Papua New Guinea Clear Potential with Near Term Challenges UK-PNG Trade & Investment Forum London - June 2015
AA- rated ANZ is the major international bank in the Pacific A presence in 12 markets across the Pacific for over 130 years Regional connectivity is playing to our unique position in the Pacific Pacific-Asia Trade: US$4.4b PNG U$ 4bn SI U$ 300 Denotes two way merchandise trade flow (2010) Denotes inward FI flow (2010) TL U$ 342 Vanuat u U$ 368 US Fiji $2b n Aus-NZ-Pacific Trade: US$3.8b 2,200 staff in 12 countries & 55 branches 17,500 commercial/corporate customers 420,000 retail customers Trade flows between Asia and the Pacific have grown 25% p.a. for each of the past 5 years 2
2013 ANZ insight report the view to 2030 Within an Asian Century, PNG s location and natural resources invited a re-imagining of the country s future Balanced economic development, with resources as the initial impetus, will deliver higher quality growth Our 2013 report aimed to promote a conversation on how best to achieve this: How to assist the resources sector to contribute wealth, activity and skills How to create the low cost, high priority infrastructure assets needed to underpin business opportunities in all sectors How to support the agribusiness entrepreneurs, and help create stable, widespread development 3
Page 4 PNG LNG a World Scale Project transforming the country Goroka Elk Antelope LNG Total, Oilsearch Interoil
Broad based opportunities in hard and soft commodities Mines Palm Oil Tuna Coffee Current Potential Advanced Kokopo Hides
Balanced development will allow high-quality growth Links between sectors Baseload demand Investment and technical skills Guide to infrastructure prioritisation RESOURCES: build wealth, activity and skills Ease investor concern Lower costs Avoid resources curse by productive investment Source of demand for entrepreneurs extend to other sectors Model good governance practices Avoid resources curse lower exchange rate income stabilisation Buffer for resource sector labour demand cycles Avoid urban inmigration INFRASTRUCTURE: underpin attractive business opportunities Guide to infrastructure prioritisation Supply chain backbone Low cost inputs Processing and quality coordination Market access 6 AGRICULTURE: enable stabilising, broad based development
By 2030 resource sector export revenues could be four times their current size 1 Base case export revenue in commodity markets* Real 2013 US$ Billion pa 3.9 times Gold Copper Oil LNG Share of GDP**: 44% 37% 39% 65% 59% 57% * Export revenue is total export value, free-on-board ** GDP: IMF figures used from 05-17, USDA GDP growth rates used from 17 onwards Source: Bank PNG (historicals); USDA; IMF; PJP analysis 7
Ongoing momentum depends on mobilising ample capital at a difficult time for the sector 1 Range of possible investment* outcomes in commodity markets Real 2013 US$ Billion pa Total investment 2013-2030 High $172 Base $112 Low $30 High Total investment** Base Low * Gross investment, not net of imports ** Calculated by multiplying IMF figures for Total Investment as share of GDP by GDP Source: PJP analysis 8
Potential after improvement Given policy improvements, PNG can outcompete others for investment 1 Resource sector potential PNG and selected African countries Global rank given best practice * policy settings 1st 50th Botswana Tanzania Zambia Madagascar Egypt Mauritania Mali Namibia Sth Africa PNG DRC Ghana Burkina Faso Zimbabwe Guinea Source: Fraser mining survey 2012/2013 100th Niger Morocco 1st 50th 100th Current global rank Room for improvement * Best practices: World class regulatory environment, highly competitive taxation, no political risk or un-certainty, and a fully stable mining regime 9
Enhanced infrastructure will underpin growth in agriculture and the economy more broadly 2 Opportunities to improve PNG infrastructure Telecoms Improvement already achieved in price and availability Catalysed by entry of private players and market reforms Benefits now extending beyond voice and data to mobile banking Roads Ports Network expansion to increase access Improve quality overall, and particularly for key highways Address substantial maintenance requirement Add capacity at key ports, including Lae, Port Moresby and Madang Reduce throughput times, to maximise use of existing capacity Lower costs Electricity Lower tariffs Improve reliability Better anticipate future demand 10
PNG is well located to serve Asian-centric food demand growth 3 Incremental food demand by region 2006-2030 Teracalories/day * Includes India ** Includes China Source: FAO report World agriculture towards 2030/2050 - Interim Report 11
Three imperatives to kick-start improved performance in agriculture 3 Imperatives for improved agriculture sector performance Create the scale effects needed for global competitiveness Scale drives lower costs in agribusinesses In PNG, larger scale plantations still underpin areas of high performance Improve transport infrastructure and logistics Lowers costs and sometimes creates access - for fertiliser, power, and other key inputs Creates and improve access to markets Set and achieve quality and yield targets linked to global market needs Basis of improved returns throughout value chain First step to value adding/ sustainable competitive advantage
