Robust growth keeping PNG stable

PNG's economy has been growing by an average of 8 per cent each year since 2007. Picture: Stuart McEvoy Source: The Australian

MOODY'S ratings agency has maintained its outlook on Papua New Guinea as stable, despite the government's massive budget.

This year's budget involves a 20 per cent increase in spending, anticipating a deficit of 7.2 per cent of gross domestic product. The effectiveness of this rise is made uncertain by the decentralisation of development spending, Moody's says.

But the agency has retained PNG's B1 government-issued rating because it is "supported by robust growth and low public debt", and increasing reliance

on domestic funding, as well as benign inflation running at 4 per cent.

The economy has been growing by an average of 8 per cent a year since 2007, but Moody's expects this to slow to about 5.5 per cent for 2013.

The rating might have been higher but for the lack of breadth in the country's resources-dependent economic development, and for "shortcomings in the investment climate", which has nevertheless attracted almost $17 billion from Australia.

The agency warns that the economy -- already relying heavily on exports and lacking diversification -- "is subject to even greater concentration risks owing to the scale of the $19bn PNG LNG project", though its long-term arrangements are all in place, protecting it from any impact from the US shale-gas revolution.

Moody's says PNG remains weak institutionally, "as highlighted by the inadequacies related to the effectiveness of governance, control of corruption and the rule of law".

Such shortcomings, it says, constrain the potential to fully develop PNG's natural resource endowment, but the government is seeking to address such issues, including through the toughening of the criminal code to introduce the death penalty, in parliament this week.

Moody's says that "political risks have decreased following the strong leadership mandate received by Prime Minister Peter O'Neill". It supports as "prudent" the establishment of a sovereign wealth fund to spread the benefits from gas sales.

Before those revenues are landed, it says, the medium-term outlook is clouded by a likely decline in gold and oil production.

The agency says that spillovers to the domestic economy from the LNG construction include higher wage costs, ample liquidity in the banking system and a run-up in real estate prices in Lae and Port Moresby.

The economy will gain in the long term, however, from "the associated infrastructure build-out, as well as the development of human capital".

The assessment of PNG's economic strength has improved from very low to low, due to

the favourable medium-term outlook.

However, the country measures poorly in human development standards, out-ranking only Zambia among the Moody's-rated nations in the UN index.

Source: The Australian