Outlook and Challenges for PNG Economy in 2011

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Papua New Guinea Economy:
Outlook and Challenges
Presentation to:
Port Moresby
Chamber of Commerce and Industry
Dominic Mellor
Asian Development Bank
29 March 2011
Presentation Structure
2
A.
Cost of Doing Business – Inflation
B.
Income Prospects – Drivers of Growth
C.
Risks and Assumptions
D.
Other Issues and Challenges
A. Cost of Doing Business
3
Low official inflation …
Decomposition of CPI inflation (%)
Transportation
16
Other
Food
12
Fuel, rent, electricity
8
4
0
-4
Jun07 Dec Jun08 Dec Jun09 Dec Jun10 Dec
Source: National Statistical Office
4
… 1-2% higher if adjust for rental prices
Annual Consumer Price Index Inflation, 2005Q4 – 2010Q4
16
Official
14
12
Scen1: 20% rental increases in
POM and Lae
10
Scen2: High rental prices and
30% CPI weight for rentals
8
6
4
2
-4
Source: National Statistical Office and ADB Estimates
5
Dec10
Jun
Dec09
Jun
Dec08
Jun
Dec07
Jun
Dec06
Jun
-2
Dec05
0
Trust fund drawdowns yet to be expended?
Fiscal Balance, 2006Q4 – 2011Q4
20
Official
Include trust funds
Non-mineral
10
0
-10
-20
Dec06
Dec07
Dec08
Dec09
Source: National Statistical Office and ADB Estimate
6
Dec10f
Dec11f
Strong Australian dollar but …
Nominal exchange rate, 2009M1 – 2010M12, (Base Index = 100 in 2009M1)
110
100
90
AUD/PGK
USD/PGK
80
70
Ja
n0
9
Fe
b
M
a
Ap r
M r
ay
Ju
n
Ju
Au l
Se g
p
O
ct
N
o
D v
Ja ec
n1
0
Fe
b
M
ar
Ap
M r
ay
Ju
n
Ju
Au l
g
Se
p
O
ct
N
o
D v
ec
60
Source: Bank of PNG
7
… diversification of imports …
Origin of imports from Asia-Pacific, 2005Q1 – 2010Q4, %
100
South Pacific
Emerging Asia
80
60
40
20
0
05
06
07
Source: Calculated by ADB using Bank of PNG data
8
08
09
10
… and substitution helped anchor inflation
Index price of imported and domestic staple, 1979 – 2010, (Base Year = 1977)
1,400.0
1,200.0
Index
1,000.0
800.0
Imported Staples
600.0
Domestic Staples
400.0
200.0
Year
Source: National Statistical Office; ADB Staff Calculations
9
20
05
20
07
20
01
20
03
19
95
19
97
19
99
19
91
19
93
19
85
19
87
19
89
19
81
19
83
19
79
0.0
NFA contributed notably to money growth
Contributions to Money Supply, 2005Q1 – 2010Q4, %
Net foreign assets (NFA)
Net domestic assets
50
16
NFA (in months of imports, rhs)
25
8
0
0
-25
-8
Oct08
Source: Bank of PNG
10
Apr09
Oct
Apr10
Oct
Inflation expected to trend up
Consumer price index inflation, 2005 – 2012, % year-average
16
Headline
Underlying
12
8
4
0
2005
06
07
08
09
10
11f
Note: ADB calculates underlying by variance-weighting CPI subgroups based
on historical volatility
Source: Bank of PNG and ADB estimates
11
12f
B. Indicators of Growth
12
LNG construction boosted growth …
Agricultural and mineral exports, 2006Q1 – 2015Q4, US$ million
12
Agriculture
Mineral
Industry
Services
10
8
6
4
2
0
2006
Source: Bank of PNG
13
07
08
09
10e
… and also strong commodity prices
Agricultural and mining export price and volume, 2004Q4 – 2010Q4
400
Volume (agriculture and log)
Price (agriculture and log)
Dec03=100
Volume (mining and oil)
300
Price (mining and oil)
200
100
0
Dec 04
Dec 05
Dec 06
Source: Bank of PNG and ADB for 2010Q4
14
Dec 07
Dec 08
Dec 09
Dec10f
Supported by other indicators …
140
120
100
80
60
40
20
0
-20
-40
-60
-80
Motor Vehicle Imports
-100
03
04
05
Source: Pacific Economic Monitor
15
06
07
08
09
10
… which are good indicators of growth
10
100
5
50
0
0
-50
GDP Growth (% annual) (lhs)
Motor Vehicle (numbers) (rhs)
-5
-100
03
04
05
Source: ADB Pacific Economic Monitor
16
06
07
08
09
10
Near-term GDP boosted by LNG construction,
commodity prices, strong investor sentiment
Change in real GDP (%)
10
8
6
4
2
0
2005
06
07
08
09
10
Source: National Statistical Office, PNG Treasury, ADB staff estimates
17
11f
12f
… but uncertain medium-term outlook
Agricultural and mineral exports, 2006Q1 – 2015Q4, US$ million
2,000
1,600
Agriculture
Crude oil
Copper
Other (inc LNG)
Actual
Gold
Forecas
t
1,200
800
400
0
200 07
08
09 10e 11f 12f 13f 14f 15f
Source: Bank of PNG and the 2011 National Budget
18
C. Risks and Assumptions


Upside
 2nd LNG project valued at $4 billion starts
earlier then planned
 Higher commodity prices
 Increased mining activities
 Trust fund expenditures ahead of 2012
National Election
Downside
 Further delays in large resource projects
due to landowner compensation disputes
and land access issues
D. Other Issues and Challenges
20
Need for flexible supplementary budget
that allows for funding of rehabilitation
Historical budget revenue forecasts, 2003 – 2010, outturn-to-budget ratio
Mineral revenue
Non-mineral revenue
3
If ratio is greater than 1 then the outturn is larger
than budget target
2
1
0
2003
04
05
06
07
08
Source: ADB estimates using PNG budget documents, 2003 to 2010
21
09
10e
Large flows to social sectors but
stagnated for infrastructure as %GDP
Government expenditure by functional classification, 2002 – 2010, Kina million
Total expenditure (2002 prices, rhs)
%
Infrastructure (lhs)
Health (lhs)
12
8,000
Education (lhs)
6,000
8
4,000
4
2,000
0
0
2002 03
04 05 06
07 08
09 10 11
Source: ADB estimates using PNG budget documents, 2003 to 2010
22
Other Issues and Challenges





Risk of accumulating public liabilities until
resource revenues are realized
Agree SWF working group findings
Welcome decision to move new trust funds
to BPNG. Eventually should consolidate all
existing trust funds with SWF
Delay non-priority projects until after peak
construction phase of resource projects
BPNG to balance need to accumulate
foreign reserves against impact of liquidity
injection
Thank you
Contact: [email protected]
Website: www.adb.org/pnrm
Pacific Economic Monitor – Mar, Jul, Dec
Asian Development Outlook – Apr, Sep
24
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