Papua New Guinea 'PNG' is located just north of Australia in the Asia-Pacific corridor next to Indonesia. PNG is a developing country rich in natural resources home to a relatively small population of 5.17 million. Since 1997, economic and social conditions have been quite turbulent and challenging at times as Papua New Guinea's economy has technically entered a depression during this time frame. Their national currency, the 'kina' has experienced steady depreciation versus the USD since the government decided to float the currency in 1995.
POLITICS: independence in 1975, previous to this date Australia administered Papua New Guinea. There is a sad history of political violence within PNG 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 and Prime Minister Sir Mekere Morauta of The People's Democratic Movement is now the official opposition.
Political risk overall is high as further risk is encountered within the military as mutinies have taken place in protest to defense spending cut backs. In Bougainville, Papua New Guinea in 1988, civil war broke out over ownerhsip of the Giant mine which was a major contributor to PNG's economy. A cease fire was declared in 2001 after thousands have been killed in fighting. Political strife has greatly impacted PNG's economy as the Panguan gold/copper mine was abandoned as well. Canadian global miner Placer Dome had gold mining operations interrupted during summer 2002 from political protests and violence.
ECONOMY: Papua New Guinea has experienced a prolonged economic recession since the 1997 Asian financial crisis coupled with low commodity prices and drought. This Pacific nation is currently stabilizing with stronger real GDP growth estimated at 1.1 percent for year 2003 from higher oil & global commodity prices and containment of money supply growth. Papua New Guinea does however remain vulnerable to external economic shocks. The recent difficult economic times for PNG have resulted in IMF and World Bank assistance in order to help restore confidence and stabilize the kina. The new government is continuing with privatization policies and is trying to stabilize the fiscal budget deficit position. The collapse of the kina over the last few years has increased inflation and increased the cost of living considerably. 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 77 percent of the working population. Mining (gold, copper, etc.) and oil account for 72 percent of exports and 25 percent of GDP.
Economic Statistics
GDP fell 3.4 percent in 2001, year 2002 was flat growth. GDP as measured by purchasing power parity is at $12.2 billion USD (2001) reflecting in GDP/capita at $2.400 USD (2001). Inflation 2000 at 15.6 percent, 2001 at 9.3 percent, 2002 at 12 percent. Total public debt to GDP is moderate to high at 68.3 percent. A key problem for PNG is that the current account has remained in persistant deficit for a long time for non-mineral activities. However, the overall current account fortunately has recorded surpluses of 5 to 10 percent of GDP although it slightly fell 0.8 percent in 2002. The capital account deficit remains as many citizens prefer to invest abroad. The fiscal account is also in deficit at 2 percent for year 2002, 2001 at 3.6 percent deficit. External debt (2000) at $2.6 billion USD. 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 PNG 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 PNG economy is currently starting to slowly improve as water levels in the Fly river are now okay thus aiding the export of copper ore concentrate. The PNG authorities should also look to expand PNG's rich resources in the forestry and fisheries industries. GDP growth for 2003 for PNG is estimated at 1.1 percent with CPI inflation in at 9.3 percent. Medium forecast for 5 years is positive reversing trend with GDP growth at a positive 1.6 percent and CPI inflation at 5 percent. The economy is at bottom and will now return to slow gradual growth reflecting in an upswing in the kina. Higher oil prices will return the current account to surplus since PNG is a net oil exporter. The government has recently announced plans to privatize some public industries such as banking but more importantly revealed that the corporate tax for new petroleum products has been reduced to 30 percent.
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 difficulites for the cocoa and coconut sector. PNG is on the brink of an AIDS/HIV crisis with 1 percent of the population is now infected but high risk behaviour may increase this figure drastically.
BANKING SYSTEM: Bank of Papua New Guinea is the country's central bank. As of January 2003, interest rates are at 14.5 percent although real interest rates are low when subtracting the inflation component. Current monetary policy supports higher nominal rates to reign in inflation and to provide support for the kina. Net reserves as of year-end 2001 including gold were at $442 million USD and are currently increasing due to high world oil prices.
REGIONAL: Australia, Indonesia, Asia
Stability risk is high in Indonesia offset with a very stable Australia to the south. Presently, Australia sends anywhere from $190 million to $300 million USD/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 source for PNG's valuable resource exports including copper, lumber and food products particularly the huge consumer markets of India and China.
KNOWLEDGE: Papau New Guinea's government should look to the mining industry as a key platform in the nation's economic recovery. Although PNG terrain is rugged, mountainous making it difficult for communication and infrastructure requirements, the nation is rich in natural resources particularly gold. Although the terrain makes it more expensive for mining, the collapse in the kina will help to offset these costs with lower real labour costs compared to mining in many other countries with a stronger currency. The nation is rich in geology and has the capability to increase mining revenue tremendously. At present, copper and gold mining earn 60 percent of export earnings for PNG. Prime Minister Somare said recently that his new government is serious about attracting new mining investments and he plans to abolish the profits tax for mining.
CURRENCY: ISO symbol 'PGK', kina. At time of review on January 20, 2003, the kina had an exchange value of 3.94 PGK to 1 USD or equivalent to 25.3 US cents. The kina currency crisis has been unfolding since 1997 reflecting Papua New Guinea's resource dependent economy and the collapse of 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. Several factors assisted in this currency collapse including drought which prevented exports of copper ore concentrate from the OK Tedi Mining operation as shipping lanes were impaired due to the affects from El Nino. Further, closure of oil fields, implementation of the VAT (value-added tax), persistant budget deficits, higher government spending & management difficulties, drop in value of exports of coffee due to global depressed prices and threats made against the World Bank over forestry conversation plans. These culminating events have skyrocketed prices & inflation as the kina collapsed to offset the impact of these economic shocks.
CURRENCY HISTORY: the kina was introduced in 1974, one year before national independence. At that time, the kina was pegged to the USD at par and stayed at that valuation except a one time 10 percent devaluation until 1995 when the kina was then floated. Since 1997, the kina has crashed in value. Historical quotes 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.
CURRENCY FORECAST: off the bottom, slow gradual appreciation to take place. One year forecast by BI.C is for the kina to appreciate to 30 US cent with medium term outlook to the 40 US cent marker. When compared to regional currencies such as the New Zealand dollar trading at 54 US cents and the Australian dollar presently at 58 US cents, the kina should trade in a range that is at a discount of say 25 percent to these larger more mature and wealthier economies. The current currency crisis is a reflection of the current mismanagement in addition to several unfortunate circumstances such as drought as mentioned. Possible short term ramifications to maintain a floor value for the kina include restrictions on capital flows or perhaps re-peg the kina to a hard currency such as the Australian dollar. Potential for Australian dollarization in the long term is an option for Papua New Guinea. Float. UPDATED: January 20, 2003
