MEDIUM TO LONG TERM PROSPECTS & OUTLOOK Presentation by: Mr Loi - PowerPoint PPT Presentation

MEDIUM TO LONG TERM PROSPECTS & OUTLOOK Presentation by: Mr Loi M. Bakani CMG Governor-Bank of PNG National Development Forum 18 th October 2016 Port Moresby

Presenta8on Ø Background of Current Financial and Economic Issues in PNG Ø Short Term Issues & Challenges Ø Medium to Long Term Prospects Ø Conclusion

Robust economic growth track record and potenKal Real GDP by contribu8on (2010– 2016E) Strong GDP growth ConstrucKon Agriculture/Forestry/Fishing Real GDP (K bn) Real GDP growth rate (Y-o-Y %) Wholesale and retail trade Mining and quarrying (K billion) 28.3 Oil and gas extracKon Others 1 27.1 28.8 30 CAGR 2 2010–2016E: [8.6 ]% 24.7 27.1 24.7 21.8 25 34 20.8 34% 19.2 21.8 17.3 % 20.8 38% 19.2 20 17.3 46% 7% 7% 13.3% 42% 45% 11.1% 15 8% 10% 10 40% 9.9% 8% 11% % 8% 8.0% 7.6% 10% 14% 11% 8% 10 16% 24 12% 5.0% 12% 25% 11% 12% 18% % 10% 10% 9% 10% 5 3% 3% 4% 4% 17 4.3% 20% 19% 19% 19% 18% 17% % 0 2010 2011 2012 2013 2014 2015 2016E 2010 2011 2012 2013 2014 2015 2016 Source: Department of Treasury and Central Bank Source: Department of Treasury 2016E real GDP growth vs. peers Real GDP per capita CAGR 2 2010–2016E: [5.6 ]% 20% 3,386 3,343 3,134 2,849 2,782 15% 2,443 2,643 7.9% 10% 6.4% 6.3% 6.0% 5.0% 4.3% 3.6% 3.0% 5% 2.4% 0% 2010 2011 2012 2013 2014 2015 2016E PNG China India Vietnam Kenya Fiji Zambia Mongolia Ghana (B+) (AA-) (BBB-) (BB-) (B+) (B+) (B) (B) (B-) Source: PNG and S&P (Jun 2015) Source: Department of Treasury and Central Bank 1 Others include educaKon, human health and social work, electricity, gas and air condiKoning, manufacturing, water supply and waste management, finance and insurance, real estate acKviKes, community social, personal services, transport and storage, public administraKon and defense, informaKon and communicaKon, accommodaKon and food services, administraKve and support services, professional, scienKfic and technical acKviKes, and other services; 2 CAGR: Compounded Annual Growth Rate 3

Short Term Issues & Challenges • Despite high economic growth, large budget deficits & Kina depreciaKon of around 36% between 2012 and October 2016, inflaKon remained low at manageable level. • Exporters should have taken advantage of the kina depreciaKon & increased producKon/exports, thus increase FX inflows. • Importers & consumers should have adjusted & resort to domesKcally produced goods/support local producKon, thus reduce FX demand. • The Bank has to balance the foreign currency need of the Government, private sector demand and ensure maintenance of adequate level of foreign exchange reserves for the country to maintain confidence in economy.

InflaKon Consumer Price Index Inflation (percentage change) 9 9 Projections 7 7 5 5 3 3 1 1 -1 -1 -3 -3 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Dec-16 Dec-17 Dec-18 Headline (Annual) Underlying Exclusion-Based (Annual) Underlying Trimmed Mean (Annual)

AUD & USD 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Q3 '16 Q2 '16 Q1 '16 Quarterly Kina exchange rate against AUD, USD, TWI and REER AUD Q4 '15 Q3 '15 Q2' 15 Kina Exchange Rate Q1 '15 Q4 '14 Q3 '14 USD Q2 '14 Q1 '14 Q4 '13 Q3 '13 Q2 '13 TWI Q1 '13 Q4 '12 Q3 '12 Q2 '12 Q1 '12 Q4 '11 REER Q3 '11 Q2 '11 Q1 '11 Q4 '10 Q3 '10 Q2 '10 Q1 '10 80 60 40 20 0 120 100 TWI & REER

Short Term Issues & Challenges • Govt’s plan to conKnue funding of priority sectors through deficit budget is clear. • With low revenue coming from LNG project and decline in internal revenue from various sources, poses a challenge for budgetary financing for 2016 to 2018 • Govt needs to realise budgeted external financing given the fiscal space from low external debt stock & debt servicing • The Government and the Bank are pursuing it. • External financing will provide relief for domesKc market as main source of borrowing

Short Term Issues & Challenges • Current account surplus did not translate to foreign exchange inflows, as mining & petroleum companies were allowed to keep export earnings in offshore accounts to meet overseas liabiliKes, under provisions for accelerated depreciaKon. Allowed under various Development Agreements. • Aier the debt service and accelerated depreciaKon provisions for the PNG LNG project are over, capital account will move into surplus, translaKng into foreign exchange inflows through Gov’t taxes.

