PNG—earthquake to exacerbate economic woes ahead of new investment

The 7.5 magnitude earthquake that struck the Southern Highlands on 26 February killed 125 people, displaced 35,000 and saw tribal fighting flare. While production at the US$19b PNG LNG project was restarted ahead of the expected eight-week outage, the quake will increase strain on PNG’s public finances and economic recovery. Indeed, Moody’s subsequently downgraded the outlook on its B2 rating to negative, and S&P lowered its rating to B, citing increased borrowing requirements and rollover risks.

In addition to the impact of the earthquake, FX shortages continue to hamper prospects. The FX backlog is estimated at A$1b—though this understates true demand as many businesses have simply given up submitting orders. Over 70% of respondents to a recent CEO survey said access to FX was the most significant issue facing businesses (Chart), up from 60% in 2017. But the government’s ongoing ‘revenue crisis’ (there is limited scope to further reduce spending from the 2017 level of 17% of GDP) has deterred international investor appetite to write additional public debt. As such, only the start of PNG’s next major resource project is likely to restore balance to the FX market. The immediate investment pipeline includes an estimated US$13b expansion of the PNG LNG project, and a US$2.3b development of the Wafi-Golpu goldmine—both with a final investment decision possible in 2019. However, realistically, investment funds will only flow onshore subject to a multi-year delay.