PAUL FLANAGAN | PNG Economics
CANBERRA – Papua New Guinea’s supplementary budget, due out this week, is a key document for rebuilding investor confidence. Can it demonstrate the resilience of the great PNG Hunters win on Sunday?
There has been encouraging news over the last few weeks from new Treasurer Charles Abel. This included a commitment to better processes of consultation, better transparency and indication of a willingness to cut electoral funds.
The sale of the Oil Search shares, though, was an awful initial mistake.
The PNG investment conference in Sydney earlier this month was also an opportunity to build investor confidence in PNG. How did it go?
In an earlier article I suggested three key questions for potential investors. Here are my answers.
PNG’s business stance
There was a strong sense that the new government was taking a much more pro-business stance than its predecessor. This was more inclusive of the non-resource sector including agriculture, tourism and other investment options.
I was pleasantly surprised by planning minister Maru’s presentation. He stated the new government’s first priority was economic growth and that the government recognised that it needed the private sector to help generate this growth.
There was probably too much emphasis on import replacement relative to export opportunities but overall the messaging was very good.
However, there is a need for better information to be provided as current figures being quoted are simply inaccurate (such as a greatly exaggerated level of rice imports).
The governor of the central bank was less impressive. The objectives of higher and more diversified growth are commendable; however there was no indication of any action to address a major barrier to growth caused by the exchange rate being fixed at too high a level.
The central bank has the simplest lever to help rebuild confidence in the economy but it is failing to use it.
Rebuilding confidence and helping growth would be greatly assisted by moving to a more competitive exchange rate and freeing foreign exchange restrictions – see here.
And the governor’s focus was on import replacement rather than an export orientation. PNG’s long-term potential needs more of an outward orientation to the possibilities of the Indo-Pacific region. And this means thinking about exports even more than import replacement.
The panels from businesses operating in PNG were generally reassuring, especially over medium-term prospects. There is nothing to match the views of those with skin in the game.
There were also practical panels on the legal obligations of investors as well as pragmatic issues such as dealing with health challenges in PNG.
Money in, money out?
There is no doubt that a very major challenge facing existing businesses in PNG is that they cannot get their money out. This is a major concern for any investor, new or old.
The inability of businesses to get money out also leads to many distortions in the economy. Ironically, this has some benefits for the government as it encourages businesses to park their money in government securities while waiting.
So what are my peers doing?
This was probably the most depressing element of the conference. Not so much in what was said, but in actions on the ground. There were only about 200 people at the conference. Even though attendance was at senior levels, one would have hoped for many more.
When looking at government portals to encourage investment in PNG, such as the Investment Promotion Authority, it is a concern that economic and investment information hasn’t been updated over the last few years and that the once commendable online registration processes are currently offline.
There would seem to be easy fixes to improve the way PNG presents itself to investor peers. It is still not clear to me why there was another PNG investment conference held in Brisbane in August. A more unified approach would be helpful, along with some additional assistance to the Investment Promotion Authority.
There was a fascinating session on other investment possibilities in the Pacific. The Fiji presentation was particularly notable in that it seemed to have very few of the major challenges facing PNG.
However, as noted by businesses that were operating in both PNG and Fiji, the advantage of PNG is the potential upside of a much larger market (eight million people in PNG and just under one million in Fiji).
Overall, the new PNG government still has some way to go to convince new investors that the medium to longer-term opportunities are worth the risks demonstrated over the last few years.
There are some positive noises from the new government including from the new Treasurer and Planning Minister. But the central bank could be doing much more to promote investment and growth by correcting the current foolish exchange rate policy.
The 2017 supplementary budget, and more importantly the 2018 budget due in November, will more clearly demonstrate whether investors can be confident that PNG has a credible path out of the current mess.
Consistent messaging between the Treasurer and prime minister will be important, as will be transparency on the real state of government finances (including state-owned enterprises such as Kumul Petroleum and the real costs of the Oil Search share purchase).
Let’s hope economic policy over the next few months does as well as the PNG Hunters.