Balance of Payments Current account Capital and financial account Overall Balance 20.0 15.0 13.4 10.0 6.2 6.0 4.0 5.0 3.0 1.6 0.0 (0.4) (1.7) -5.0 (4.8) (6.8) (7.7) -10.0 -15.0 (14.1) -20.0 2010 2011 2012 2013 2014 2015

Short Term Issues & Challenges • There will be a turn-around in the foreign exchange market, Government revenue will increase. • Start up of any pipeline projects (LNG & Mining) will provide relief to budget & foreign exchange situaKon and support economic growth. • Recovery in export prices especially for non- mineral commodiKes will also support increased employment.

Short Term Issues & Challenges • Good inflows of foreign currencies by exporters • Contributed by the resumpKon of Ok Tedi mine in March 2016, combined with Lihir's increasing producKon and exports, & inflows by other mineral companies. • BPNG intervenKons & increased foreign exchange inflows was sufficient to clear genuine import & service payment orders . However, import orders sKll remain but reduced. • New Foreign Exchange DirecKves issued on 30 th Sept 2016.

New Forex DirecKves Ø All holders of onshore FCAs have to reapply to BPNG by 28 th October 2016 Ø All domesKc lending in foreign currency such as trade finance have to be approved by BPNG in line with RegulaKon 6 of the Foreign Exchange Control RegulaKons Ø Spot inflows should only be used to clear spot market orders, & not for forwards and foreign currency trade finance loans Ø DirecKves do not mean a change in the Foreign Exchange (FE) Control regime. Ø All the measures introduced since 2014 are to restore order and ensure a smooth & efficient funcKoning of the FX market, with transparent price senng and some protecKon for consumers.

MEDIUM TO LONG TERM PROSPECTS • NEXT SLIDES

Medium to Long Term Prospects • The PNG economy will conKnue to grow in real terms but at a lower pace (2% to 3%). InflaKon projected to be in the range of 6 to 7%. • Clear and direct focus by Gov’t on developing rural areas, infrastructure, educaKon, health, agriculture, tourism & SME is the right strategy for PNG • The Government is focussing on diversifying the economy to broaden revenue base & to achieve future sustainability of inclusive growth • Large integrated projects in agriculture sector & SME are encouraged. Good iniKaKves already led by Government and landowners. • Providing access to innovaKve technology, financing & markets for agriculture, tourism & SME sectors would increase parKcipaKon by populaKon

Medium to Long Term Prospects • Benefits from past & current investments in priority areas by Gov’t will be realised • The non-mineral sectors have the potenKal for inclusive growth and employment opportuniKes • Need appropriate trade and investment policies to help boost growth in the non-mineral sectors. • Need improvements in public uKliKes & services sector to facilitate developments in the non-mineral sector • Would reduce reliance on the non-renewable resources sector.

Unlocking the vast potenKal from the agriculture, forestry, and fisheries sectors Agriculture Forestry Fisheries n 29mm ha of forested land (63% of total land n Economic backbone for the past 70 years n Largest fisheries zone in South Pacific (2.4mm area) km) n Huge growth potenKal with current low export base of n 15mm ha rich in Kmber species n Harvest approximately 500,000–750,000 tons of K2bn (using only 3% of available agriculture land) fish & shellfish p.a. n DSP 2010-2030 seeks to maximize sustainable benefits and minimize detrimental impact on n NaKonal Fisheries Development Plan promotes environment sustainable fishing and advancement of the sector Agriculture export value (Kbn): n Key exports desKnaKons: EU, Japan, Philippines, Forestry export value (Kmm): Palm oil Coffee Taiwan and Thailand Timber Other forest products Cocoa Copra + Copra Oil 962 1% Others 3.3 865 1% 10% Fisheries export value (Kmm): 768 5% 760 1% 1% 744 5% 730 7% 2.6 10% 2.4 466 2.2 5% 627 2.1 2.0 11% 13% 395 13% 40% 6% 28% 1.8 13% 3% 4% 15% 4% 16% 335 14% 330 11% 9% 3% 2% 12% 10% 23% 21% 22% 24% 260 19% 234 15% 44% 45% 50% 51% 51% 32% 95% 95% 95% 99% 99% 99% 99% 48% 114 2010 2011 2012 2013 2014 2015 2016E Note: Others include rubber, tea, and a very small portion of manufactured goods 2010 2011 2012 2013 2014 2015 2016E Source: Central Bank and Department of Treasury 2010 2011 2012 2013 2014 2015 2016E Note: Others forest products include timber, plywood, and woodchips