Papua New Guinea is located just north of Australia in the Asia-Pacific corridor next to Indonesia. Papua New Guinea consists of a mainland the size of California in addition to approximately 600 offshore islands making up the country. It is a developing country rich in natural resources home to a relatively small population of 6.3 million. Since 1997, economic and social conditions have been quite turbulent and challenging at times as Papua New Guinea's economy has flirted with depression. The national currency, the 'kina' has experienced steady depreciation versus the USD since the government decided to float the currency in 1995.
The majority of the population is rural; the terrain is mountainous jungle. Papua New Guinea is considered the world’s most heterogeneous society with upwards of over 700 plus language dialects spoken with many villages having each their own culture and traditions. Papua New Guinea’s thousands of villages create an environment for Tribal warfare with the variance in customs. Conflict between villages at times has been historical in nature and perhaps worse now with the introduction of modern weapons.
In the capital city of Port Moresby, unemployment has been reported as high as 60 percent. The city itself has been ranked one of the most challenging as crime is high due to gang conflict. A very high murder rate, robbery and rape make Port Moresby a very cautious city for day to day living.
POLITICS: there is a sad history of political violence within Papua New Guinea more recently ending in 1997 after a 9-year secessionist revolt which claimed 20,000 lives. Again during the June 2002 elections, 30 people were killed in political violence. The election outcome resulted in former Prime Minister Sir Michael Somare, the founding father of modern Papua New Guinea of the National Alliance Party regaining power where he remains at the helm to this day. Political risk overall is high. For a complete assessment on the country’s political dynamics, please contact us at BankINTRO.com.
ECONOMY: small open economy. Papua New Guinea has experienced a prolonged economic recession during the late 1990’s at a time of the Asian financial crisis coupled with low commodity prices and drought. The economy has performed well over particularly over the last 5 years with windfall revenues from the upswing in the mineral extraction industry. A significant detriment is the nation’s high population growth rate at 2.5 percent. The majority of the people, 85 percent live in rural areas and survive on subsistence farming, agriculture accounts for 25 percent of GDP and employs 75 percent of the working population. Mining (gold, copper, etc.) and oil account for 72 percent of exports and 25 percent of GDP. Oil reserves are small at 88 million barrels whilst natural gas reserves are huge standing at an estimated 227 billion cu meters. It has been reported that Papua New Guinea has been negotiating for financing, land agreement and other infrastructure issues with regards to a new proposed 10 billion USD Liquefied Natural Gas plant. If this development does indeed take hold, it would be a massive boost to the economy.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 13.2 billion USD with corresponding GDP per capita at 2,200 USD. Market GDP stands at 8.1 billion USD (2008). GDP growth for year 2008 came in at 7.2 percent, year 2009 projected at 4 percent, year 2010 at 3.7 percent. Inflation quotes include 2008 moderately high at 10.8 percent due to the then rapid rise in crude oil prices, June 2009 inflation at 6.7 percent, year 2009 at 8.2 percent, year 2010 estimated at 5 percent. Other years for inflation for comparison include year 2000 at 15.6 percent, 2001 at 9.3 percent and 2002 at 12 percent. Total public debt to GDP has fallen dramatically now down to 32 percent (2008). The overall current account is in surplus (year 2005-08) although 2009 has slipped into deficit. The trade component is showing a healthy 2.8 billion USD surplus in 2008 although it has declined to around the 600 million USD mark so far in 2009. The fiscal account is close to balance for 2009, the fiscal account had healthy surpluses in 2008 at 4.5 percent of GDP and 2007 at 8 percent reflecting bonanza windfall revenues from mining. Unfortunately, the collapse in value for the kina will make it more expensive to debt service foreign currency issued debt.
Economic Forecast
The upswing in global commodity prices will help Papua New Guinea rebound quicker and will help appreciate the kina as the world now enters a multi-year bull market in gold bullion and base metals. The authorities should also look to expand Papua New Guinea’s rich resources in the forestry and fisheries industries.
POSITIVE: rich in undeveloped natural resources, mining and oil exploration is underway by foreign companies, oil refinery development in Port Moresby currently in progress by InterOil. CONCERN: El Nino and droughts have created difficulties for the cocoa and coconut sector. AIDS/HIV crisis with 1 percent of the population is now infected but high risk behavior may increase this figure drastically – highest infection rate in S.E. Asia & Pacific; other infectious diseases – tropical climate, high infant mortality, overall life expectancy.
