AUSTRALIAN CONFERENCE ON PAPUA NEW GUINEA

UNCLAS SECTION 01 OF 02 CANBERRA 000615

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/ANP, EEB

E.O. 12958: N/A
TAGS: EAID ECON EFIN PREL PP AS
SUBJECT: AUSTRALIAN CONFERENCE ON PAPUA NEW GUINEA

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1. (U) SUMMARY: Australian Papua New Guinea watchers are
cautiously optimistic about the PNG economy but concerned
about the longer term management of potential revenue
windfalls from major resource projects, particularly the
ExxonMobil LNG project that could double GDP by 2014.
However, Australian economists warn that PNG Government
forecasts are too optimistic and worry that PNG is looking to
spend the windfall profits before the project is up and
running. PNG officials in Australia are trying to convince
observers that the country has learned from previous mistakes
and is prepared to deal with the windfall profits. Australia
provided over A$400 million (US$320 million) in assistance to
PNG in 2008-09 and is the largest source of foreign
investment. Experts in Canberra believe that PNG's overall
economic development strategy is good, with implementation
being the major challenge. Australian observers are
optimistic that PNG,s debt reduction and current account
surplus in 2008 will allow them to weather the global
financial crisis, though they worry about falling tax revenue
caused by slowing global commodity demand. End Summary.

ASSESSMENT ON PNG,s FISCAL POLICY


2. (U) Australia National University held its annual PNG
Policy Forum, considered the premier annual conference for
Australia's comparatively large community of PNG watchers.
Bob Warner, Director of the Center for International
Economics, stated that PNG had a good strategy for dealing
with the windfall profits from a new ExxonMobil LNG project
in PNG,s Southern Highlands. At the same time, Warner
admitted the government had a history of "patchy
implementation" of previous similar strategies and that there
is reason to be concerned about future governments following
this strategy. He warned that the PNG government is already
looking at ways to spend the significant expected profits
from the LNG project but that there will be no cash flow
until 2014. According to Warner, the PNG government is not
sticking to their strategy to use 40% of windfall revenues
from current projects to reduce debt, with only 17% of
current revenues going to service debt. There is no
accounting for 60% of the trust account spending and
government also issued a supplementary budget after running a
deficit in 2008 reversing the planned 1% surplus.


3. (U) The PNG High Commissioner to Australia countered that
the government is anticipating strong profits and is
preparing to use them properly. He suggested that a budget
stabilization fund could easily be created. However, PNG saw
its Mineral Resource Stabilization Fund emptied in 1999 to
deal with government debt instead of vital infrastructure.
Economists at the conference expressed concern about a repeat
caused by insufficient planning. Australia National
University,s Aaron Battan also noted that the government's
forecasted doubling of GDP from the LNG project was too
optimistic.

OUTLOOK ON PNG


4. (U) The panel pointed out that PNG,s economy is
primarily commodity-based and focused on cash crops (coffee,
cocoa and palm oil),minerals, timber and petroleum. Gold,
coffee and cocoa prices have remained stable, but the fall of
oil and copper prices and the fall of timber demand are
expected to reduce tax revenue 25% in 2009. However, AusAID
Chief Economist Mark McGillivray stated that PNG was
QChief Economist Mark McGillivray stated that PNG was
relatively well positioned going into the GFC. PNG,s
current account surplus was 8.7% of GDP in 2008 and the
government reduced debt from 70% to 30% of GDP. PNG,s
banking sector has remained stable and the country has
limited exposure to the decline in tourism. 75% of the
population depends on the subsistence sector which is more
exposed to natural disasters. However, it was noted that PNG
is highly exposed to fluctuations in commodity prices and
overseas demand. Government expenditures and inflation have
also increased substantially with the windfall revenues from
the recent commodity price boom.


5. (SBU) COMMENT: As Australia,s former protectorate and
closest neighbor, PNG remains a major interest to Australian
academics and government officials. Australian experts are
clearly wary about PNG plans to absorb what could be
substantial profits from the ExxonMobil LNG play.
Australia,s mixed record with commodities extraction in PNG

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may play a role in that, but concerns over institutional
capacity and transparency are clearly coloring their views on
how PNG should and will handle the revenue. PNG is
Australia,s largest recipient of development assistance, and
wasteful spending of windfall profits could undermine further
support in Canberra for future increases in assistance. End
Comment.

Clune