BSP Financial : Pacific Economic & Market Insights | March Quarter

PACIFIC ECONOMIC AND MARKET INSIGHTS

March Quarter 2024

BSP Classification: Internal Use Only

MARCH QUARTER 2024

Key trends at a glance

GLOBAL ECONOMY SLOWS DOWN

• The IMF has projected global economic growth at 3.2% in 2024. The World Bank and the Organisation for Economic Cooperation and Development forecast lower growth of 2.4% and 2.9% respectively.
• Global growth to slow as the lagged effects of the increase in interest rates by central banks designed to combat inflation, weakens economic activity and limits access to credit.

● According to the IMF, inflation in 2024 will recede to 5.9% due to constrained economic activity and moderating food and energy prices.

COMMODITIES PRICE TRENDS

• Crude oil prices made gains in Q1-24, due to supply cuts and geopolitical tensions.
• Prices for precious metals inched higher in Q1, fueled by expectations of Fed rate cuts and geopolitical tensions.
• Cocoa prices remained bullish in Q1, with prices reaching historic highs averaging US$7.1/kg in

March.

● Supply concerns supported coffee prices in Q1. In PNG, the average market price for cocoa was K1,500/bag (US$398/bag).

• Lower production and high demand pushed palm oil prices higher in Q1-24.

HIGHER GROWTH FOR PNG IN 2023

• The Asian Development Bank (ADB) forecasts PNG's economic growth at 3.3% in 2024, which is 1.3% higher than the 2.0% growth estimated for 2023.
• FX imbalances and law and order issues continue to hamper PNG's economic outlook and dampen investor confidence.
• ADB forecasts PNG's inflation at 4.5% for 2024, while BPNG forecasts the same at 5%. The central bank anticipates that inflationary pressures may intensify in 2024.
• FX market turnover fell in Q1-24, due to reduced BPNG intervention.
• BPNG interventions in the market help to remediate structural imbalances between FX inflows and outflows.
• FID for Papua LNG is expected to be delayed to 2025.
• Approval of the Frieda River Gold project anticipated for Q3 2026.
• Black Wednesday damage estimated at K450m (US$119m) in stock and property losses excluding loss of trading for business impacted.

MODERATE GROWTH IN THE PACIFIC

• Growth is expected to be slower in the Pacific in 2024.
• Growth in Pacific projected at 3.3% in 2024, and 4.0% in 2025.

REAL GDP GROWTH RATES

2022 2023 2024

+

+20.0%

+7.8%

+3.0%

-4.2% +2.5% +2.2%

-5.3% +8.0% +4.2%

-2.2% +2.8% +2.6%

+2.0% +1.0% +3.1%

+10.5% +13.3% +9.1%

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MARCH QUARTER 2024

BSP economic and market views

Mark T. Robinson

Group Chief Executive Officer

What inflation trends have you observed in the South Pacific?

• Inflation is stable, but remains elevated and on a slightly upward trajectory across our Pacific Markets. Early in 2024, increases in the consumer price index (CPI) were reported in various Pacific Markets.
• CPI increases are largely attributed to the increased cost of imported goods, including food items, household goods, and fuel. Furthermore, increases in the Value-added Tax (VAT) and customs duties in Fiji add to inflation pressures in that market. Vanuatu's 36% increase in the minimum wage (from June 2023), as well as supply chain disruptions from natural disasters could potentially worsen Vanuatu's inflation estimates in 2024.
• Most monetary authorities in the Pacific Markets are responding to inflation concerns by taking a contractionary monetary stance and increasing interest rates. This has the intended effect of tightening money supply to control spending and consumption in the economy, thereby cooling down inflation. These measures, however, also have the adverse effect of restricting access to credit and may hinder economic activity if prolonged.
• On a positive note, increasing visitor arrivals to the South Pacific, as well as high prices for key agriculture exports, will help to bolster activity at the grassroots level as monetary authorities combat inflation.

What key global trends are affecting the South Pacific's economic outlook?

