EconomicOutlookforPNG-2016&Beyond

Presentation by: Mr Loi M. Bakani CMG Governor-Bank of PNG

Business Summit

1-2 September 2016 BRISBANE, AUSTRALIA

Keyfacts

4.3% 6.3%

7.9% 6.4% 6.0%

2.4% 3.0% 3.6% 5.0%

PNG (B+)

China (AA-)

India (BBB-)

Vietnam (BB-)

Kenya (B+)

Fiji (B+)

Zambia (B)

Mongolia (B)

Ghana (B-)

0%

5%

10%

15%

20%

Source: PNG and S&P (May 2016)

n  KeysectorsofGDP(2015): n  Keyexports(2015):

Overview

OverviewofPapuaNewGuinea(PNG)Economy

2

n  2015nominalGDP:K64,162mm(US$21.5bn)n  2015realGDP:K27,134mm(US$9.1bn)n  2015realGDPgrowth:9.9%n  Area:463,000sqkmn  Capital:PortMoresbyn  PopulaLon:8.1mm

n  Currency:Kina(PGK)/US$1=K3.16(May2016)

1 Others include education, human health and social work, electricity, gas and air conditioning, manufacturing, water supply and waste management, mining and quarrying, finance and insurance, real estate activities, community social, personal services, transport and storage, public administration and defense, information and communication, accommodation and food services, administrative and support services, professional, scientific and technical activities, wholesale and retail trade and other services; 2 Other minerals include copper, nickel, cobalt, crude oil, condensate and refined petroleum products

RealGDPgrowth 2016ErealGDPgrowthvs.peers

Others151%

Oilandgas25%

Agriculture,forestry,andfishing17%

ConstrucXon8%

Otherminerals218%

LNG43%

Gold23%

Agriculture,forestry,andfishing16%

GlobalB-ratedpeersAsianpeers

Japan:~5,000km

Australia:~500km

China:~4,900km

PapuaNewGuinea

Australia

Indonesia

7.6% 11.1%

8.0% 4.9%

13.3% 9.9%

4.3%

2010 2011 2012 2013 2014 2015 2016E 0%

4%

8%

12%

16%

20%

Source: PNG

Source: Department of Treasury, Central Bank, 2011 National Population & Housing Census

KEYFACTS–PapuaNewGuinea§  Papua New Guinea is located in the South Pacific region, north of

Australia and within close proximity to our key export markets ofAustralia,JapanandChina

§  Papua New Guinea has a dual economy comprising a public- andcorporate-basedsector,andalargesubsistencefarming-basedsector.Agriculture, forestryandfishing,oil&gasandconstrucLonaremajorcomponentsofourdiversifiedGDPbase

§  Papua New Guinea is rich in both renewable and non-renewablenatural resources. These includeextensiverain forests,a richmarinelife, ferLle soil for agriculture and significant reserves of gold, silver,copper,nickel,cobalt,othermineraldeposits,crudeoilandnaturalgas

§  The commercial development of natural resources has created aresources-based export economy and our main exports include LNG,gold, copper, silver, nickel and cobalt and otherminerals and certaincashcrops,oilpalm,coffee,cocoa,forestryandmarineproducts

§  WearecurrentlyenjoyingourlongestperiodofrealGDPgrowthwhichisexpectedtoconLnuein2015for14consecuLveyearssince2002

§  From2007to2014,ouraveragerealGDPgrowthacceleratedto8.0%,morethandoublethepopulaLongrowthrate.

§  BasedonS&Pdata,wehaveoneofthehighestrealGDPgrowthratesin2015compared tosimilar ratedpeersandhigher thanhighgrowtheconomiessuchasChina,IndiaandVietnam

17.3 19.220.8

21.824.7

27.128.8

0

5

10

15

20

25

30

2010 2011 2012 2013 2014 2015 2016

34%

7% 10% 8% 24%

17%

RobusteconomicgrowthtrackrecordandpotenXal

17.3 19.2 20.8 21.8

24.7 27.1 28.3

7.6%

11.1% 8.0%

5.0%

13.3% 9.9%

4.3%

2010 2011 2012 2013 2014 2015 2016E

Real GDP (K bn) Real GDP growth rate (Y-o-Y %)

StrongGDPgrowth

4

1OthersincludeeducaXon,humanhealthandsocialwork,electricity,gasandaircondiXoning,manufacturing,watersupplyandwastemanagement,financeandinsurance,realestateacXviXes,communitysocial,personalservices,transportandstorage,publicadministraXonanddefense,informaXonandcommunicaXon,accommodaXonandfoodservices,administraXveandsupportservices,professional,scienXficandtechnicalacXviXes,andotherservices;2CAGR:CompoundedAnnualGrowthRate

RealGDPbycontribuLon(2010–2016E)