Nominal GDP set to rise sharply through 2018 Per-capita GDP also set to climb GDP - Incremental Gains USD28bn by 2018 +2.1 2018 GDP per capita - USD3,500 by 2018 $182 $47 $173 2018 +1.9 +0.9 2017 2017 2016 $710 2016 $16.1bn +5.7 2015 $2,300 2015 2014 $168 2014 +1.6 2013 2013 Source: IMF, ANZ
Japanese LNG USD/MMbtu 182 day 364 day 2 year 5 year 10 year 17 year Yield Some macroeconomic drivers for PNG are under pressure PGK Yield Curve 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Yields have come in from their peak, but are still high 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Central Bank Reserves Peak : $4.18bn Q4 2012: $3.96bn Q1 2013: $3.67bn ; -$264m Q2 2013: $3.11bn ; -$551m Q3 2013: $2.96bn ; -$155m Q4 2013: $2.86bn ; -$155m Q1 2014: $2.78bn; -$74m Q2 2014: $2.59bn; -$185m Q3 2014: $2.49bn; -$104m Q4 2014: $2.42bn; -$63m 2015: $2.07bn; -$356m about 7 months of imports The Central Bank has come to market to provide support 2015 2.0% 1.0 0.0% 0.5 0.0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Jul-13-14 Mar-14 Apr-15 Jul-14 Aug-14 LNG Price Expectations 18.00 16.00 LNG Prices to fall over coming months PGK / USD Since June 2014 PGK has depreciated, albeit slowly 14.00 12.00-42% over medium term 10.00 8.00 6.00 4.00 Forecasts 2.00 0.00 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18
Government spending has started to buffer growth Much of this on key sectors to raise potential growth 18 16 14 12 10 8 6 4 2 0 Growth in expenditure PNG - Government Expenditure (PGKbn) +13.1% +7.7% +31.6% +15.7% 2010 2011 2012 2013 2014 Admin Eco & Ags Education Health Infrastructure Law & Order Provinces Social Revenue Total Exp Source: PNG Treasury, ANZ Page 15
PGKbn, 4Q rolling sum PNG Exports are the key source of foreign revenue Values have stagnated with gold holding the largest share 18 16 14 12 10 8 6 4 2 PNG Value of Exports by type 0 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Ags & Other Marine Forestry Crude oil Gold Copper Nickel Cobalt Page 16
Foreign exchange market temporarily under pressure Kina is a thinly traded currency and subject to supply/demand pressures Volatility in the PGK/USD FX markets prompted Regulatory action in June 2014. Onshore banks restricted to quoting 75bps either side of mid-rate. Onshore USD liquidity currently limited due to fall in commodity prices and volumes, against strong import demand. Situation will normalise once USD inflows from PNG LNG and other projects materialise. In the longer term the market will be better balanced. Sovereign Wealth Fund legislation provides the mechanism to manage currency issues
Net Index Balance ANZ PNG Quarterly Business Survey March 2015 Current conditions are difficult, underlying optimism remains 40 30 20 ANZ PNG Business Survey Q1 2015 22 10 4 0-10 -20-30 -40-4 ANZ PNG Business Confidence Components -31 Coincident & Lagging Short Term Outlook (up to 1 yr) Long Term Outlook (5 year) Page 18
Inaugural ANZ PNG Quarterly Business Survey (April 2015) Short Term Pain, Long Term Gain 1 Business/Sales Q1 2015 sales declined in 63% of firms. 2 Business Costs 3 Business Outlook 4 Hiring Intentions Were higher in 43% of firms on q/q basis and 53% of firms on an annual basis. Increasingly positive with 41% of firms expecting an increase in business over Q2 2015, 56% over the next 12 months and 81% over next 5 years. Not expected to change over Q2 2015. Over the next 12 months 36% of firms expect to hire additional workers compared to 21% which expect to decrease their labour force. 5 Capital Investment Is expected to increase in 47% of firms over next 12 months and 60% over next 5 years. 6 Top Risks Competition, Regulatory (Law & Order, Corruption) & Currency liquidity 7 Currency (PGK) Businesses expect this to depreciate by 3% against the USD over the next 12 months, although there is a wide dispersion of views
ANZ is a long term supporter of PNG and the Pacific Network ANZ has been in PNG for 105 years with the last 10 years being very active 600 staff across 15 branches with a full suite of electronic banking products Product capabilities Full range of core products across Lending, Global Markets, Payments, Trade Finance, Asset Finance, Retail Banking Project & Structured Finance and Advisory delivered via Sector specialists from Australia, Hong Kong and Singapore Corporate and Social Responsibility Financial Inclusion a key element of our social license to operate. Delivered though award winning MoneyMinded programme alongside mobile banking
In summary - PNG has what Asia needs PNG s long term potential is undoubted. The PNG LNG project shows that a world scale project can be completed successfully, with leading project economics ANZ s medium term view (2 years +) is positive, driven by LNG and other resource investments Infrastructure to be the key enabler to drive growth higher and broader over the medium term.
Papua New Guinea Clear Potential with Near Term Challenges UK-PNG Trade & Investment Forum London - June 2015