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Old 24-06-2010, 02:56 PM
Cool_Guy1 Cool_Guy1 is offline
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What's new in the development agenda?

After a shrink of 1/2 percent in global economic growth in 2009 due to the sub-prime mortgage crisis in America, most of the advance economies and emerging developing economies, such as China and India are picking up in growth. America also has recovered well from the crisis and global growth is expected to be around 4.5 percent in 2010.

Historically growth in PNG tend to be driven by the external sector. When the external sector of PNG does favorably, so does economic growth. However on the flip side, the external sector also plays an important role in the determination of inflation outcomes. Imported inflation and developments in the kina exchange rate tend to play an important role in determining the direction of PNG's inflation outcomes. With the pick-up in global growth, international prices of of all agricultural and mineral products are likely to increase and would result in favorable current account balance.

With a favorable current account balance and the inflow of foreign direct investment earmarked for the LNG project, the country is faced with a prospect of growth.

The challenge however faced at the moment is the high liquidity in the banking sytem due to the prime-pumping of cash into the system by the Government to fulfill their obligations to landowners of the LNG project. Most of the trust funds that we saved from previous years surpluses have been almost depleted due to the constant drawing down of this trust accounts to pay landowners of the LNG project. Consequently, the banking system is flushed with cash, and how much is inflationary and how much is not is a matter for the Central bank or the Department of treasury to work out.

If anticipated growth is dwinddled by the inflation, negative growth can ensure. Such high liquidity floating in the banking system can be inflationary. If anticipated growth rate in PNG is less than inflation, we could end up with a negative real growth. In this regard, the government has to control its expenditure patterns to make sure the Central bank sterilises the liquidity in the system to control inflation. When the government keeps on pumping money into the banking system without consideration of inflation, the central bank is faced with a gigatic task of sterilising liquidity at the cost of its own balance sheet. It is apparent that this can happen if the current trend continues.

In the private sector, the anticipation of the LNG project has been the main force behind the increase in business activities especially in Port Moresby and the LNG project site provinces. Growths in this provinces are led more on expectations, with building booms and high real estate prices. One precaution real estate owners have to take heed is that, are the price explosion in the real estate industry moved by economic fundamentals (demand and supply) or are they speculative (Price bubbles). Home buyers who have a mortgage on a property, during a price bubble tend to loose when the bubble burst. How can that happen? For instance, a home owner might take out a loan based on prices during the price bubble, however then the bubble burst, the price of the house comes down dramaticaly, while the home loan still remains stable. The home owner's liability becomes higher than its asset (the home). No one has done any work on the cause of the increase in real estate price in PNG, and it is a vague area, which is a cause for concern. With the promised institutional houses and private home ownership schemes that are coming up, presummably, prices might tumble down-wards and the people that have committed themseves to loans during the price bubble time might be the ones who loose out.

to be continued......
Life is fragile, take each turn with caution, and live it to the full...

Last edited by Cool_Guy1; 24-06-2010 at 03:19 PM.
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