• The escalating conflict in the Middle East has the potential to affect global trade and increase the price of key inputs, such as fuel. This will have an impact on our South Pacific markets, given our reliance on imported goods for household consumption and inputs for production.
• 2024 will see elections occurring in at least 64 countries, which represents
  49% of the world's population. The potential shift in foreign policy, trade relations and international aide can have a cascading impact on global markets and the economies of the South Pacific.
• A weakened Chinese economy will also have an impact on commodity demand in the region. Demand for raw material inputs from China lifts output from Asia and the Pacific, which has second- and third-order impacts on the South Pacific economies. However, monetary easing and fiscal support in China is expected to continue with the aim of kicking the world's second-largest economy into high gear.

How do you see PNG's economy performing in 2024?

• Despite a difficult start due to the January civil unrest, I remain cautiously optimistic in the 2024 performance of our home market of PNG. The anticipated resumption of mining projects is expected to support topline growth in the country. Investment in mining-adjacent sectors will drive employment and lending, but investor confidence has been shaken by bouts of law and order issues.
• The gradual transitioning of PNG's exchange rate regime to a free-floating system is ongoing and has precipitated the steady depreciation of the PGK against the USD. This has had a direct impact on imports and exports, and influences inflation and domestic consumption. This transition also presents opportunities for innovation in a more competitive FX market.

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month or 5% p.a. and BPNG will re-assessthe pace of crawling depreciation in May with IMF. We are expecting FX inflows to reduce, with some fuel imports being settled in foreign currency . With BPNG FX intervention unlikely to increase, we're expecting outstanding FX orders to move back towards previous highs experienced in September/October 2023.

● With availability of foreign currency volatile and outstanding FX orders growing, it's critical that customers place FX orders as quickly as possible, with correct documentation to avoid any unwanted delays.

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Under the "crawling peg" the PGK will continue its gradual depreciation against USD by approx. 0.4% per,

●

intervention (-37.2%to PGK 1.17 billion) from the Central Bank (BPNG). BPNG FX intervention provided 21.7% of FX inflows to the market in Q1 2024, down from 25.6% in Q4.

● Reduced BPNG intervention and FX inflows from exporters over the March Quarter saw BSP Customer Outstanding FX Orders peaked at PGK 785 million and had more than doubled to PGK 550 million by the end of March.

● Consequently, FX order execution times lengthened (in some cases to 10 weeks), with "State of Emergency and National Interest" orders taking priority over all other orders, and trade and service orders over capital payments (dividends etc.).

● BPNG intervention is helping reduce the continuing structural imbalance between FX inflows and outflows. ● The pace of PGK/USD depreciation under the "crawling peg" continued reduced, falling by 1.2% to 0.2651.

Against the Australian dollar, the Kina rose by 1% to 0.4064 on weaker iron ore prices and Chinese economy and a more resilient US economy, pushing back the timing of U.S. rate cuts.

What's the outlook for FX inflows for the upcoming quarter and how should Corporate and Retail customers manage volatility in foreign currency inflows?

FX market turnover in the 1st quarter fell 22%, from the December quarter to K11.38 billion, due to reduced FX

●

Rohan George

Group General Manager - Treasury & Markets

How was foreign exchange liquidity and the Kina in the first quarter of 2024?

MARCH QUARTER 2024

BSP's economic and market views

Peter Beswick

Group General Manager - Corporate Bank

What trends in business sentiment have you seen during the quarter?

● Investor confidence is waning, amid ongoing law and order issues, FX shortages, currency depreciation and service disruptions in power and water.

• Even though Porgera's resumption is a boost to the PNG economy, the civil unrest in January and deteriorating infrastructure has dampened PNG's outlook in 2024.
• Business operations in PNG are impacted by inconsistent access to essential utilities like water and power supply. The frequent blackouts have forced many businesses to rely on generators to maintain operations, which has resulted in higher operating costs.
• Puma's ceasing of fuel supply in February and March further exacerbated business costs and mobility during the quarter.
• The FX market imbalances have delayed businesses stock replenishing and their ability to expand their operations. Although, BPNG's move to depreciating the Kina aims at addressing the ongoing FX issues, it has and will continue to create tougher financing conditions over the short-term.
• The delayed relief to businesses affected by the 'Black Wednesday' riots has exasperated cash flow constraints. These on-going delays may lead to businesses downsizing operations and further job loss,

not only for businesses directly affected, but also for those in their supply chain.

