png economic update a revised outlook for business in 2012 aaron batten, country economist port...
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PNG Economic Update A revised outlook for business in 2012
Aaron Batten, Country EconomistPort Moresby Resident Mission
July 18th 2012
The state of the economy and its near term outlook
Business confidence is riding a wave of optimism…
Substantially more than 2011
Slightly more than 2011
Same as 2011
Slightly less than 2011
Substantially less than 2011
Substantially more than 2011
Slightly more than 2011
Same as 2011
Slightly less than 2011
Substantially less than 2011
Expected Capital Investment in 2012 Profit Expectations for 2012
…and the ‘Pacific tiger’ is likely to again exceed growth forecasts…
0
1
2
3
4
5
6
7
8
9
10
0
50
100
150
200
250
300
350
400
450
500
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
GDP growth, annual, rhsJapan car imports, 3 month moving average, lhsFuel imports, volume, lhs
Number cars per month/ Fuel imports, tonnes (100's) % p.a
…with surging private sector employment growth so far in 2012.
-5%
0%
5%
10%
15%
20%
0
40
80
120
160
200
1978 81 84 87 90 93 96 99 02 05 08 11
GDP growth (real, %), rhs Total employment (Index), lhs
Why has this period of economic growth been so good for business?
Growth has supported a wide range of businesses because it has been led by the
non-mineral sector…
GDP Growth by sector (per cent per annum, average)
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
1995-2000 2001-2005 2006-2012
Industry incl. mining
Agriculture
Services
Employment Growth by Sub-Sector (%, per annum)
-6%
-4%
-2%
0%
2%
4%
6%
8%
Total Transport & Comms
Finance Wholesale Retail
2001-2005 2006-2012
…but non-mining sector has reached the peak of this economic cycle…
-20
-15
-10
-5
0
5
10
15
20
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Mining GDP Non-Mining GDP
GDP
GDP Growth by sector (%)
…as the FDI funded construction binge winds down…
0
5
10
15
20
25
30
35
40
45
50
2003 2005 2007 2009 2011 2013 2015
Construction Transport and communications
GDP Growth by sub-sector (%)
…which will change the composition of future growth.
-2
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Other Non-mineral Transport and communicationsConstructionAgriculture, Forestry and FisheryMining and Petroleum
(Contributions to growth by sector)
What macroeconomic trends will impact on business conditions over the next 2-3 years?
Euro instability is unlikely to affect already stagnating commercial lending.
(Private sector lending growth, Quarterly, %)
-20
-10
0
10
20
30
40
50
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
(Private sector credit, % GDP)
But commodity exports make economies vulnerable. PNG is no exception.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Copper ($/mt), lhs2012 Budget Forecast - Copper ($/mt), lhsGold ($/toz), rhs2013 Budget Forecast - Gold ($/toz), rhs
(Commodity prices, Monthly, $US)
Lower agricultural prices will hurt rural incomes in particular.
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Cocoa (cents/kg)
Coffee, arabica (cents/kg)
Copra ($/mt)
Palm oil ($/mt)
Logs, ($/cubic metre)
(Agricultural commodity prices, Monthly, $US)
FDI will remain strong in the short term, but may be offset by increasing offshore
investment…(Foreign Direct Investment, USD, millions)
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2001 02 03 04 05 06 07 08 09 10 11 12
Inward FDI - Total (IMF)
Inward FDI - from Australia (ABS)
Outward FDI - to Australia (ABS)
The Kina will stay high but has likely peaked.
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
AUD
USD
(Kina exchange rate, FX/Kina)
Official inflation has dropped significantly this year…
(Official Consumer Price Index growth, Quarterly, %)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
Moresby Goroka
Lae Madang
…but these figures probably exaggerate the real situation.
(Official and alternative Consumer Price Index growth, Quarterly, %)
-5
0
5
10
15
20
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
OfficialAdjusted for rents, housing weight and education subsidy
What macroeconomic policies should business support?
BPNG has been effective in sterilizing large capital inflows...
Source: IMF Article IV, 2012
…but business should expect a more austere government over the next 2-3 years…
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2000 02 04 06 08 10 12f 14f 16f
2012 Budget, original target
(Government Revenue, Kina, millions, constant prices)
10%
15%
20%
25%
30%
35%
2006 2008 2010 2012 2014 2016
(Government revenue to GDP, %)
..and support government’s need to correct its declining revenue base…
(Government revenue, per capita)
..to help foster greater levels of public investment.
0
400
800
1,200
1,600
2,000LNG contribution by 2028LNG contribution by 2015Foreign AidDomestic Revenue
USD per capita
Ultimately, non-mineral growth requires a reinvigoration of microeconomic reform.
3 3.5 4 4.5
Corruption
Red tape
Government capacity
Rental costs
Employment
Expertise
Logistics
Law and order
Skills shortage
(Critical issues facing business, CEO Survey)
The outlook
PNG’s macroeconomic fundamentals remain sound but the next 12-24 months will see a more moderate rate of economic growth.
More importantly for business, the underlying sources of economic growth are about to change quite significantly.
This will have an impact on business conditions and growth in the non-mineral sector.
Eurozone instability and slowing China is lowering commodity prices creating pressure on Government spending.– This will restrict much needed revenue growth but
unlikely to jeopardize macroeconomic stability. The exchange rate has likely peaked whilst short
term inflationary pressures are also easing. As revenues shrink, greater austerity is needed to
protect funding for existing assets and prevent another round of inflationary pressures.
The outlook
Thank you.
Asian Development Bank6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines
Tel + 632 632 4444
Port Moresby Resident Mission Level 13, Deloitte Tower
Port Moresby, PNG