Presentation to:

POMCCI

Charles Andrews and Aaron BattenAsian Development Bank25 August 2011

Macroeconomic UpdatePapua New Guinea

2

ADB Support for Private Sector Development

PPP policy and implementation

Secure transactions

Strengthening ICCC

Access to finance -- mobile banking

3

Access to finance -- MFi Other SOE reform, including CSO

policy Research and analysis and

advocacy, eg. 'Challenges of Doing Business in PNG" and "Private Sector Assessment"

4

ADB Support for Private Sector Development

5

PNG Economic Update

A. Business Climate

B. Inflation Outlook

C. Impact of LNG on Business – When and how big?

D. Implications

6

1. Business Climate Update

Twin track global economic performance…

7

also leading to twin track Pacific economic performance.

8

Real GDP Growth (%)

PNG economy boosted by record terms of trade…

9

World Prices of Key Pacific Commodities (1980-2012p)

…as well as improved fiscal discipline…

10

Government debt by denomination (% of GDP)

0%

10%

20%

30%

40%

50%

60%

70%

80%M

ar-9

4

Jun-9

5

Sep-9

6

No

v-97

Feb-9

9

Ma

y-00

Au

g-01

No

v-02

Feb-0

4

Ma

y-05

Au

g-06

No

v-07

Feb-0

9

Ma

y-10

Foreign Debt/GDP Domestic Debt/GDP

…leading to strong economic growth…

11

0123456789

10

04 05 06 07 08 09 10 11f 12f

Real GDP growth %

…across a variety of sectors.

12

Sources of Real GDP Growth (% p.a)

-8

-4

0

4

8

12

16

04 05 06 07 08 09 10 11f 12f 13f 14f 15f 16f

Mining Non-Mining

151%

Looking forward….

Resurgent commodity prices benefitting PNG

Unlikely to be threatened by current global instability

However, economy is increasingly exposed to a number of vulnerabilities Inflation LNG

13

14

c2. The Rising Inflation Challenge

15

Inflation is again on an upwards trend...

Growth in CPI Index (Annual % Change)

02468

101214161820

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011 (e)

2013

2015

?

16

Closer to hyper-inflation than official figures suggest…

-5

0

5

10

15

20

25

9.0

Official CPI Growth

14.5

w/ 16.5% housing price growth21.7

w/ 16.5% housing price growth & weighting adjustment

17

BPNG is finally having some success curtailing credit growth...

Private sector credit (% GDP)

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010 2011

Private Sector Credit(end-year, % GDP)

18

…and would be assisted by a fiscal surplus this year.

Fiscal impact on money supply (Annual budget balance, % GDP)

19

…and strengthening of the Kina will control imported price pressures.

0.36

0.37

0.38

0.39

0.4

0.41

0.42

0.43

0.44

0.45

0.46

AUD/PGK

USD/PGK

20

But BPNG efforts to control the money supply are being hampered…

Govt deposits (Million Kina)

Commercial Bank Accounts

BPNG Accounts

0%

5%

10%

15%

20%

25%

30%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Mar

-02

Dec

-02

Sep-

03

Jun-

04

Mar

-05

Dec

-05

Sep-

06

Jun-

07

Mar

-08

Dec

-08

Sep-

09

Jun-

10

Mar

-11

Commercial Deposits, millions Kina (LHS)Govt Share, % total (RHS)

Govt Share of Commercial Deposits

21

-15

-10

-5

0

5

10

15

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Real deposit rate

Real lending rate

Real interest rates (weighted commercial average, %)

…real interest rates are likely to remain negative…

22

Looking forward…

- Inflation likely to remain high in next 1-2 years.

- Coordinated policy response may help to alleviate some of these pressures.

- Urgent review of CPI needed to assess cost of living and assist business in making informed investment choices.

23

c3. Impact of LNG on Business: When and how big?

24

Sovereign Wealth Fund arrangements have now been finalized - Key features:

- Stabilization Fund, Infrastructure Fund, Savings Fund;

- Offshore to prevent excessive exchange rate appreciation; and

- Expenditures channeled through budget processes.

What impact will LNG have on business opportunities in PNG?

25

‘Myth’ 1 - LNG will double PNG income by 2020

Contribution of LNG to real GDP (Millions Kina)

0%

5%

10%

15%

20%

25%

30%Ja

n-12

Jan-

14

Jan-

16

Jan-

18

Jan-

20

Jan-

22

Jan-

24

Jan-

26

Jan-

28

Jan-

30

Jan-

32

Jan-

34

Jan-

36

Jan-

38

Jan-

40

% Impact of LNG on Real GDP

26

Once profit repatriation occurs…

Destination of LNG Production Value (Millions Kina)

0

5,000

10,000

15,000

20,000

25,000

30,000

Impact of LNG on Nominal GDP

LNG production value onshore

LNG production value repatriated

27

the impact of LNG on national income will be much smaller.

0%

5%

10%

15%

20%

25%

30%Ja

n-12

Jan-

14

Jan-

16

Jan-

18

Jan-

20

Jan-

22

Jan-

24

Jan-

26

Jan-

28

Jan-

30

Jan-

32

Jan-

34

Jan-

36

Jan-

38

Jan-

40

% Impact of LNG on Nominal GNI

% Impact of LNG on Real GDP

Contribution of LNG to real GDP Growth (Millions Kina)

28

…whilst payments to private enterprise will likely peak in 2013

Distribution of LNG induced domestic economic activity (Millions Kina)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Tax to Government Commercial Payment

29

‘Myth’ 2: LNG solves all of Government’s fiscal challenges

Source: ACIL Tasman, 2011 Budget, Treasury Officials.

Tax and Royalty Revenue from LNG Project (Millions Kina)

0

500

1,000

1,500

2,000

2,500

2013 2014 2015 2016 2017 2018 2019 2020

ACIL Tasman (2009)

2011 Budget (2010)

Unofficial (2011)

25% increase on 2011 Total Revenue and Grants

30

Long run optimism, but significant medium term fiscal challenge.

Estimates of Government Revenue (Millions Kina)

LNG Revenues to Government

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

Kina, million

Stagnant government revenue

till 2015

Decline in concessions

31

Conclusion

- Optimistic macroeconomic outlook.

- But significant threats emerging.- Inflation - LNG induced expectations

- Long term challenge is to ensure future growth does not become siloed in mining

32

Q&A Session

Contact: abatten@adb.orgWebsite: www.adb.org/pnrm

Thank you

Business begun hiring again…

33

PNG Formal Sector Employment Index (Quarterly % Change)