In early June, PM O’Neill stepped down before facing an expected vote of no confidence in Parliament. In power since 2011, he was replaced by former Finance Minister James Marape.
O’Neill’s resignation highlights the country’s persisting political volatility. Though he won the 2012 and 2017 elections, his position had often been under threat due to corruption or mismanagement accusations which resulted into shifting support from within his government coalition. Marape’s appointment could allow a return to political stability until the next elections scheduled in 2022 as he even has the support from the opposition. While he is investor-friendly like O’Neill, Marape made it clear that his government policy will aim to get a more balanced share of commodity revenues in favour of the state, landowners and population. Weak redistribution of commodity revenues is indeed a recurrent source of social instability.
The change of PM has occurred at a time of a gradually rebounding economy (the IMF expects a 3.8% growth this year). Last year, a severe earthquake brought the economy to a standstill as annual real GDP didn’t grow. Also, the resource-dependent economy is suffering from weaker commodity prices in a context of slowing global demand. Still, medium- to long-term growth prospects could become more positive as several mining projects are in the pipeline and production of LNG (the first source of foreign currency receipts) promises stronger earnings after the government reached an agreement with oil majors last April on a second significant LNG project. All those projects will raise future government and export revenues.
Main downside risks to the outlook are related to commodity price evolution and the completion of commodity projects. PM Marape’s intention to review resource laws and upcoming projects could lead to delays in LNG projects and further harm investor confidence in addition to high corruption, heavy bureaucracy and erratic legal protection. Foreign exchange rationing has long been an issue as the authorities intervene to stabilise the kina and the country faces capital outflows from resource-related private-debt repayments. Nevertheless, the foreign currency backlog for importers has been considerably curtailed over the past year and is expected to further improve in the coming months. Beside the overall difficult business environment, Papua New Guinea’s external debt is elevated and exposed to tighter financing conditions and a strong USD. However, a potential easing of the US monetary policy as from this year, Papua New Guinea’s successful first-ever issuance of a USD 500 m sovereign bond in September 2018, and the downward trend in external private debt – as private loans are being repaid by resource receipts – could mitigate external debt stress in the next 12 months. Therefore, in the current circumstances, the change of PM is unlikely to have an impact on Credendo’s political risk ratings in the very short term.
Analyst: Raphaël Cecchi - firstname.lastname@example.org