Papua New Guinea’s foreign currency reserves are being put under renewed pressure by the coronavirus pandemic, but there is hope that gold exports could partially offset falling prices and lower demand in other commodities markets.
The Pacific Island nation initially entered a two-week state of emergency on March 24, shortly after its first Covid-19 case was detected. During this time, international flights were suspended, movement between provinces was prohibited, schools were closed and all non-essential workers were ordered to stay at home.
Although the state of emergency was later extended until the end of May, certain measures have been relaxed: schools and tertiary education institutions have been cleared to resume classes and domestic flights permitted to begin operations again. Public transport is expected to resume in the coming days under Covid-19 health protocols.
Prime Minister James Marape’s decision to prolong the state of emergency was informed by concerns that the country’s health care infrastructure would struggle to cope with large numbers of Covid-19 patients.
As of April 23, Papua New Guinea has officially recorded eight local Covid-19 cases and no deaths; this may be compared to the 18 cases that its smaller neighbours Fiji and New Caledonia have each registered.
With a population of 8.9 million, Papua New Guinea currently has capacity to conduct around 900 Covid-19 tests a day. Testing and contact tracing efforts have been mainly focused on the provinces with confirmed cases, namely East New Britain, National Capital District and Western Provinces.
Forex challenges and solutions
Disruption to the global economy is impacting on Papua New Guinea’s extractive exports and foreign exchange (forex) reserves.
In 2019 the extractive industries – which are principally focused on liquified natural gas (LNG) and gold – contributed approximately 28 per cent of Papua New Guinea’s GDP, and were responsible for an estimated 94 per cent of exports. This means general forex flows are primarily linked to commodity markets, all of which are currently in negative territory – with the exception of gold.
Difficulties in sourcing forex have been an issue in the country since long before Covid-19.
Respondents to OBG’s CEO surveys in the country have consistently cited foreign currency shortages as the biggest impediment to doing business in Papua New Guinea, saying that they add to business administration costs and cause delays in paying foreign suppliers, as well as undermining productivity and long-term corporate planning.
The issue dates back to 2014, when the central bank imposed a trading band for the kina. This was an effort to prevent further slides in value caused by the completion of the construction phase of the US$19 billion Papua New Guinea LNG project, alongside a slump in commodity prices.
However, the situation had seemed to be improving before the Covid-19 outbreak, thanks to the combination of a maiden US$500 billion sovereign bond issuance in 2018, concessional loans from development banks and bilateral partners, improved performance in extractive exports and targeted interventions by the central bank.
Speaking to local media on April 21, central bank governor Loi Bakani said the country had FX reserves of around 6.9 billion kina (US$2 billion), equivalent to 9.3 months of non-mining import cover and 5.4 months of total import cover.
He added that the central bank would intervene in the forex market to ensure health care institutions and related businesses on the Covid-19 frontline could meet their import needs.
“Careful management of our reserves will see FX supplies into the market continue on a regular basis, but care will need to be taken to ensure demand needs are met whilst not running down reserves, especially give the increased demand for Covid-19-specific responses, a priority that was not envisaged just weeks ago,” Deepak Gupta, executive general manager, wealth, at Kina Bank, told OBG.
“Through various state-owned entities, PNG has built up large FX balances that are held overseas. Although they are not necessarily needed at this point in time, it would be worthwhile looking at bringing them back onshore as part of the FX toolkit, to be used should conditions worsen or extend for a longer period,” he added.
To help meet immediate Covid-19 response measures, PNG is looking to tap donor countries and multilateral institutions, for example by sourcing one billion kina ($291m) from the IMF under a rapid credit facility.
Gold lining
Gold is seen as a safe option for investors looking to hedge against uncertainty in equity and currency markets, and there is thus some hope that Papua New Guinea’s plentiful gold mining reserves could partly offset declines in other commodity exports.
Papua New Guinea is the world’s 14th-largest gold producer, and the precious metal accounted for almost 77 per cent of the mining sector’s export revenues in the first half of 2019. Major active mines include Lihir (gold), OK Tedi (gold, copper and silver) and Porgera (gold and silver).
Although prices of copper, Papua New Guinea’s second-most-valuable mining export product, have fallen significantly since December 2019, gold prices have steadily risen to above US$1,700 per ounce.
Bank of America has projected that the price could go as high as US$3,000 per ounce within 18 months, while UBS has forecast prices of around US$1,800 per ounce in the short term.
Mining companies have maintained operations in Papua New Guinea, while implementing new hygiene and social distancing measures and preparing medical response facilities. They have also had to make roster adjustments to reduce fatigue and cover for the usual fly-in, fly-out portion of the workforce.
Emphasising that the situation changes daily, Peter Graham, managing director and chief executive officer of OK Tedi Mining, remained hopeful that increases in gold revenues could offset declines in copper.
“Assuming Covid-19 does not cause production to be shut down, I expect that FX inflows from mining should not change significantly in 2020, given the balance of gold and copper production,” Graham told OBG.
This opinion piece was produced by the Oxford Business Group.