Two articles about Papua New Guinea. The first about it already undergoing economic revival, the second one describes the (rather spectacular) effects on the economy if even a single LNG (liquified natural gas) plant gets constructed. The economy will more double as a result, and this is far from the only plan scheduled or already halfway being realized… We will follow these articles with another post with articles about the LNG plans.

On the brink of success – Papua New Guinea’s economic revival

Author: Aaron Batten July 31, 2008

• PNG is often seen by Australia as a fragile state dependent on foreign assistance with limited economic prospects. It was even described some years back as being on ‘the brink of collapse’. Since 2002 however our 6 million northern neighbours have been experiencing somewhat of an economic revival. While this has been driven by surging commodity prices it has also been underwritten by considerable improvements in macroeconomic and fiscal management. GDP growth rates have been high and the budget has been in surplus for 5 consecutive years – a record for PNG. The question on everyone’s lips however is; is this trend sustainable?
• Last year Patrick Pruatich was appointed Minister for Treasury and Finance, having moved from his previous role as Minister for Forestry. Many feared that this was an attempt by the National Alliance Party to allow them greater access to government funds for pork barrelling in the lead up to the 2007 elections. These fears have not as yet been realised.
• Expenditures remained relatively restrained in the lead up to the election. The Government recorded a budget surplus equal to 1.7 per of GDP in 2007 albeit on the back of continued oil and mining revenues and a 6 per cent GDP growth rate. The current government has also brought national debt levels down from a record 72 per cent of GDP in 2002 to approximately 35 per cent of GDP this year.
• To try and ensure the government doesn’t fall into the trap of previous decades the Treasurer and his Department are currently developing an updated Medium Term Fiscal Strategy (MTFS 2008-2012) to act in conjunction with the Fiscal Responsibility Act (FRA 2006) to make a number of changes to both the revenue and expenditure priorities of the Government and to place restrictions on the extent of its fiscal austerity. The draft MTFS effectively targets an underlying balance for government expenditure which is exclusive of the amount of mineral revenue deemed to be over and above a normal level. The document proposes that any additional revenue which exceeds this amount be allocated in ways which free up resources into the future rather than commit the government to future spending obligations. This includes approximately 60 per cent of additional mineral revenue being used for public investments and 40 per cent for debt prepayment. Whether or not the Government accepts these specific proposals is uncertain but it is certainly talking and thinking about the right issues.
• People are invariably wary of these successes, not least because in the past, commodity booms have led to rapid expansions in government expenditure and on 3 separate occasions a lack of fiscal discipline has brought the country to the brink of bankruptcy.
• None of this should also understate the huge development challenges facing the country. A major threat to the ability of economic success to improve living standards in PNG is rising inflation. Unofficial forecasts put inflation at close to 8 per cent this year, but this is most likely an understatement.
• The Central Bank has been lacklustre in its response to an overheating economy. Real interest rates remain negative (the 28 day CBB rate is about 5.4 per cent) and it has shown little inclination towards reigning in rapidly growing domestic credit levels. The Bank’s foreign exchange reserves are now also at remarkably high levels. Many people have even been suggesting that the BPNG has actually started behaving like a profit making entity rather than a monetary authority. This is a poor performance from an institution which in the past has prided itself on being the bastion of economic stability in an otherwise volatile country. In the Central Bank’s defence, inflation is being largely driven by rising food and oil prices which are set on world markets and hard to curtail. But without adequate monetary responses these effects are being amplified, particularly as the economy steams ahead.
• Another major challenge for PNG is that in spite of the commodity boom and an increasingly development focussed fiscal policy the supply side of the economy has shown minimal response. A couple of resource projects are coming on-line but these were in development prior to the commodity boom. A decline in global demand for these commodities would not only lead to a large scale reduction in foreign exchange earnings but place a disproportionate burden on government revenue. If recurrent expenditures are allowed to grow within the budget this could subsequently lead to another blow out in expenditure levels – as has been learnt by the lessons of the 1990s in particular.
• Poor supply side responses necessitate a renewed commitment by the government to address many of the structural constraints on growth present within the economy. These include, high rates of crime, unreliable and expensive services from basic utilities, poor transportation infrastructure limiting market access, low public sector capacity to provide services, unclear and rigid regulation policies, low levels of human capital, and land tenure issues. These issues have meant that both domestic and foreign investment have remained limited outside of the mineral sector and this constitutes the biggest constraint on the recent macroeconomic success leading to more improvements in development outcomes across the country.

