crude oil is sold internationally and Australia is a major buyer. Gold, silver and copper are sold in the world markets and agricultural exports are primarily sold into Europe. All of them to high rated International Trading Partners

18. Medium to Long Term Prospects
Growth to be supported by pipeline of investment, including 2 major LNG projects-Penyang & Papua LNG, and 2 major mining projects-Wafi-Golpu & Frieda River Gold mines, which will have positive impact on the economy like the PNG LNG project did.
Lessons learnt from extensive concessions given to extractive projects in non-renewable sector should be LIMITED in future.
Use of SWF to save excess revenue from non-renewable resources developments for future use & generation

19. Medium to Long Term Prospects
Some necessary infrastructures to enable inclusive growth already established include;
Improved telecommunication
Strong & stable financial system
Improved National Payments System
AML initiatives
For wider benefit of our population, we need to reduce the proportion of our unbanked population (around 70% now) into modern financial services sector
Great need for financial education & literacy of our population
All these initiatives in place and in future should provide a platform for greater participation of our population to start a journey towards improved well being and prosperity by sharing in future economic growth of our country.

20. POSITIVE NEWS
WHILE THERE ARE ISSUES & CHALLENGES WE FACE IN SHORT TERM, THE MEDIUM TO LONG TERM PROSPECTS AND OUTLOOK FOR THE ECONOMY ARE:
“POSITIVE & STRONG”
THANKYOU.