• As businesses grapple with rising costs, many are forced to reassess their strategies and are reluctant to invest.

What can be done to restore business confidence in 2024?

• Bolstering confidence in the market will require Government addressing these multifaceted challenges. However, it will require time and a concerted effort from policymakers, businesses, and stakeholders.
• In addition, tangible progress towards the commencement of Wafi-Golpu mine will also be crucial in improving business confidence, given the signing of the Papua LNG FID being postponed to 2025.

MARCH QUARTER 2024

Global economic outlook

Subdued global growth anticipated for 2024 as the effects of tighter global monetary policy limits access to credit and constricts activity.

World Real GDP Growth (%)

IMF OECD World Bank

3.2

2025f

3.2

2.7

World growth

● The International Monetary Fund (IMF) forecasts global economic

growth at 3.2% in 2024, the same as their growth estimates for 2023.

In contrast, the World Bank (WB) and Organisation for Economic

Cooperation and Development (OECD) expect growth in 2024 to be at

2.4% and 3.1%, respectively.

● Despite the contrast in forecasts, the general consensus is that

economic activity in 2024 will continue to soften as the effects of

Inflation

• The IMF forecasts global headline inflation to recede to 5.9% in 2024 before falling to 4.5% in 2025. Economic activity is expected to be constrained as a consequence due to the sharp increase in interest rates, especially in advanced countries, and moderating food and energy prices.

Monthly headline Inflation

World Inflation outlook

3.2

monetary policy tightening by central banks (particularly in advanced

economies), continue to constrain business activity and create tough

6.8%

2023

2024

2024f

3.1

2.4

	3.2
2023e	3.1
	2.6
	3.5
2022	3.4
	3.0
	6.5
2021	6.3
	6.2

financial conditions.

● In 2024, growth in advanced economies is expected to improve

slightly to 1.7% compared to 1.6% in 2023. The sluggish growth in

advanced economies is attributed to tight labour markets, drags on

aggregate demand, and monetary policy tightening.

● Emerging and developing economies (EMDEs) are expected to grow

by 4.2% in 2024, a slight decline from 4.3% in 2023. The growth

momentum in EMDEs continues to be fueled by a rebound in trade

and improved domestic demand as inflation recedes. Nonetheless,

elevated borrowing costs will continue to squeeze fiscal space in

EMDEs.

● In addition, the recent conflict in the Middle East has heightened

geopolitical risks and created uncertainty in commodity markets. This

comes at a time when the world economy is coping with the lingering

effects of COVID-19 easing, the Russia-Ukraine war, heightened global

inflation, and subsequent hawkish monetary conditions to combat

inflation globally.

5.9%

2025

4.5%

Central bank interest rates

● US Federal Reserve (Fed) - The US March Inflation data has cut

expectations for an early dovish pivot by the Fed from its current

interest rate stance. The Fed looks to curb inflation to its target of 2%.

● Bank of Japan (BOJ) - The BOJ decided to increase short-term interest

rates to a range of 0%-0.1%, marking an end to 8 years of negative

interest rates.

● People's Bank of China - China increased support to its troubled

property sector by reducing its 5 year loan prime rate by 25 basis

points to 3.95%. However, this was met with muted response from

investors, raising expectations that more aggressive policy measures

Source: IMF World Economic Outlook-Jan 2024, OECD World Economic Outlook Fed-2024, World Bank GEP-Jan 2024

will be needed in the coming months.

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MARCH QUARTER 2024

Currency trends

Anticipated rate cuts raised expectations of the USD weakening in Q1-24. However, the Fed's bullish stance on monetary policy resulted in a more resilient USD against other major currencies. The PGK further depreciated against the USD to US$0.2651, following the sequenced depreciation of the PGK.

