What business leaders expect from: PNG’s chairmanship of APEC in 2018

Papua New Guinea’s chairmanship of APEC in 2018 comes at a time when the Pacific Island nation is still grappling with a foreign exchange shortage and high public debt, as well as persistent problems with law and order. Despite these challenges – and, in some quarters, grumblings that hosting APEC 2018 is an unnecessary drain on public finances – OBG’s Business Barometer: PNG CEO Survey indicates that a majority of chief executives see the country’s chairmanship of the multilateral organisation in a positive light. Indeed, 77% of business leaders who participated in our survey feel that APEC 2018 will have a positive or very positive effect on the economy.

OBG conducted the survey with 112 C-suite executives in face-to-face meetings to gauge sentiment on a range of business indicators. In February 2018 we also held a panel discussion with local business and political leaders in Port Moresby to explore the economic opportunities arising from APEC.

While APEC is bringing some short-term economic benefits – not least in the construction, tourism and hospitality sectors – the main positive effects will be seen in the longer term if the country can capitalise on the visibility and networking opportunities associated with chairing an organisation featuring the world’s top-three economies and other emerging powers.

CEOS Anticipate Economic Rebound

On the back of falling commodity prices and ballooning public debt, GDP growth contracted from 10.5% in 2015 to 2% in 2016, according to the Asian Development Bank (ADB), before recovering slightly to 2.2% in 2017. However, according to our editorial manager in Port Moresby, who conducted the survey on the ground, CEOs generally feel that the worst is now over and the economy is slowly improving, driven by concerted government efforts towards economic diversification and gradual improvements in commodity prices, which are expected to enhance the value of exports while making extractive projects more economically viable.

Indeed, CEOs were slightly more optimistic than the ADB on GDP expansion in 2018, with 67% forecasting growth of above 2%, whereas the ADB projects a contraction to 1.8%. The IMF is yet more optimistic, projecting growth of 2.9% for 2018.

Looking at the investment climate, 71% of respondents say their firm is likely or very likely to make a significant capital investment by 2019, despite ongoing difficulties in sourcing foreign exchange following the 2014 imposition of an enforced trading band for the kina to limit fluctuations in its value. Breaking this down by industry, 82% of CEOs in construction and real estate, 71% in energy, and 77% in transport and logistics are likely or very likely to invest, against only 47% in industry and manufacturing.

Foreign Exchange Concerns

The foreign exchange shortage remains the top concern, with 31% of respondents citing currency stabilisation as the most important factor to improving PNG’s attractiveness as an investment destination. Businesses are forced to wait extended lengths of time to convert kina into foreign currency to pay for imports or services from overseas companies. One CEO said that sourcing foreign currency is now the biggest demand on his time, which means there is little scope for long-term strategic or visionary thinking.

With understandable concerns about inflation, the authorities have shown little appetite to end the enforced trading band for the kina, which would result in a rapid depreciation of the currency. Already severely constrained by debt-servicing obligations, the government is instead relying on economic diversification and self-sufficiency to improve foreign currency reserves by becoming less reliant on imports. While diversification is to be encouraged, it is unlikely to resolve the foreign exchange problems in the near term, and the country may face more hard choices if currency controls continue to weigh on productivity.

Diversification Efforts

Despite the government’s clear emphasis on diversification and the cultivation of new growth engines such as agriculture and tourism, extractive industries will continue to underpin the economy. Although the trickle-down effects of the $19bn PNG LNG project have been called into question, the venture is considered to be a remarkable technical success, and exports to South Korea, Japan and China have exceeded expectations since the project came on-line in 2014.

With lucrative new mining ventures and the expansion of the liquefied natural gas project in the pipeline, it is little wonder that the majority (67%) of survey respondents cite commodity price fluctuation – including oil – as the biggest external risk to the economy. The next-highest response to this question was a slowdown in Chinese demand (18%), reflecting the country’s growing presence, as China expands its influence in the South Pacific through infrastructure projects and bilateral loans, often under opaque terms. Indeed, recent media reports suggest PNG and China are negotiating a bilateral free trade agreement, following deals for the development of several Chinese-funded infrastructure projects under the Belt and Road Initiative.

CEOs from industry and manufacturing, and construction and real estate comprised the highest proportion of respondents viewing Chinese demand as the biggest external risk. Particularly in the construction sector, established companies told us that increased competition from Chinese players has driven down margins and made it harder to win tenders.

APEC 2018 Opportunities

Ultimately, PNG aims to translate its considerable extractive resources into inclusive growth by investing revenue in emerging industries and developing human resources. At the same time, it hopes to bridge the sizeable infrastructure gaps that weigh on productivity and drive up the costs of doing business in the vast, mountainous country.

In the longer term PNG can benefit from the international spotlight that comes with hosting APEC, showcasing its considerable hydrocarbons and mineral resources, abundance of fertile land and natural attractions largely untouched by outsiders. Crucially, the government and private sector have an opportunity to build and strengthen trade relationships, expand access to regional value chains and take a leading role in important discussions on issues such as digital transformation.