So, they’re not there yet, but if you read economic reports about basically any country there are things listed as challenges or weaknesses. Thing could very well become a whole lot better if the following happens:

Socio-economic benefits from PNG’s coming resources boom are unimaginable
Thursday, 20 March 2008

• This column has generally taken a bullish view of Papua New Guinea’s potential but recent developments are way beyond anything this writer could have imagined even a couple of years ago.By Brian Gomez
• This thought comes to mind following last week’s release by ExxonMobil of an independent study by ACIL Tasman on the economic impact of its 6.3 million tonnes a year liquefied natural gas project in Papua New Guinea.
• No one appears to have predicted that this project alone, as calculated by ACIL Tasman, will more than double the size of PNG’s economy within a mere six years. That translates to an annual GDP growth rate of 15-16%.
• Some projections suggest why the impact will be nothing short of massive.
• ACIL estimates that the country’s oil and gas exports will increase four-fold with the annual value of LNG output estimated at K11.4 billion ($US4.2 billion) compared with oil and gas exports worth K2.6 billion in 2006.
• Tax, levy and royalty payments to the PNG Government and landowners was anticipated to average K2 billion a year in the first 10 years and to rise to K3 billion annually for the remaining 20 years of operation.
• Over the 30-year life of the project, cash flow to the Government and landowners will total K114 billion. Visualise that against a total national budget in 2007 of K7 billion.
• “The scale of the project relative to the current size of the PNG economy is such that the modelling results can only be regarded as indicative estimates,” ACIL Tasman noted.
• The mind boggles at the additional expectation that the InterOil-led consortium, Liquid Niugini Gas, is fast-tracking another LNG venture of a similar scale, in about the same time frame as ExxonMobil.
• The market is anxiously awaiting drilling results from InterOil’s Elk-4 to better ascertain the quantum of the gas resource and if it is adequate for the planned LNG facility.
• Some of the expansionary impacts of LNG will be detrimental to key sectors such as agriculture and forestry. The increased value of the kina, along with other inflationary impacts, will make it much more difficult for them to remain competitive.
• LNG is only one bullish segment within PNG’s evolving resources scenario with an even more dynamic scenario on the minerals front.
• Next year the US$1.3 billion Ramu Nickel project will come onstream, as will Harmony Gold’s Hidden Valley gold-silver mine.
• At about this time Marengo Mining expects to complete a feasibility study for a $US1 billion dollar copper-molybdenum mine with construction possibly being completed as early as 2011, or 2-3 years prior to start-up of the ExxonMobil LNG project.
• This is the same year that Lihir Gold expects its ramped-up mine to become a million ounce-plus annual gold producer following expenditure of nearly $US700 million on a huge autoclave and associated processing facilities.
• Harmony also plans to crank up another billion dollar operation at its Wafi-Golpu project and Xstrata has announced plans to spend $US2.6 billion to commence exports from its Frieda River copper-gold project in 2016.
• After the dearth of projects over more than a decade and a severe rundown in capacity, it is impossible even with the closest scrutiny of reports, such as the latest one from ACIL Tasman, to visualise the incredible socio-economic impacts that will flow from resource sector developments.
• This is a nation where, since independence 33 years ago, most people – some 80-85% of the population – have seen little or no change in their standards of living and subsistence lifestyles.
• For many their lives are about to be transformed in ways no one today is capable of imagining.

Now, what would all these projects mean for demand from the refinery? It could be filled to capacity sooner rather than later, and with fixed cost already incurred, a disproportionate part of such expansion will go to InterOil’s bottom line..