Agriculture/Forestry/Fishing ConstrucXon

Wholesaleandretailtrade MiningandquarryingOilandgasextracXon Others1(Kbillion)

CAGR22010–2

016E:[8.6]%

2016ErealGDPgrowthvs.peers

4.3% 6.3%

7.9% 6.4% 6.0%

2.4% 3.0% 3.6% 5.0%

PNG (B+)

China (AA-)

India (BBB-)

Vietnam (BB-)

Kenya (B+)

Fiji (B+)

Zambia (B)

Mongolia (B)

Ghana (B-)

0%

5%

10%

15%

20%

Source: PNG and S&P (Jun 2015)

Source:DepartmentofTreasuryandCentralBank

RealGDPpercapita

2,443 2,643 2,782 2,849 3,134 3,343 3,386

2010 2011 2012 2013 2014 2015 2016E

Source:DepartmentofTreasuryandCentralBank

20%4%10%11%16%

40%

Source:DepartmentofTreasury

CAGR22010–2016E:[5.6]%

19%4%9%12%

14%

42%

19%3%10%12%11%

45%

19%3%10%12%10%

46%

18%

18%

8%11%8%

38%

17%

25%

8%10%7%

34%

Diversified economic structure

51.0%

20.0%

20.0%

10.0%

Others

Oil and gas extraction

Agriculture, Forestry andFishing

Construction

47.0%

29.0%

17.0%

8.0%

Others

Oil and gas extraction

Agriculture, Forestry andFishing

Construction

By 2015 • Full year of LNG production and export - mining, oil & gas sector’s share increased to 29% • Other traditional sectors – agriculture/forestry/fisheries, construction remain dominant

In 2010 •  Dominant sectors are: mining, oil

and gas; agriculture/forestry/fisheries; and construction

•  Others include commerce, transport, manufacturing, finance

Fiscal Operations (K’mn)

•  Responsible fiscal management – supplementary budgets were introduced in 2014 and 2015 given the declining revenues from international commodity prices and El Nino drought effects

•  Key priority areas of education, health, transport & infrastructure, law & order, and rural development in general were not affected

Increased Gov’t spending on key economic enablers (K’bn)

•  Budget deficit spending put to good use – growing the economic base •  Largest allocation and spending was to the key priority sectors of economic

& agriculture, education, health, transport & infrastructure, law & order, and rural development increased from K6.2 bn in 2011 to K7.6 bn in 2015

•  Spending in these priority areas averaged 68.8% of the total budget over the five years 2011-2015

Government Debt (K’mn)

•  Total Gov’t debt in 2015 totalled K18 bn, increased to K19b in 2016. •  Mainly domestic debt and around small component from external sources •  External debt was all concessional, from ADB, World Bank, JICA,

Australian Gov’t, etc.

Debt to GDP

•  Prudent debt management by the Gov’t •  No breach of statutory borrowing limit (debt-to-GDP ratio of 35%) under

the Fiscal Responsibility Act •  Highest ratio of 28% was reached in 2015 •  Very low debt burden and negligible foreign debt burden

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 Kina per USD Kina per AUD Kina per EUR

4.4% 4.6% 5.0% 5.2%

6.0%

0%

1%

2%

3%

4%

5%

6%

7%

2010 2011 2012 2013 2014 2015

Prices,employment,andwagesExchangerateHeadlineinflaLonrate

Source: National Statistical Office and Department of Treasury *2010 Based on old CPI basket

Source: Bloomberg

10

Kina

InflaLonbygroupNon-mineralandmineralemployment

161 172 172 161 159

173

188

270

237 247

100.0

140.0

180.0

220.0

260.0

300.0

2011 2012 2013 2014 2015

Non mining and petroleum Mining and petroleum

Source: Central Bank

FortheyearendedDecember31 Year-on-yearinflaLon(%) 2012 2013 2014 2015 Foodandnon-alcoholicbeverages(34.9%) (1.4) (0.9) 4.8 4.9 Alcohol,tobaccoandbetelnut(7.9%) 69.3 43.8 4.6 12.1 Clothingandfootwear(5.5%) 2.6 3.1 3.5 9.7 Housing(11.2%) 10.3 10.7 12.0 15.4 Householdequipment(4.5%) 1.1 (0.2) 5.2 10.4 Transport(14.2%) (0.5) - 6.7 (3.7) CommunicaXon(4.5%) - - (5.6) 0.1 Health(2.7%) 3.2 5.6 13.3 17.2 RecreaXon(2.9%) (4.4) (3.1) 5.2 (0.7) EducaXon(7.4%) 0.2 0.4 (1.9) - Restaurantsandhotels(2.6%) 8.5 7.2 6.1 5.1 Miscellaneous(1.5%) (3.9) (5.7) 4.5 (3.5) Allgroups 4.6 5.0 5.2 6.0

Source: National Statistical Office

Employmentindex,March2002=100

BalanceofPayments

(1.7) (0.4)

(4.8)

(7.7)

6.0

13.4

3.0 1.6

4.0

6.2

(6.8)

(14.1)

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2010 2011 2012 2013 2014 2015

Current account Capital and financial account Overall Balance

Highlights

•  Despitedeficitbudgets,KinadepreciaXonofaround36%between2012andAugust2016,andhigheconomicgrowth,inflaXonremainedlowatmanageablelevel.

