Westpac Bank’s Senior Economist Justin Smirk identifies five key highlights from Business Advantage’s PNG 100 CEO Survey of chief executives in the country’s biggest companies.
Business Advantage International has run a survey of senior PNG executives every year since 2012. Known as the PNG 100 CEO Survey, its eight years of data reveal enlightening trends about the state of business confidence in PNG.
From the 2020 survey (which can be downloaded here), five key highlights have been identified:
1. Despite significant volatility, PNG businesses remain optimistic.
Each year, the survey asks business leaders whether profits had met their expectations. Through the last eight years, profit expectations remained positive, although they did ease through the 2013 and 2014 downturn.
Through 2013 to 2016 reported profits were poorer than expected, with local businesses surprised by the underlying weakness of the domestic economy following the resources boom.
Profits outperformed expectations through 2017 and 2018 as the economy recovered, only to turn south again in 2019 when profits significantly underperformed.
For 2020, profit expectations remain positive but the improvement on the previous year is the smallest since the post-resources boom funk of 2014. Firms are less upbeat than they were in 2019, even though profits underperformed expectations that year and you would hope for something of a bounce.
2. Recruitment, investment and profit expectations all eased for 2020, with formal employment expected to stall.
The survey also asks executives for their expectations on profits, recruitment and investment for the year ahead.
The weighted net balance of expectations for all three remains positive for 2020 but at less than half of what it was in 2019.
Following a disappointing year, the responses suggest firms are expecting, at best, a modest rebound in 2020. Investment and recruitment are more upbeat than the 2014 low while profits are on par.
We should note that, outside of 2014, recruitment has been expected to grow each year in the survey; the official data on formal employment, however, has been more volatile. This suggests that, allowing for the upward bias in employment expectations, PNG businesses’ expectations are pointing to formal employment stalling in 2020.
3. The volatility of the resources sector means total GDP is not a good representation of local business conditions.
From the recruitment, investment and profit expectations series, Westpac has compiled a single Business Expectations Index for PNG (see black line in graph below). From the data we have, it is clear that the index is not being driven by measured GDP growth, which is dominated by the large swings in resources activity.
This argues for caution when using headline GDP as a guide for business plans.
Westpac has found that non-mining GDP is a better, if still not perfect, fit.
4. The moderation in expectations raises questions about the outlook for 2020.
Back in April 2019, the Asian Development Bank was forecasting economic growth in PNG to slow from 3.7 per cent in 2019 to 3.1 per cent in 2020. This slowdown is driven by mining growth stalling from 2.1 per cent in 2019 to – 0.1 per cent in 2020.
Ex-mining GDP was forecast to lift from 1.6 per cent to 3.2 per cent driven mostly by a large lift in construction activity and an acceleration in growth from services.
Since then, the ADB has revised their forecast to 4.8 per cent for 2019 and 2.1 per cent for 2020 (same as the Bank of PNG forecast) but at the time of writing we don’t have an update on the industry contributions. As such, we can’t be confident what the new non-mining profile would look like, but the Business Expectations Index suggests 2020 should be significantly more modest than the initial estimate.
5. While foreign exchange liquidity has improved, firms see it as a key constraint in 2020, but the communications sector has improved. Utilities are, however, seen as more unreliable than before
Each year, Business Advantage PNG asks business what their top constraints are. Since 2014, the top five have been: skill shortages, foreign exchange (forex) shortages, security, unreliable telecommunications and unreliable utilities.
From 2016 to 2019, forex liquidity improved and dropped back down the list but, for 2020, forex has popped back to be the most significant constraint.
Telecommunications have improved from 2019 but are still a bigger constraint than they were in 2017, as are utilities and security. It is disappointing to see these key issues deteriorate further.
But it is not all bad news: logistics have improved significantly from 2016, as have rental costs. And the Bank of Papua New Guinea can take a bow, as their monetary policy setting has helped to contain inflation, which is seen as less of a constraint than it was in 2014.
The 2020 PNG 100 CEO Survey was conducted by Business Advantage International between October and December 2019. The survey included senior executives from a representative sample of PNG’s largest companies, across all sectors of the economy. To obtain a full copy of the 2020 report, click here.
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