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PNG Economic Update A revised outlook for business in 2012

PNG Economic Update A revised outlook for business in 2012. Aaron Batten, Country Economist Port Moresby Resident Mission. July 18 th 2012. The state of the economy and its near term outlook . Business confidence is riding a wave of optimism…. Expected Capital Investment in 2012 .

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PNG Economic Update A revised outlook for business in 2012

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  1. PNG Economic Update A revised outlook for business in 2012 • Aaron Batten, Country Economist • Port Moresby Resident Mission • July 18th 2012

  2. The state of the economy and its near term outlook

  3. Business confidence is riding a wave of optimism… Expected Capital Investment in 2012 Profit Expectations for 2012

  4. …and the ‘Pacific tiger’ is likely to again exceed growth forecasts…

  5. …with surging private sector employment growth so far in 2012.

  6. Why has this period of economic growth been so good for business?

  7. Growth has supported a wide range of businesses because it has been led by the non-mineral sector… Employment Growth by Sub-Sector (%, per annum) GDP Growth by sector (per cent per annum, average)

  8. …but non-mining sector has reached the peak of this economic cycle… GDP Growth by sector (%)

  9. …as the FDI funded construction binge winds down… GDP Growth by sub-sector (%) 50 Construction Transport and communications 45 40 35 30 25 20 15 10 5 0 2003 2005 2007 2009 2011 2013 2015

  10. …which will change the composition of future growth. (Contributions to growth by sector)

  11. What macroeconomic trends will impact on business conditions over the next 2-3 years?

  12. Euro instability is unlikely to affect already stagnating commercial lending. (Private sector lending growth, Quarterly, %) (Private sector credit, % GDP)

  13. But commodity exports make economies vulnerable. PNG is no exception. (Commodity prices, Monthly, $US)

  14. Lower agricultural prices will hurt rural incomes in particular. (Agricultural commodity prices, Monthly, $US)

  15. FDI will remain strong in the short term, but may be offset by increasing offshore investment… (Foreign Direct Investment, USD, millions) 2,000 Inward FDI - Total (IMF) 1,800 Inward FDI - from Australia (ABS) 1,600 Outward FDI - to Australia (ABS) 1,400 1,200 1,000 800 600 400 200 0 2001 02 03 04 05 06 07 08 09 10 11 12 - 200

  16. The Kina will stay high but has likely peaked. (Kina exchange rate, FX/Kina)

  17. Official inflation has dropped significantly this year… (Official Consumer Price Index growth, Quarterly, %)

  18. …but these figures probably exaggerate the real situation. (Official and alternative Consumer Price Index growth, Quarterly, %) 20 Official Adjusted for rents, housing weight and education subsidy 15 10 5 0 - 5 Mar - 05 Mar - 06 Mar - 07 Mar - 08 Mar - 09 Mar - 10 Mar - 11 Mar - 12

  19. What macroeconomic policies should business support?

  20. BPNG has been effective in sterilizing large capital inflows... Source: IMF Article IV, 2012

  21. …but business should expect a more austere government over the next 2-3 years… (Government Revenue, Kina, millions, constant prices)

  22. ..and support government’s need to correct its declining revenue base… (Government revenue to GDP, %)

  23. ..to help foster greater levels of public investment. (Government revenue, per capita) USD per capita 2,000 LNG contribution by 2028 LNG contribution by 2015 1,600 Foreign Aid 1,200 Domestic Revenue 800 400 0

  24. Ultimately, non-mineral growth requires a reinvigoration of microeconomic reform. (Critical issues facing business, CEO Survey)

  25. The outlook • PNG’s macroeconomic fundamentals remain sound but the next 12-24 months will see a more moderate rate of economic growth. • More importantly for business, the underlying sources of economic growth are about to change quite significantly. • This will have an impact on business conditions and growth in the non-mineral sector.

  26. The outlook • Eurozone instability and slowing China is lowering commodity prices creating pressure on Government spending. • This will restrict much needed revenue growth but unlikely to jeopardize macroeconomic stability. • The exchange rate has likely peaked whilst short term inflationary pressures are also easing. • As revenues shrink, greater austerity is needed to protect funding for existing assets and prevent another round of inflationary pressures.

  27. Thank you.Asian Development Bank6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines Tel + 632 632 4444  Port Moresby Resident Mission Level 13, Deloitte TowerPort Moresby, PNG

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