BANKING SYSTEM: Bank of Papua New Guinea is the country's central bank. As of November 2008, the country’s facility interest rates traded at 8 percent. Current monetary policy supports higher nominal rates to rein in inflation and to provide support for the kina. Foreign exchange reserves at year-end 2008 were at 2.1 billion USD.
REGIONAL: Australia, Asia
At present, Australia sends anywhere from 190 million to 300 million USD per year in aid to Papua New Guinea. The collapse of the kina has had an even more dramatic fall in relative valuation when compared to the Australian dollar. The kina use to be worth 50 percent more than the Australian dollar as it is now worth less than half its value. Asia will be an important market in the future for Papua New Guinea’s valuable resource exports including copper, lumber and food products particularly the huge consumer markets of India and China.
KNOWLEDGE: Mining Industry for Future Prosperity
In 2003, Papua New Guinea ranked as the world’s 11th largest producer of gold. The country is home to bonanza gold resources as the country is located on the Pacific Rim of Fire. To date, the region is the site of 5 world class gold deposits with several more untapped gold discoveries quite likely. The wealth to be created from this resource has the potential to boost Papua New Guinea to a whole new economic class if prudently managed. Further to gold and other mineral resources, Papua New Guinea itself has further untapped potential in hydrocarbon resource yet to be explored.
Papua New Guinea's has taken notice and accordingly implemented favorable acts to help promote and protect foreign investors within the country’s mining sector. This sound affirmation of the mining industry is a key platform for Papua New Guinea’s economic advancement. Although the terrain is rugged, mountainous making it difficult for communication and infrastructure requirements, the nation is rich in natural resources particularly gold and has the capability to increase mining revenue tremendously. At present, copper and gold mining represent 25 percent of GDP output for the country and 50 percent of export revenue (2003).
CURRENCY: ISO symbol 'PGK', Papua New Guinean kina, kina. At time of review on November 13, 2009, the kina had an exchange value of 2.611 PGK to 1 US-dollar (USD) equivalent to 38.2 US cents and/or 3.883 PGK to 1 Euroland euro (EUR). The central bank does have certain exchange controls in place. Floating exchange rate regime is presently in use.
CURRENCY HISTORY: the kina was introduced in April 1975 when it replaced the then circulating Australian dollar (AUD) at par (1.0). At that time, the kina was pegged to the USD at par and stayed at that valuation except a onetime 10 percent devaluation until 1995 when the kina was then floated. During the late 1990’s, the kina then crashed in value reflecting Papua New Guinea’s resource dependent economy at a time of low commodity prices. The currency crisis heightened with political violence in the summer 2002 until the kina hit bottom in October 2002 at all time low of 19 US cents. The kina collapse was directly impacted by these economic shocks.
Historical exchange quotes for the kina include year 1995 average at 78 US cent for 1 PGK, 1997 at 69 US cents, 1998 at 48.5, 1999 at 39.5, 2000 at 36.2, 2001 at 29.6, January 2002 at 27, October 2002 at 19 US cents, January 2003 at 25.5, January 2004 at 30, January 2005 at 32, January 2006 32.3, December 2008 35.35.
CURRENCY FORECAST: BankINTRO.com’s one year forecast is for the kina to appreciate to 40 US cent with medium term outlook to the 45 to 50 US cent marker. When compared to regional currencies such as the New Zealand dollar trading at 74 US cents and the Australian dollar presently at 93 US cents, the kina should trade in a range that is at a discount of say 50 percent to these larger more mature and wealthier economies. The country’s history of episodes of currency crisis is a reflection of the vulnerabilities inherited in Papua New Guinea’s structure.
The future valuation of the kina will be determined by the nation’s continued success of capitalizing on its rich natural resources, using the royalties to enhance its institutions and reduction in crime, improvement in education and social services to reduce its crippling poverty rate. Previous windfall revenues were in recent years was allocated to a national Trust Fund which started the process of social & infrastructure investments. Papua New Guinea does however remain vulnerable to external economic shocks and a wide array of natural disaster possibilities.
An alternative currency option to further support the kina is for the PGK to be hard pegged to the Australian dollar and/or outright Australian dollarization in the long term is an option for Papua New Guinea. UPDATED: November 13, 2009
