At the Prime Minister’s Back to Business breakfast today, Kina Bank’s Executive General Manager for Wealth gave a broadly positive forecast for the economy in 2019, expecting GDP growth during 2019 to rebound to around the 2.5% level.
“We see an improving national fiscal situation driven by strong ongoing production and profitability from resource companies, and a resulting improvement of foreign exchange supplies into the market. Combined with improved productivity of government expenditure, and greater efficiency in tax collection, we’re seeing a number of positives that are building and that we expect to continue.”
Mr Gupta says that an improved national fiscal situation will also be driven by stable to moderately decreasing interest rates. Over the last few months, since the sovereign bond issue, PNG has seen one year short term interest rates decrease by about 40 basis points.
“With potential reductions in the supply of local government debt combined with ongoing strong investor demand there is potential for the cost of debt to government to also decrease….We expect to see a gradual decline in interest rates and the net impact of this is to help reduce government financing costs – which in turn of course helps the fiscal situation. This will be a virtuous cycle to be in, if we get there.”
After a year in 2018 where the Kina strengthened against the Australian dollar Kina Bank’s view is that the PGK will continue to remain stable.
“There remains large local demand for foreign exchange but that supply is improving and we expect that improvement to remain in place and continue,” says Mr Gupta.
“Over the course of 2018, the price for Brent oil went up to over US$80 and has settled around the US$60 mark. At current prices we are confident of ongoing foreign exchange remittances from PNG’s share of equity distributions from PNG LNG; and secondly at the current Brent oil price we believe the project is making taxable profits. Therefore there will be tax revenue for the government.”
Mr Gupta also predicts a further stepping up of foreign exchange later in 2019 when resource projects including Papua LNG and Wafi Golpu move closer to Final Investment Decision.
“There will be a building realisation that PGK will be needed by the major resource projects for on-the-ground expenditures and there may be a PGK financing component that will also create demand for PGK.”
He did however suggest that there is still a cautious mood, saying: “Businesses remain cautious and are still doing it tough – as the background of the economy that is beginning to turn is still at a very early stage and will take time to trickle down into a broader recovery. However we see this as improving and stabilising and the views of business will change, in our view, over the course of the year.”