Papua New Guinea: A wealth of energy

Glowing assessments of Papua New Guinea's economic outlook see natural resource wealth leading growth for this year, with positive implications for the country's broader development. However, external factors threaten to post challenges to a major liquefied natural gas (LNG) project.

A bi-annual report on developing East Asian economies released by the World Bank in late November has predicted that Papua New Guinea's economic growth will be close to 10% in 2011. Real GDP growth is estimated to have picked up from 5.5% in 2009 to 7% in 2010, amounting to $14.93bn.

According to the World Bank, the expansion has been spurred by three main factors: foreign-investment funded construction projects; soaring prices for Papua New Guinea’s exports; and bullish government spending.

“The sectors of the economy most directly impacted by these factors – particularly construction, road, air and sea transport, storage and communications – are expected to expand by as much as 20% in 2011,” the bank reported. “This strength is spilling into other sectors in the economy, thus creating a broader dynamic."

Exports are currently dominated by mineral deposits, including copper, gold, and oil, which account for nearly two-thirds of earnings and reached $5.98bn in 2010.

However, natural gas reserves amount to an estimated 227bn cu metres, with US-based firm Exxon currently developing an LNG plant in in the southern highlands and western provinces to tap the resource. Expected to produce 6.6m tonnes per annum, the project is a joint venture between Exxon Mobil; Oil Search, Papua New Guinea’s largest oil and gas producer; Australian firm Santos; Japan's JX Nippon Oil and Gas Exploration, a unit of JX Holdings; and the Papua New Guinea government.

While the World Bank warned in its November report that the government must be wary of "a deteriorating and more uncertain global outlook" that poses risks for the prices of Papua New Guinea’s exports, recent developments in the price of the Australian dollar have underlined the vulnerability of the expected LNG export boom to external shocks.

Indeed, in late November Exxon's partners told international media that the project was facing a cost increase of over 4%, to $15.7bn, due to the impact of a stronger Australian dollar on capital costs. However, they added that it was still on track to achieve its first sales in 2014.

While confidence in the potential of natural resources to strengthen the economy has spurred economic growth, it has also raised the possibility of high inflation, however the government has been making adjustments in recent months to keep this in check.

The central bank, the Bank of Papua New Guinea, raised the policy rate from 7% to 7.75% in September 2011 and tightened banks’ reserve requirements. It also increased its issuance of central bank bills, to PGK157.2m ($73.8m) in the first quarter, with the intent of absorbing excess liquidity in the banking system.

The administration will likely keep on an eye on the LNG project as confidence in it and other resources saw large increases in government spending in 2011. The 2011 budget, equal to PGK10bn ($4.7bn), was the country’s largest since independence in 1975, but the draft 2012 budget, at PGK10.6bn ($4.98bn), is expected to surpass that.

The 2012 budget focuses on free education, national elections, and improvements to its road infrastructure. The LNG project is expected to continue to drive overall economic growth in 2012, which the government forecasts will decline slightly to 7.8%, lower than the World Bank’s projection, from its end-2011 estimate of 8.9%.

Indeed, the November World Bank report forecasts that GDP will dip to 6% next year, while mineral related taxes and dividends are forecast to fall from about PGK1.6bn ($751.2m) in 2011 to PGK356m ($167.1m) in 2015. Some economists argue that the outlay is sustainable, and wise, for the long-term.

Matthew Morris, a research fellow at the Crawford School of Economics and Governance and deputy director of the Development Policy Centre at ANU College of Asia and the Pacific, said that some may feel the government should be running a budget surplus to mitigate the risk of revenue losses later. However, he added, "with LNG revenues expected to come in 2018, and pressing development constraints, Papua New Guinea needs to spend more now".

With plans under way to establish a sovereign wealth fund that should mitigate the risks of banking so much growth in the country’s LNG project, and continued government spending across the board, Papua New Guinea is on the right track for economic diversification and growth in 2012.