Currency Movements

PGK/USD in Q1-24

-1.2%

PGK/AUD in Q1-24

3.5%

AUD/USD in Q1-24

-4.3%

NZD/USD in Q1-24

-5.4%

02-Jan-24

31-Jan-24

29-Feb-24

29-Mar-24

Notes on Currency Movements

• USD - The USD proved resilient in Q1-24, as it remained strong against other major currencies. The quarter ended with the USD index up by almost 3%. Strong economic data and Fed's contractionary stance on monitory policy contributed to the greenback's strength.
• PGK - The PGK/USD reference midrate closed at 0.2651, resulting in the PGK down 1.2% against the USD for Q1-24. In contrast, the PGK closed 3.5% higher against the AUD, supported by a resilient USD along with concerns about the Chinese economy and resulting low iron ore prices weighing on the AUD.
• AUD - The AUD made gains against the USD during the first part of March, but lost traction due to higher-than-expected US inflation, which affected interest rate differentials and currency demand. The AUD was 4.3% weaker against the USD over the Q1-24 period.
• NZD - The New Zealand dollar stayed well above the US$0.60 mark during the first part of the quarter, but dropped to the US$0.59 mark towards the end of March. The USD yield washed out gains made by the NZD, causing the NZD to close 5.4% weaker in Q1-24.

Source: Reuters, yahoo finance, BPNG, RNZ, Western Aus. Treasury Corp.

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MARCH QUARTER 2024

Commodity price trends

Geopolitical tensions, climate-related concerns and China's slow economic recovery had the greatest influence on commodity prices in Q1-24.

Commodity	Q4-23	Q1-24	Change (%)	12 months	Comments
major	(Average price)	(Average price)	Trend
					Although average prices were lower than the previous quarter, crude oil prices remain elevated due to persistent volatility
Crude Oil, Brent	84.0	83.1	(-1.1%)▼		surrounding geopolitical developments and monetary policies from major central banks. The elevated prices in Q1-24 reflects
[US$/bbl.]		tightened crude oil supply attributed to the destruction of Russian oil refining facilities and ongoing Houthi rebel attacks on
					shipping vessels in the Red Sea.
LNG, Japan					LNG prices increased over the quarter, reflecting the seasonal winter demand in Europe and Asia. However, LNG prices are
13.3	13.8	4.4%▲		expected to decrease, due to the seasonal decrease in demand and high inventories. Demand in Europe and Asian markets has
[US$/MMBtu]
				tapered as milder winter weather patterns experienced in Asia and Europe leave ample inventories.
Gold					Gold prices hit highs in Q1-24, making significant gains throughout January, fueled by expectations of rate cuts by the Fed. The
1,975.5	2071.8	4.9%▲		Fed's monetary policy decisions are a predominant force for the gold market as prices fluctuate when they give concrete
[US$/troy oz.]
				indications, backed by actions, on the direction of monetary policy.
Copper					Copper prices surged over the quarter as Chinese smelters pledge to cut output by 5% to 10%. As the world's leading producer
8,175.6	8,444.3	3.3%▲		and consumer of refined copper, developments in China's smelting industry have significant implications for global copper
[US$/MT]
				markets. The prospect of production cuts has raised concerns about supply constraints, driving prices higher in the short term.
Palm Oil					Palm oil prices increased over the quarter amid seasonally lower production across major producing countries in Southeast Asia
816.1	881.6	8.0%▲		and higher demand driven by the Chinese New Year and Ramadan.
[US$/MT]
Arabica Coffee					Arabica coffee prices increased over the quarter supported by supply concerns due to adverse weather conditions. Although
4.3	4.6	4.9%▲		Coffee prices in the quarter were fairly volatile, prices are likely trend downwards in 2024 as weather conditions are expected to
[US$/kg]
				improve in Q3-24 boosting global output.
Cocoa					Cocoa prices continued its bullish run, with prices reaching historic highs averaging US$7.1/kg in March. Traders continue to
4.0	5.7	43.6%▲		scramble for dwindling cocoa supplies, predicting ever wider deficits this season, with adverse weather conditions weighing
[US$/kg]
				down production yields in major cocoa suppliers Cote d'Ivoire and Ghana.
					Source: World Bank Commodity prices, ADB, Reuters, Nasdaq, ICCO, S&P Global, INN.

