ANALYSIS: INVESTORS SHOULD REMAIN CAUTIOUS IN PNG

After 40 years of independence from Australia; Papua New Guinea has many reasons to be optimistic about its future. Yet, as the government continues to falter and tensions bubble under the surface, political unrest could soon threaten foreign investments in the island state.

The Good News 

PNG is in possession of a vast resource base, including an estimated 8 trillion cubic feet of natural gas reserves. Straddling the line between Southeast Asia and Oceania, it is seen as an economic powerhouse in the Pacific Islands.

Developing positive youth leadership in PNG is one of the National Goals and Directive Principles, established following independence, and the growing middle class is producing a number of young and vibrant leaders, committed to changing the historically weak trajectory of the country.

These young leaders are starting to push the government, private sector and civil society in a positive direction with ambitious strategic plans, informed by lessons learned from the shortcomings of the previous Somare and O’Neil governments.

The Bad News

This youthful leadership faces a highly complex set of challenges, influenced by seven key trends: weak governance; a deeply flawed judicial system; systematic failures in healthcare, a mediocre national education system; a continuing over-reliance on the extractives industry; the unrealised potential of subsistence agriculture; and a growing population.

In August 2016, following an upsurge in inter-tribal clashes, local landowners besieged the Exxonmobil Liquefied Natural Gas project in the Highlands region of Hela province.

In response, the PNG government opted for military intervention in December 2016, deploying troops to crush ongoing threats by local landowners. Agitators claim that the government has failed to honour promises of land compensation, leaving them no option but to create ‘chaos’.

Political Unrest in the Approaching Elections

The growing unrest in Hela province is emblematic of broader problems facing PNG in the run up to the general election.

Against the backdrop of lower commodity prices, GDP growth has plummeted from 8.5 percent in 2014 to a forecasted 3 percent in 2017. Exacerbated by high public debt, the government has been forced to scale back on their fiscal commitments.

Analysts say that this is fuelling public resentment towards the government. Greater fiscal restrictions and a series of political scandals is reinforcing fears that the upper echelons of government are benefiting from the country’s wealth of natural resources, at the expense of the broader population.

The decision to mobilise military units to the LNG facility is illustrative of a government that frequently uses force to tackle social and economic issues. It followed the death of four students in June 2016, after police opened fire on an anti-corruption protest.

PNG commodity prices are set to remain low, and the population will likely continue to complain that rewards are being inadequately shared from the exploitation of natural resources – which is meanwhile causing extensive environmental degradation.

This will almost certainly lead to a greater division between the population and the government in the run-up to the elections later this year. With greater instability predicted, the government is unlikely to change its tactic of using force to squash dissent.

In particular, there is a risk of continued periodic clashes in PNG as the country approaches the national elections, which will take place from the end of June until the beginning of July 2017.

The political climate of the country looks uncertain, with the incumbent prime minister still holding onto a moderate chance of staying in power, despite only narrowly surviving a vote of no confidence in 2016.

What this Means for Investors

Investors should be conscious of the great risk of further instability facing PNG in the run up to the general elections this year. No matter the outcome, PNG faces an uncertain future; without structural change, distrust of the government is unlikely to ease.

In addition to the high likelihood of increasing unrest, investors should take note of the reputational risk associated with operating in PNG.

As international attention turns to PNG in the run-up to the election, investors should be cautious of associating themselves with a government that is willing to use worrying levels of force to tackle social and economic issues.

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