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MalaysiaResource extraction to drive growth in 2025
After rising in 2024, economic growth is set to decelerate in 2025, as the strong positive effects of the reopening of the Porgera gold mine fade. Nevertheless, the reopening of the mine in December 2023 and the resulting increase in gold production and exports should continue to support growth in 2025. Moreover, with monetary easing from the Fed expected to continue, the US dollar could weaken, and global gold prices could rise given their inverse relationship with the USD. However, Donald Trump's potentially inflationary policies are a risk as they could slow the pace of rate cuts, keeping the dollar strong and thus dampening the rise in gold prices. The outlook for liquefied natural gas (LNG) exports (above 25% of total exports) is also positive, with the market expected to remain tight due to strong demand and limited supply. In 2024, soaring cocoa and coffee prices led to a sharp increase in export revenues from cash crops, and the Kina depreciation made rural exports more competitive. However, with crop shortages easing, crop export earnings are expected to decline amid a more balanced market in 2025.
Household consumption, which accounts for around 50% of GDP, should benefit from favourable conditions in the extractive and construction industries, which will encourage job creation and wage increases. However, household consumption will continue to be restricted by lower public spending on households, a persistently high poverty rate (around 40% in 2022), and the limited influence of other sectors on the agricultural sector, which employs 85% of the population, mainly informally. Investments will be driven by infrastructure construction projects, notably the Papua LNG production site (developed by TotalEnergies, Exxon Mobil and Santos), the construction of which has been postponed to 2025.
While inflation should be muted due to the expected ongoing moderation in oil and food prices, it could be affected by upward pressure due to increased import spending amid continued currency depreciation. From January 2024, BPNG implemented a crawl-like exchange rate arrangement aiming to reduce Kina overvaluation and ensure its price is more reflective of its market rate. The central bank subsequently raised its key rate by a cumulative 200 basis points to 4% (as of November 2024).
Fiscal consolidation to continue
The budget deficit climbed to 8.8% in 2020 during the pandemic but is on a downward trend due to consolidation efforts that were the conditions set for extended IMF credit facilities. The deficit should narrow further in 2025 and the government expects a balanced budget in 2027. Public revenues are expected to increase thanks to the resource and non-resource sectors, driven by improved economic activity. Resource revenues include dividends from state-owned enterprises and taxes in the mining and oil sectors, while non-resource revenues include tax on goods and services, personal income tax, and corporate tax. However, the government faces major spending challenges. While fiscal consolidation is a priority, the government must balance the needs in terms of cost of living for the poorest Papuans, development projects, law and order, health care, and so on. For the 2025 budget, law and order issues are likely to take centre stage, given the ongoing risk of social unrest. Meanwhile, a significant proportion of public spending will continue to be devoted to ongoing development projects. The current account will continue to show a large surplus, driven by LNG and gold exports, as well as the improved competitiveness expected from the depreciation of the kina. Despite this, the surplus will fall slightly as imports increase owing to the need for capital goods to implement development projects.
Although below the 60% ceiling, public debt is made up of a significant proportion of short-maturity securities (treasury bills), creating a slight refinancing risk. Public financing will therefore continue to shift towards a growing share of bilateral and multilateral donors as domestic sources of financing become increasingly costly. In this context, the IMF approved in March 2023 a 38-month arrangement under the Extended Fund Facility and the Extended Credit Facility, for USD 918 million. As at October 2024, approximately USD 488 million remained to be disbursed under the IMF ECF/EFF arrangement. While fiscal consolidation is unpopular owing to the pressure it places on the poorest households, IMF support should help to alleviate currency shortages and restore financial stability.
Persistent risk of social unrest
After dealing with the pandemic and against the backdrop of the war in Ukraine, Prime Minister James Marape returned to office following the legislative elections in July 2022, albeit amid some tension. The country, which is historically known for its tense elections, was once again the scene of electoral fraud and violence that led to the deaths of 55 people. However, the Prime Minister's party, PANGU, emerged stronger with a comfortable victory (39 seats won by his party and 77 by its broad ruling coalition out of the 110 at stake).
While the unpopular reforms surrounding the IMF credit facility did not meet any real political resistance, bread-and-butter issues led to deadly protests in January 2024 in Port Moresby. Pay cuts for police and other civil servants led to strikes outside Parliament. The government attributed the pay cuts to a computer error that should have been corrected the following month, but that explanation was not enough to calm the protests. This prompted Prime Minister Marape to declare a 14-day state of emergency and deploy the army. At least 22 people died and 41 were injured. Marape reshuffled his cabinet following the events. The absence of an effective national political opposition should enable the Prime Minister to remain in office in 2025. In light of the fact that no elections are scheduled until 2027, a vote of no confidence in Parliament similar to the one in September 2024 is likely. Marape should escape unscathed, as he did in September when he obtained 75 votes in his favour and 32 against. Marape will still have to deal with local, environmental and land disputes over decisions related to the exploitation of natural resources in a highly fragmented society. Tribal violence in Papua New Guinea, particularly in the Highlands, has escalated significantly, with clashes resulting in deaths following disputes over mining resources in the Porgera Valley. The introduction of automatic firearms has intensified these conflicts, leading to higher casualties and a breakdown of traditional conflict resolution methods, an example of which was a massacre in which at least 49 people were killed during a tribal dispute in Enga Province. The question of the independence of the island of Bougainville subsists. The result (98% in favour of independence) of the non-binding referendum held in November 2019 in this autonomous region has given rise to negotiations between the government and the province. However, the government remains reluctant to grant full independence to the province given its copper reserves.
On the geopolitical front, Marape will continue to forge closer ties with Australia, which has been working to build a special relationship since 2019, notably through the development of projects in key areas (telecommunications, port activities, etc.). At the same time, the country strives to maintain a balanced relationship with the US and China. In May 2023, PNG signed a Defense Cooperation Agreement (DCA) with the US, enabling enhanced military collaboration seen as part of the US strategy to counter China's influence in the Pacific region. Meanwhile, China is PNG's largest trading partner, and Chinese investment makes a significant contribution to the PNG economy. However, growing indebtedness to China has raised concerns about the political influence China could exert on PNG.