•  CurrentaccountsurplusdoesnotmeanhighForexinflows,asmining&petroleumcompanieswereallowedtokeepexportearningsinoffshoreaccountstomeetoverseasliabiliXes.AllowedundervariousDevelopmentAgreements.

•  Theybringinforexforlocalexpenses,tax,royalXes,leviesanddividends

•  KinadepreciaXonreflectssupply&demandcondiXons,whichistypicalofafloaXngexchangerateregime.

•  AcXonin2014toimposetradingmarginof75basispointsfrommidratewastoapplydisciplinetomarketsekngrate.

•  FurtheracXonin2015ondomesXcforeigncurrencyaccounts.

Foreign Exchange Reserves

ForeignreservesdeclinebutImportcoverincrease

10.5

11.5 11.0

7.9 8.0

10.0

0.0

2.0

4.0

6.0

8.0

10.0

0.0

3.0

6.0

9.0

12.0

15.0

18.0

2010 2011 2012 2013 2014 2015

FCY reserves (LHS) Import ratio of FCY reserves (RHS)

Foreign Exchange Reserves

•  The Central Bank continued to support the foreign exchange market by supplying some foreign currency out of its reserves to meet some of the import demand by the private sector.

•  From 2012 to date in 2016, the Central Bank has intervened by supplying US$2.4 billion in the foreign exchange market.

•  With low Government external debt, the private sector has been the beneficiary of the forex intervention.

•  Consequently, Reserves declined from US$4.0 billion at the end of 2012 to US$1.7 billion currently.

Short Term Issues – Budget Financing & Forex

•  Govt’s plan to continue funding of priority sectors through deficit budget is clear.

•  Without any revenue coming from LNG project and lower internal revenue from various sources, poses a challenge for budgetary financing for 2016 to 2018

•  Also challenge for management of forex reserves •  Govt needs to realise budgeted external financing of

the budget given the fiscal space from external debt stock & low debt servicing

•  The Government and the Bank are pursuing it. •  Provide relief for domestic market as main source of

borrowing •  Provide support for foreign exchange reserves &

market

Short Term Issues –Budget Financing & Forex

•  Early this year we were asking “What are the prospects for improvement in the forex market?”

•  There is a queue in the foreign currency market of non-served orders.

•  Good inflows of foreign currencies by exporters •  The resumption of Ok Tedi mine in March 2016,

combined with Lihir's increasing production and exports, & inflows by other mineral companies contributed.

•  BPNG interventions & increased forex inflows was sufficient to clear geniune import & service payment orders

•  The total non-served orders have not declined much.

Short Term Issues – Budget Financing & Forex

•  After the debt service and accelerated depreciation provisions are catered for there will be more foreign exchange inflows from the LNG project.

•  There will be a turn-around in the forex market, Government revenue will increase, growth in economic activity will increase.

•  Start up of any pipeline projects will provide relief to current situation.

Short Term Issues – Budget Financing & Forex

•  Need for exporters to take advantage of the kina depreciation to increase production and exports that would bring in the much needed foreign exchange.

•  Importers & consumers to resort to domestically produced goods, reduce FX demand and support local production.

•  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.

MEDIUMTOLONGTERMPROSPECTS

•  NEXTSLIDES

Mine Metals 2015ProducXon(’000)

OkTedi1Gold

CopperSilver

147ozAu43tCu482Ag

Porgera GoldSilver

591ozAu109Ag

Lihir Gold

805ozAu

Ramu NickelCobalt

26tNi3tCo

HiddenValley GoldSilver

161ozAu1,836ozAg

LargeandestablishedmineralsectorwithatrackrecordofdevelopmentwithinternaXonalpartners

Overview

Source: Mineral Resources Authority Note: 1 As a result of the El Niño weather phenomenon, operations at OK Tedi mine has

been suspended until 1Q2016

LargescaleoperaLngmines

Valueofmineralexported(2010–2015EMineralExports)

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016E

Gold Copper Nickel Cobalt

84%

TotalproducLonvalue(Kbillion)

