Transcript Current challenges facing PNG in the international economy

Current challenges facing PNG in
the international economy
Paul Flanagan
Development Policy Centre
Australian National University
Structure
• External Accounts
– The link between flows and stocks
– PNG’s Balance of Payments (flows) and
International Reserves (stocks)
• External shock
– Oil price drop – implications for flows and stocks
• Policy options
– Quantitative (regulations)
– Price (exchange rate)
External Accounts
• National accounting conventions
• Current account (goods and services exports
and imports) + capital account (flow of capital
such as foreign investment and dividend
payments) =
Balance of Payments (overall flow in External
Accounts)
– PNG’s Balance of Payments (past and expectations
from Table 3 of IMF Article IV)
PNG’s Balance of Payments
$1,500
USD millions
$1,000
Surplus
$500
Surplus
$0
2010
($500)
2011
2012
2013
2014
Deficit
($1,000)
($1,500)
Overall BoP balance (before oil price shock)
2015
2016
2017
Flows and Stocks
• The overall balance of payments is the flow of
external income
• A country’s international reserves is the stock of
assets held by the central bank from previous year’s
flows
• Broadly, one can think in terms of how your net annual
income (an annual flow) affects your bank balance
sheet (a stock)
• International reserves from previous year + Balance of
Payments flows = International reserves at end of year
PNG’s BoP and International Reserves
$5,000
USD millions
$4,000
$3,000
$2,000
$1,000
Surplus
Surplus
$0
2010
2011
2012
2013
Deficit
2014
2015
2016
($1,000)
($2,000)
Overall BoP balance (before oil price shock)
Net international reserves (IMF)
2017
Current PNG challenge – oil price fall
• External trade shock
–
–
–
–
Large price fall in PNG’s key commodity export LNG
Oil price fall will lead to an LNG price fall
Background reading – estimated a 35% fall
ANZ says a 42% fall by second quarter 2015
• What are the implications for PNG’s balance of
payments and international reserves?
– Following analysis assumes a 20% fall in price for
PNG’s commodity exports with no change in export
quantities
Oil price fall – PNG BoP
$1,500
USD millions
$1,000
$500
$0
2010
($500)
2011
2012
2013
Deficit
($1,000)
2014
2015
2016
Emerging Balance
of Payments
($1,500)
($2,000)
($2,500)
Overall BoP balance (before oil price shock)
2017
Overall BoP balance (after oil price shock)
$5,000
$4,000
Emerging
International
Reserves Crisis
USD millions
$3,000
$2,000
$1,000
$0
2010
2011
2012
2013
2014
2015
2016
($1,000)
($2,000)
($3,000)
Overall BoP balance (before oil price shock)
Net international reserves (IMF)
Overall BoP balance (after oil price shock)
Net international reserves (after oil price shock)
2017
Policy Options
• A country must not run out of international
reserves (it would stop trade – can no longer pay
for imports or capital obligations)
• Quantitative restrictions
– Limiting when importers can be given foreign
exchange to pay suppliers – delays can help bolster
international reserves
– Limiting who can deal in foreign currency
– Stopping various types of imports
– Stopping various types of payments
Policy response - regulatory
$5,000
$4,000
USD millions
$3,000
Emerging
International
$2,000
$1,000
$0
2010
2011
2012
2013
2014
2015
2016
($1,000)
($2,000)
($3,000)
($4,000)
Net international reserves (IMF)
Net International Reserves less forward book
Net international reserves (after oil price shock)
2017
Policy response – market prices
• International market for PNG’s goods, services and capital
flows
• Traded with the world through foreign exchange markets
• Supply and demand – equilibrium levels can bring balance
to balance of payments
– And if the flow is balanced, the stock of international currency
reserves will also become balanced
• Sudden appreciation of the Kina on 4 June 2014 difficult to
explain – hurts especially poor rural exporters
–
–
–
–
Might have soon be returning to more a market-based level
But now have had a major external shock
Exchange rate can be a shock absorber in such circumstances
Australia’s exchange rate depreciated by 16% since June 2014
PNG’s exchange rate
0.42
0.4
0.38
0.36
0.34
0.32
0.3
Kina to USD
PNG and Australian exchange rates
0.42
1.25
0.4
1.15
0.38
1.05
0.36
0.95
0.34
0.32
0.85
0.3
0.75
Kina to USD
AUD to USD
Conclusions
• PNG should have a serious discussion about
policy options to deal with a possible crisis
– Not too late – actions can still be taken
• Quantitative restrictions will slow the crisis
but is doing significant damage to PNG’s
economy
• Moving back to a market-based exchange rate
appears to be a key option
– But this must now be done in an orderly way
Structure
• External Accounts
– The link between flows and stocks
– PNG’s Balance of Payments (flows) and
International Reserves (stocks)
• External shock
– Oil price drop – implications for flows and stocks
• Policy options
– Quantitative (regulations)
– Price (exchange rate)