Director of the Australian National University’s Development Policy Centre, STEPHEN HOWES, has analysed the results of the most recent Business Advantage International’s long-running annual ‘PNG 100 CEO Survey’. Here are his conclusions…..
CANBERRA - Every year since 2012, Business Advantage International has run a survey of Papua New Guinea business executives.
Called the ‘PNG 100 CEO Survey’, it is said to be a survey of ‘senior executives from a representative sample of PNG’s largest companies, across all sectors of the economy.’
While I am not in a position to judge how representative is the sample surveyed, the results are certainly illuminating. This article summarises the trends from these surveys, and draws out three lessons.
- The last seven years have been full of surprise for PNG business
A value above zero indicates that, for a majority of businesses, performance exceeded expectations in the year shown.
A value below zero indicates that a majority under-performed.
We all know that the last few years have been a boom-bust roller-coaster, but what is interesting—and a good indicator of the severity of this business cycle—is just how many businesses have been surprised, first on the upside then on the down.
In the boom years of 2011 and 2012, many businesses did better than expected. But from 2013 to 2016, businesses were surprised by the downturn on the economy, experiencing underperformance against expectations, especially in 2014 and 2015.
It is only last year that performance and expectations were, on average, aligned.
To give more concrete numbers: in 2012, only 15% of businesses did worse than expected, but in 2015 only 13% did better than expected.
Last year, exactly the same proportion did better and worse than expected: 37.5%.
- PNG businesses sound positive
The index is positive every year, and often quite large, indicating that, every year, more businesses were planning to do better, and invest and employ more in the coming year than the contrary.
In fact, we know this often hasn’t happened. For example, formal sector employment has fallen every year since 2013.
Whether PNG businesses really are as optimistic as they say, or whether they think they need to sound positive to bolster confidence is one of those imponderables.
- For the last three years, the main problem identified by businesses is foreign exchange
Every year, Business Advantage asks executives to list their firms’ top hindrances or constraints. Over the years, four constraints repeatedly appear at the top of the list: security, skills shortages, utilities/telecoms, and, more recently, foreign exchange.
The figure here shows the average ratings these four business constraints have received, on a scale from 1 to 5. In 2012 and 2013, the top three constraints were security, skills shortages and utilities/telecoms.
In 2014, foreign exchange joined the top four, in third place, and in 2015, it was in third place. But since 2016 foreign exchange has been the top constraint listed by business, and by an increasingly large margin.
PNG’s foreign exchange woes are increasingly well known, but what is surprising is that they have continued for so long.
This survey of business adds to the evidence that they are the prime culprit for the economic downturn (for example, falling employment levels).
If businesses can’t import, they are not going to produce and employ. And if they can’t get their profits out, foreign investors are going to stay away.
The IMF put it well in its 2017 report on PNG: “The main impediment to private sector development is macroeconomic policies. The main obstacle to business activity and investment are difficulties in obtaining foreign exchange.”
The government’s solution to foreign exchange shortages is to borrow in dollars; the Opposition’s policy is to run down foreign exchange reserves.
But both are temporary and limited fixes that will quickly be exhausted. The exchange rate is now set by the Bank of PNG, and the nominal exchange rate has been virtually unchanged for over two years.
The only real solution is a devaluation of the exchange rate. I won’t go into all the arguments for and against here. At this stage, the point is simply that there is no other way to resolve the foreign exchange crisis.
Again, the IMF has it right: “[We] recommend that the Kina be allowed to depreciate to eliminate the current over-valuation of the currency, end the FX [foreign exchange] shortage, and promote external competitiveness.”
It is quite remarkable that traditional business concerns such as security, skills shortages and infrastructure have been displaced by concerns around foreign exchange availability.
How long will it be before government bites the bullet, and devalues the exchange rate to address what has been for the last three years the top concern of PNG business?