The current economic conditions are the most ‘challenging in our lifetime’, according to Justin Smirk, Senior Economist at Westpac. He told a Business Advantage PNG briefing that the success of the 2021 National Budget depended on getting Papua New Guinea’s non-resources economy firing.
Last week, Treasurer Ian Ling-Stuckey described the economic context for Papua New Guinea’s 2021 National Budget as ‘the most challenging in the nation’s history’.
If anything, that’s an ‘understatement’, according to Westpac’s Senior Economist, Justin Smirk. Smirk called it the most ‘difficult environment ever in the history of PNG’ and ‘the most challenging we have ever experienced in our lifetime’ during a Business Advantage PNG online briefing last Thursday.
What makes the current economic crisis so unusual, according to Smirk, is that it is caused by a supply shock. A supply shock is a sudden change in the supply of a product or commodity.
‘This one is where the governments around the world came in and said: “We want to stop peoples’ contact”. They stopped social interaction around the world. It hit the economies hard, quickly and directly, in a very rapid way. Economies that are focused around production are doing better because they haven’t had as much contraction.
‘Anything that is leveraged towards the Chinese production story does better. So, commodities that are focused around industrial production will do well.’
‘We have never experienced this, even back in the days of post World War I when we are talking about the Spanish flu. We have never had this unified shutting down of the global economy, then trying to reopen haphazardly [with] different events around the world, different monetary policies, different policies around the way COVID is treated.’
This was unlike traditional boom-bust economic cycles, he explained, which are demand-led and tend to self-correct.
Smirk described the medium-term assumptions in the Budget as ‘not too bad’. He said the economic prospects are better for China than America, with the US economy at the end of 2021 expected to be below the level of December 2019, whereas China’s economy will be 10 per cent higher than December 2019 (by the end of 2021).
‘Anything that is leveraged towards the Chinese production story does better. So, commodities that are focused around industrial production will do well. Ones around the broader and local economy don’t do so well.’
He gave a run down of how he thinks PNG’s major export commodities will fare. He said he is ‘not too excited’ about the prospects for oil and gas prices, believing that as demand picks up, so will supply. He was ‘more upbeat’ about copper prices because of likely demand in China and supply constraints.
Smirk is sceptical, however, about the future price of one of PNG’s other major exports, gold.
‘Gold has been getting so much benefit from all the risk out there. If you really believe the world is going to be a better place in two year’s time, then gold prices are likely to be lower as people revert to high yielding assets. Can gold maintain these record highs?’
Smirk said the PNG government’s biggest challenge is achieving its forecast of a rebound in the non-mining economy.
‘They are going to have to get things right in terms of how they provide new capital for the [non-mining] economy, the liquidity in the banking system, opening small enterprise businesses.
‘They are talking quite a lot about funding and infrastructure, which are two important components to help the evolution of new entrepreneurs come out. There is a lot of entrepreneurial spirit that exists in PNG.’
Another positive sign, said Smirk, is that the government is addressing the issue of unpaid payments to business (arrears).
‘Business are tied with this credit to the government and can’t act. Just releasing those arrears numbers allows business to expand and do more things, employ more people. There is a lot of value in doing that and the government can borrow cheaper than businesses can.’
Another ‘quick fix’, he said, is reducing the foreign exchange restraints, although he pointed out that ‘to some extent it has inspired companies to do import substitution’.
He said government should not pick winners, but ‘remove barriers that prevent these industries from growing and expanding: in domestic food production, domestic material production and simple manufacturing.’
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