Prime Minister O’Neill has survived a vote of no confidence and will remain in power over the next year. But deteriorating public finances and rising tensions with landowners of the PNG LNG project are still causing concern.
While uncertainty over the government’s leadership has subsided, the recent midyear economic and fiscal outlook revealed a further deterioration in public finances. Persistent weakness in commodity prices and a softer 2016 growth forecast—estimated at 2.2%, down from the 4.3% expected in late 2015—is weighing heavily on government revenues. Meanwhile, public spending forecasts remain unchanged from the earlier 2016 budget, causing the expected to swell from an estimated 3.8% of GDP to 6%.
To fund the export, the government is borrowing heavily from the central bank and is also trying to raise funds offshore. But additional government borrowing will push public debt further above the legislated limit of 30% of GDP and increase the need for budget cuts. Any fiscal austerity however, will cause growth to slow further.
The government is also facing protests from landowners in Hela Province who are threatening to disrupt the LNG project. They claim they are owed royalties of more than K1b (A$410m), which Exxon—the LNG project sponsor—has paid into trust accounts managed by the government. Disruptions to the LNG project could force further downward revisions to the 2016 growth forecast. A failure to resolve this impasse could send a negative signal to investors and deter foreign investment in future resource projects.