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MARCH QUARTER 2024

PNG economic outlook

The PNG economy is forecast to grow by 3.3% in 2024, however growth prospects are constrained by ongoing FX shortages and law and order issues.

2024 PNG Economic Outlook

● The Asian Development Bank (ADB) forecasts PNG economic growth

at 3.3% in 2024, which is higher than the 2.0% growth estimated for

2023. The improvement reflects the resumed operations of Porgera

mine and its trickle down impact to other sectors of the economy,

further supplemented by higher output anticipated in the Oil & Gas

sector from the newly drilled wells.

● PNG's FX imbalances, rising unemployment, and ongoing law and

ADB Economic Forecast for PNG

ADB	2023	2024	2025
Sep-23	Apr-24	Sep-23	Apr-24	Apr-24
GDP growth	2.0	2.0	2.6	3.3	4.6
Inflation	5.0	2.3	5.0	4.5	4.8

Balance of Payments (BOP)

• In its 2024 March Monetary Policy Statement (MPS), BPNG projects an overall K926.2m BOP deficit, as higher net outflows in the financial account are expected to offset a surplus in the current and capital account.
• The medium-term outlook could improve if the Papua LNG gas project and the Wafi-Golpu gold mine enter their respective construction phases.

order issues continue to be a major deterrent in its economic

prospects. These issues have led to diminishing investor confidence

and curtailed the prospect of investment spending in the short-

term.

● The PNG government will focus on delivering on its priority

expenditure items in the face of fiscal constraints. Public investment

in roads, ports, and infrastructure can also support activity in the

short run.

Key areas of concern:

Law & Order Issues

FX Shortages

Unemployment

Inflation

• National Statistics Office (NSO) December Quarter CPI data, showed annual inflation increase to 3.9% in the December quarter. This is a higher figure than ADB's estimate of 2.3% for 2023.
• The increase in inflation was mainly attributed to a;
• • increase in the alcoholic beverages, tobacco and betel nut group by 13.2%,
  • increase in clothing and footwear by 9.3%,
  • increase in health by 8.6%,
  • increase for miscellaneous items by 6.6%,
  • upturn for household equipment by 5.9%, and
  • increase for food and non-alcoholic beverages by 5.5%.
• For 2024, the ADB forecasts inflation to accelerate to 4.5%. In comparison, BPNG's forecast is higher, with inflation expected to increase from 3.9% in 2023, to 5.0% in 2024.
• BPNG anticipates inflationary pressures to pick-up in 2024, reflecting the removal of the fuel subsidy in June 2023, the depreciation of the Kina, combined with increased Government spending and impact on liquidity and import demand.

Balance of Payments (Kb)

	25.6	29.2	29.1
22.9
0.2	-0.9	0.2	0.2

-22.7

-26.5-29.1-28.9

2023

2024p

2025p

2026p

Current & Capital Account Financial Account

Overall Balance

Source: BPNG Mar-2024 MPS, NSO Dec Quarter 2023 CPI, ADB Asian Development Outlook-April 2024

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MARCH QUARTER 2024

FX market inflows vs BPNG intervention

Reduced BPNG intervention and FX inflows from exporters in Q1-24 resulted in growing outstanding FX orders and delayed order execution times.

Total FX Market Inflows vs BPNG FX Intervention (Kb)

		Total Market Inflows		BPNG Interveniton		BPNG Share of inflows
									7.1			7.3
			5.7	5.5		5.5					6.0	25.6%	5.7
					5.4	23.7%
5.1		5.0
								19.5%						20.5%
										18.1%
						17.1%
		13.3%	14.9%
12.1%
		11.3%								1.9
							1.7
0.6	0.7	0.8	0.6	1.0	1.1			1.1		1.2
Q4-21Q1-22	Q2-22Q3-22	Q4-22Q1-23Q2-23Q3-23Q4-23	Q1-24
Q1-24 FX	K5.7b			Q1-24 BPNG FX		K1.2b
Market Inflow	21.7% against Q4-23		Intervention		37.2% against Q4-23

• FX market turnover fell by 22% from Q4-23 due to BPNG intervention reducing by 37.2% to K1.2b in Q1-24.
• FX market inflows dropped by 21.7% from Q4-23 to K5.7b in Q1-24.
• BPNG FX intervention provided 20.5% of FX inflows to the market in Q1-24.

