OBG talks to Stan Joyce, Managing Director, South Pacific Brewery: Interview

Interview: Stan Joyce

To what extent have manufacturers been affected by the foreign exchange squeeze?

STAN JOYCE: This is certainly a matter of concern, but unfortunately not a recent one, as it goes back to the central bank’s intervention in 2014 when it made efforts to stabilise the kina with foreign currency trading bands. Even though this was a necessary measure at the time, it has certainly affected the manufacturing sector as much as any other industry, due to the fact that making expansion plans and accessing new equipment and products are both becoming increasingly difficult when there are billions of kinas waiting to be converted to US dollars.

This rationing is certainly causing distress in many business houses today. Clearly, the blame should not be placed entirely with the central bank, which is standing behind its decision, as the persistence of soft commodity prices on the international market had a huge effect on Papua New Guinea’s economy. Furthermore, Ok Tedi, the state-owned mining firm and traditionally one of the country’s largest foreign exchange earners, remained closed for over seven months. These external issues were virtually impossible to predict or control from PNG. Personally, I believe that we have seen the worst of the repercussions already, as normal trade flows will most likely improve the situation in the second half of 2016. In PNG, like in many other export-based economies, the financial year should be looked at as if it were composed of two separate halves, where the second is characteristically healthier and fuelled by the receipts of the agriculture sector, particularly coffee.

Could the devaluation of the kina be beneficial to manufacturers in PNG?

JOYCE: Perhaps foreigners on US dollar contracts think in these terms, but I do not see the PNG economy as stable or insulated enough to withstand the shock of such a move. It is true that the Australian dollar has lost a lot of ground on the US dollar over the last couple of years, but we are talking about a highly diversified economy that was able to reap the benefits without suffering many of the negative impacts. Suddenly, Australia became a much cheaper place to visit, which led to a considerable increase in tourism arrivals and a positive impact on the service sector, while food exports, for instance, became even more competitive. The focus in Australia shifted quickly from the extractive sector towards farming. If the same scenario occurred in PNG, the people would suffer many hardships. Unfortunately, foreign investors are the ones suffering most in this foreign exchange squeeze. One also wonders how long this situation can be sustained without putting the commercial rating of the country at risk.

How has the beer market been performing?

JOYCE: The traditional market shrank by 5% year-on-year in 2015, but by as much as 20% in 2014. This was to be expected, as the growth of the middle class pretty much came to a halt after moving steadily upwards starting roughly in the year 2000. Expectations for the long term remain high, however, and at the moment the industry is looking at the possibility of brewing a new cassava-based beer, in a move that could create a new boom for farmers in PNG. As much as 30% of imported malted barley could be substituted with cassava starch from PNG, and using ingredients closer to home would also be an answer to the shortage of foreign exchange.

Nevertheless, real change for the industry will come when the cost of doing business in PNG decreases, as electricity and water continue to be three times more expensive than anywhere else in the world. For the time being, we need to get used to the fact that another stagnant year is approaching in 2017, with the hope that the next wave of investment in the energy sector will bring another economic windfall.