67%

33%

66%

34%

71%

28%

72%

20%6%2%

69%

n  EstablishedminingsectorgovernedbyMiningAct1992andregulatedbyMineral

ResourcesAuthority(“MRA”)

n  Proventrackrecordofover40yearsofdevelopment

n  KeymineralsareGold,Silver,Copper,NickelandCobalt

n  ProjectsareoperatedandfinancedbylargeMNCs

Source: Central Bank, Department of Treasury

19%11%1%

77%

11%10%2%

9%6%1%

n  29mmhaofforestedland(63%oftotalland

area)

n  15mmharichinXmberspecies

n  DSP2010-2030seekstomaximizesustainable

benefitsandminimizedetrimentalimpacton

environment

Agriculture

UnlockingthevastpotenXalfromtheagriculture,forestry,andfisheriessectors

FisheriesForestryn  Economicbackboneforthepast70years

n  HugegrowthpotenXalwithcurrentlowexportbaseof

K2bn(usingonly3%ofavailableagricultureland)

n  LargestfisherieszoneinSouthPacific(2.4mm

km)

n  Harvestapproximately500,000–750,000tonsof

fish&shellfishp.a.

n  NaXonalFisheriesDevelopmentPlanpromotes

sustainablefishingandadvancementofthe

sector

n  KeyexportsdesXnaXons:EU,Japan,Philippines,

TaiwanandThailand

744 768

627

730

962

865

760

2010 2011 2012 2013 2014 2015 2016E

Forestry export value (Kmm):

Timber Other forest products

Note: Others forest products include timber, plywood, and woodchips

114

260

330

234

335

466

395

2010 2011 2012 2013 2014 2015 2016E

Fisheries export value (Kmm):

Source: Central Bank and Department of Treasury

Note: Others include rubber, tea, and a very small portion of manufactured goods

2010 2011 2012 2013 2014 2015 2016E

Agriculture export value (Kbn): Palm oil Coffee Cocoa Copra + Copra Oil Others

44%

15%6%

13%

50%

24%

9%

13%

51%

19%

12%

4% 16%

51%

21%

11%

13%

2%

4%

22%

45%

28%

10%7%

10%

32%

15%

10%

40%

3%

2.4

3.3

2.01.8

2.1

2.6

95%

5%

95% 95% 99% 99%

5%

5%

1%

1%

1%

2.2

48%

23%

14%3%

11%

99% 99%

1%

UnlockingtorealizeImportSubsXtuXonu  PNG’sannualimportsofagriculturalproductsamountstoaboutPGK1.2

billion.

u  Thegovernment,hasputinplacea5-yearplantogrowthedomesXcagriculture.TheiniXaXvesincludes;

Ø  reducingdependenceonimports,

Ø  diversificaXonandimprovementtotheinfrastructureand

Ø  transmissionofinputstofarms.

u  InaddiXon,thereisalsoastrongimpetustodevelopthemanufacturingsectorwhichcurrentlycontributes3.0%toPNG’srealGDPbysupporXngSMEs.

u  Over80%ofPNG’spopulaXonareinvolvedinsubsistenceagriculture.ImportsubsXtuXonwill;

Ø  improvethelivelihoodsofthemasspopulaXon

Ø  helprelievePNGofitscurrentFXpressure.23

Medium to Long Term Prospects •  The PNG economy will continue to grow but a

lower pace (2% to 3%). Inflation projected to be in the range of 6 to 7%.

•  Benefits from past & current investments in priority areas by Govt will be realised

•  Supported by pipeline of investment, including Penyang by ExxonMobil, Papua LNG by Total and Wafi-Golpu gold, which will have positive impact on the economy like the PNG LNG project did.

•  Lessons learnt from concessions given to extractive projects in non-renewable sector should be LIMITED in future.

Medium to Long Term Prospects •  The non-mineral sectors have the potential for inclusive

growth and employment opportunities. •  The Government is focussing on diversifying the economy

by giving emphasis on sectors like agriculture, tourism and SME sectors

•  Large intergrated projects in agriculture sector & SME are encouraged. Good initiatives already led by Government and landowners.

•  Need appropriate trade and investment policies to help boost growth in the non-mineral sectors.

•  Would reduce reliance on the non-renewable sector.

ProspectsForInclusiveGrowth

•  Focusondevelopingruralareas,infrastructure,educaXon,health,agriculture,tourism&SMEbyGovtisthestartofpathtoachievinginclusivegrowth

•  ProvidingaccesstoinnovaXvetechnology,financing&marketsforagriculture&SMEsectorswouldincreasedparXcipaXonbypopulaXon

•  Needtoget80%ofourunbankedpopulaXonintomodernfinancialservicessector

•  GreatneedforfinancialeducaXonofourpopulaXon

•  ConXnuefinancialinclusionandliteracystrategy

POSITIVENEWS

u WHILETHEREAREISSUES&CHALLENGESWEFACEINSHORTTERM,THEMEDIUMTOLONGTERMPROSPECTSANDOUTLOOKFORTHEECONOMYARE:“POSITIVE&STRONG”

u THANKYOU.