Volume of Outstanding Orders (Km)

				Trade	Service	Capital
					128
					165
				124		122
26					178
								123
					45
							56	112
15					77
			92	42
	29		9	854		7	25	60
	1
	0			560	19
540	17	472
			13		424	2	412	371	371
	263		307
	218	238
			184
Mar 23 Apr 23 May 23 Jun 23	Jul 23 Aug 23 Sep 23 Oct 23 Nov 23 Dec 23 Jan 24 Feb 24 Mar 24

• Reduced BPNG intervention (-37.2%) and FX Inflows (-21.7%) in Q1-24 saw outstanding FX orders by BSP customers increase to K785m in mid-March 2024, with the orders doubling towards the end of March to K554m.
• Consequently, FX order execution times lengthened with "State of Emergency and National Interest" orders taking priority over all other orders, and Trade and Service orders over Capital payments (dividends etc.)
• BPNG's intervention is helping reduce the ongoing structural imbalance between FX inflows and outflows.

Source: BSP Treasury

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MARCH QUARTER 2024

PNG resource sector

Sadly the much anticipated signing of the FID for Papua LNG has been delayed to 2025. Nevertheless, the restart of the Porgera Gold Mine will provide some relief to the PNG economy in 2024.

Extractive Resource Sector

New Porgera Gold Mine

• The Porgera Gold mine officially poured its first sets of gold doré bars on the 23rd February 2024, after significant rehabilitation work to repair damage due to vandalism and start-up testing.
• The reopening of the mine will be a material boost to the PNG economy for 2024, as operation-related spending on goods and services, employment, and foreign exchange inflows should have spillover benefits to other sectors of the economy.

Project Pipeline:

Wafi-GolpuMine (Est. capital Investment, K20.4b)

• Negotiations around US$5.4b Wafi-Golpucopper-gold project are progressing, however an agreement is expected to be delayed.
• Negotiations for the Mining Development Contract (MDC) were initially expected to conclude in Q1-24, however are now expected to conclude in Q4-24. The granting of the Special Mining Lease (SML) is expected in Q1-25 at the earliest.

Papua LNG (Est. capital Investment, K37.3b)

• Signing of the Final Investment Decision (FID) for Papua LNG is further delayed to 2025, as European financiers push for decarbonisation which creates challenges in securing financing for the Papua LNG project.

Frieda River Gold Project (Est. capital Investment, K22.6b)

• The approval process and negotiations of the US$6 Frieda River copper-gold project is expected to press ahead in Q3-24. The Department of Mining anticipates that the Frieda River project will receive all approvals by Q3-26.

Non-Extractive Resource Sector

Black Wednesday Riots

• The PNG Business Council estimates costs for damages to be at least K450m (US$119m) in stock and property losses, excluding lost trading, for business impacted by the 'Black Wednesday' riots. In response, the Government approved a K270m (US$72m) relief package for businesses in February, however, the ongoing delays in providing impacted businesses with support has seen these businesses experience cash flow pressures throughout the quarter. Furthermore, over 2,500 employees will be impacted if timely support is not provided.

Cocoa prices in PNG

• Cocoa prices in PNG are expected to remain high throughout the year, with the average market price of cocoa in all major centres in PNG reportedly at K1,500/bag (US$398/bag) during the quarter. The uplift in prices has provided farmers with much need disposable income and encouragement to re-invest for a better post harvest.
• The upward trend in cocoa prices both locally and globally is reflective of the impact of adverse weather conditions on production yields for major cocoa producers in West Africa. Prices are likely to remain elevated until the new African cocoa crops come onto the market in late 2024.

Source: Business advantage News, National Newspaper, Post-Courier, Dept. of PM & NEC media releases

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