Richly endowed with natural resources, a decade ago Papua New Guinea (PNG) was one of the fastest growing economies in the Asia-Pacific. Yet the end of the commodities supercycle has seen the country’s economy contract considerably, with serious implications for future political stability.
On account of PNG’s over-reliance on natural resources exports, the collapse of oil and precious metals prices in recent years has led to an increase in economic risks. The mining sector accounts for over 15% of GDP; gold accounts for 22% of exports, and copper ore 14% of exports. At the start of 2015, the Asian Development Bank predicted PNG would be one of the world’s fastest growing economies with a predicted GDP growth rate of over 21%. Nearly two years on, the fall in oil prices has had severe implications for future political stability as the economy struggles to readjust to reduced revenue streams and to diversify away from commodities based income. Government spending has had to be, and will continue to be, cut back. These cuts, particularly as an election approaches in June 2017, will be highly contentious. The government has little room to manoeuvre; public spending increases before the oil price collapsed will be difficult to claw back, while ongoing debt servicing payments still make up nearly 10% of government expenditure.
The challenging economic conditions in PNG, combined with the upcoming election, only adds a further layer of complexity to investing in the country, which may see miners delaying investment. The decision of Rio Tinto in June 2016 to relinquish its stake in the Panguna copper and gold mine (Bougainville Copper Ltd) following a dispute with the government stretching back to 2014, and decades of controversy surrounding the mine, is the second high profile exit of a major mining company from PNG. While undoubtedly the mining sector holds considerable promise, the fact that two of the world’s largest mining companies have exited the country in the last three years demonstrates the sheer scale of the challenge.
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For further information, please contact Harry Floyd, Partner, Mining on +44 (0)20 7466 1305 or email email@example.com