1. Presentation to: POMCCI Charles Andrews and Aaron Batten Asian Development Bank 25 August 2011 Macroeconomic Update Papua New Guinea

2. 2

3. ADB Support for Private Sector Development  PPP policy and implementation  Secure transactions  Strengthening ICCC  Access to finance -- mobile banking 3

4.  Access to finance -- MFi  Other SOE reform, including CSO policy  Research and analysis and advocacy, eg. 'Challenges of Doing Business in PNG" and "Private Sector Assessment" 4 ADB Support for Private Sector Development

5. 5 PNG Economic Update A. Business Climate B. Inflation Outlook C. Impact of LNG on Business – When and how big? D. Implications

6. 6 1. Business Climate Update

7. Twin track global economic performance… 7

8. also leading to twin track Pacific economic performance. 8 Real GDP Growth (%)

9. PNG economy boosted by record terms of trade… 9 World Prices of Key Pacific Commodities (1980-2012p)

10. …as well as improved fiscal discipline… 10 Government debt by denomination (% of GDP)

11. …leading to strong economic growth… 11

12. …across a variety of sectors. 12 Sources of Real GDP Growth (% p.a)

13. Looking forward….  Resurgent commodity prices benefitting PNG  Unlikely to be threatened by current global instability  However, economy is increasingly exposed to a number of vulnerabilities Inflation LNG 13

14. 14 c 2. The Rising Inflation Challenge

15. 15 Inflation is again on an upwards trend... Growth in CPI Index (Annual % Change) 0 2 4 6 8 10 12 14 16 18 20 199319951997199920012003200520072009 2011 (e) 20132015 ?

16. 16 Closer to hyper-inflation than official figures suggest… -5 0 5 10 15 20 25 9.0 Official CPI Growth 14.5 w/ 16.5% housing price growth 21.7 w/ 16.5% housing price growth & weighting adjustment

17. 17 BPNG is finally having some success curtailing credit growth... Private sector credit (% GDP)

18. 18 …and would be assisted by a fiscal surplus this year. Fiscal impact on money supply (Annual budget balance, % GDP)

19. 19 …and strengthening of the Kina will control imported price pressures.

20. 20 But BPNG efforts to control the money supply are being hampered… Govt deposits (Million Kina) Commercial Bank Accounts BPNG Accounts Govt Share of Commercial Deposits

21. 21 Real interest rates (weighted commercial average, %) …real interest rates are likely to remain negative…

22. 22 Looking forward… - Inflation likely to remain high in next 1-2 years. - Coordinated policy response may help to alleviate some of these pressures. - Urgent review of CPI needed to assess cost of living and assist business in making informed investment choices.

23. 23 c 3. Impact of LNG on Business: When and how big?

24. 24 Sovereign Wealth Fund arrangements have now been finalized - Key features: - Stabilization Fund, Infrastructure Fund, Savings Fund; - Offshore to prevent excessive exchange rate appreciation; and - Expenditures channeled through budget processes. What impact will LNG have on business opportunities in PNG?

25. 25 ‘Myth’ 1 - LNG will double PNG income by 2020 Contribution of LNG to real GDP (Millions Kina)

26. 26 Once profit repatriation occurs… Destination of LNG Production Value (Millions Kina) 0 5,000 10,000 15,000 20,000 25,000 30,000 Impact of LNG on Nominal GDP LNG production value onshore LNG production value repatriated

27. 27 the impact of LNG on national income will be much smaller. Contribution of LNG to real GDP Growth (Millions Kina)

28. 28 …whilst payments to private enterprise will likely peak in 2013 Distribution of LNG induced domestic economic activity (Millions Kina) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Tax to Government Commercial Payment

29. 29 ‘Myth’ 2: LNG solves all of Government’s fiscal challenges Source: ACIL Tasman, 2011 Budget, Treasury Officials. Tax and Royalty Revenue from LNG Project (Millions Kina) 0 500 1,000 1,500 2,000 2,500 20132014201520162017201820192020 ACIL Tasman (2009) 2011 Budget (2010) Unofficial (2011) 25% increase on 2011 Total Revenue and Grants

30. 30 Long run optimism, but significant medium term fiscal challenge. Estimates of Government Revenue (Millions Kina) LNG Revenues to Government 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 200620082010201220142016201820202022202420262028203020322034203620382040 Kina,million Stagnant government revenue till 2015 Decline in concessions

31. 31 Conclusion - Optimistic macroeconomic outlook. - But significant threats emerging. - Inflation - LNG induced expectations - Long term challenge is to ensure future growth does not become siloed in mining

32. 32 Q&A Session Contact: abatten@adb.orgabatten@adb.org Website: www.adb.org/pnrm Thank you

33. Business begun hiring again… 33 PNG Formal Sector Employment Index (Quarterly % Change)