(EnergyAsia, December 24 2014, Wednesday) — Papua New Guinea (PNG)’s economy faces downside risks despite the launch of a new income stream from liquefied natural gas exports (LNG) from last May, said the International Monetary Fund (IMF).
PNG’s impoverished economy received a massive boost when an ExxonMobil-led consortium completed the country’s US$19 billion integrated natural gas project ahead of schedule by several months to export LNG to Asia. As a result, PNG’s economy could expand by an explosive rate of 19.6% in 2015, said the IMF.
ExxonMobil PNG Limited, a subsidiary of the US major, leads the PNG LNG venture whose shareholders include Oil Search Limited, PNG’s National Petroleum Company, Santos Ltd, JX Nippon Oil & Gas Exploration Corp, Mineral Resources Development Company (representing local landowners) and Petromin PNG Holdings Limited.
IMF: PNG’s past and projected economic growth rates
2010 2011 2012 2013 2014 2015
Real GDP growth 7.7 10.7 8.1 5.5 5.8 19.6
Nominal GDP (2013): US$15.4 billion
Population (2013): 7.3 million
GDP per capita (2013): US$2,098
But, there are also potential drawbacks attached to the LNG project that could weigh negatively on the resource-dependent economy for years to come.
The IMF said that since mid-2013, lower commodity prices, weaker mining output, and a reduction in LNG project-related capital inflows have been exterting downward pressure on the local currency, the kina, as well as causing government debt to rise.
As the project approached completion, the government of Prime Minister Peter O’Neill began a large debt-funded fiscal expansion in an attempt to offset the impact of construction slowdown.
The government’s policy shift to develop the services sector “has significantly reduced the country’s fiscal space and led to an increase in government debt, likely to exceed legislated targets by end-2014,” said the IMF.
Along with the transition, PNG faces the risk of not realising its projected LNG export revenues given the sharp decline in global oil and gas prices, and the continued growth in competing LNG and shale gas projects in other parts of the world, namely the US.
The industry’s diminished outlook might reduce PNG’s ability to attract foreign direct investment and dampen the long-term outlook for the economy, said the IMF.
On the positive side, PNG’s inflation has moderated from its peaks during the construction boom and is likely to remain reasonably low given the global outlook for commodity prices. The country’s external current account deficit has fallen significantly since 2013 as a result declining imports related to LNG construction spending.
With the start-up of LNG, the IMF said it expects PNG’s current account deficit to fall this year before reversing into surplus in 2015 to help strengthen the country’s external position and macroeconomic fundamentals.