By Sarah Byrne

HEAVY reliance on Papua New Guinea’s resources industry has left the country susceptible to commodity price shocks, with Moody’s credit analysis calling for more diversification.

In May, Moody’s affirmed PNG’s B1 sovereign rating and changed the rating outlook to negative from stable.

Published in mid-June, Moody’s credit analysis report of PNG states lower commodity prices have adversely affected both the government’s fiscal balance and the country’s external payment position.

The lack of diversification is manifested in the economy’s reliance on commodity exports, which renders PNG susceptible to commodity price shocks, the report said.

Speaking with PNG Resources, Moody’s vice president-senior analyst, Christian de Guzman said government expenditure must be contained and diversifying the economy is fundamental to a healthy PNG economy.

“Countries with similar levels of GDP per capita have typically sought labour-intensive manufacturing investments as well as scaled up agricultural production to make full use of—and build upon—existing levels of development.”

“As such, a focus on infrastructure development complements those activities by further lowering costs,” he said.

Poor infrastructure and security concerns were noted as weighing on the country’s ability to attract labour intensive investments that could help to diversify the economy.

Governance is one of PNG’s biggest challenges, Mr de Guzman said.

“Better governance is correlated to better economic and fiscal outcomes, as well as higher ratings.”

Successful completion of the PNG LNG project is a key development Mr de Guzman said had improved the prospects for similar investments.

“The PNG LNG project was successfully completed – against the backdrop of weak institutions, difficulties in dealing with local governments, technical challenges related to the absence of infrastructure, etc.”

“The same can’t be said of other countries that have similar natural resource endowments, but just haven’t been as successful in terms of implementation,” he added.

The ExxonMobil operated PNG LNG project has been the country’s main growth driver, with high commodity prices encouraging activity in the mining sector.

Over its 30 year horizon the PNG LNG project is expected to produce nearly K70 billion in tax revenues for the PNG government and it will continue to provide a large boost to the economy, the report said.

Moody’s said the PNG LNG project would still be profitable at prices as low as those seen earlier this year of around $46 per barrel and demonstrates that large projects can be successfully delivered in PNG.

Final investment decisions on the construction of a third LNG train at the PNG LNG project and on the development of the Elk-Antelope gas fields, both due in 2017, could also provide a boost in infrastructure development, education and training.

The development of these new projects in the latter half of the decade could help sustain the country’s track record of rapid growth since 2007, the Moody’s report said.

Yet Moody’s said a trend of higher than budgeted deficits was expected in 2015 as a result of lower than forecast commodity prices and a still-high expenditure level.

Moody is forecasting PNG debt to remain above 35 per cent of GDP in 2015 and 2016.