: Super User; Region; 12 February 2012; Hits: 1315

One Step forward, three Steps back for PNG

JUST as it looked as if impoverished Papua New Guinea (PNG) was about to become a favoured investment destination, a series of events last month underlined just how politically risky the country really is.

On Jan 26, former colonel Yaura Sasa led a small group of soldiers in a pre-dawn mutiny. Arresting the head of the armed forces Francis Agwi, Mr Sasa named himself the new military leader.

It wasn’t a full-blown military coup. But it came close. After detaining Brigadier-General Agwi, Mr Sasa set a seven-day deadline for former prime minister Michael Somare to be restored to office, warning ominously that he “may be forced to take necessary actions to protect and uphold the integrity of the Constitution”, if he was not heeded. Fortunately, the tense situation was resolved without bloodshed later the same day when the government persuaded the soldiers to release Mr Agwi and withdraw.

The mutiny was part of an extended power struggle in which Prime Minister Peter O’Neill and Mr Somare claimed to be the rightful leaders of the South Pacific nation. At one point during the crisis, Papua New Guinea had two prime ministers, two governors-general, two Cabinets and two police chiefs.

PNG’s political woes are not yet over. National elections are due later this year and it is not at all clear what the outcome of the elections will be.

The economic impact of months of political uncertainty has also yet to be fully ascertained. Following the mutiny, ratings agency Standard & Poor’s revised the nation’s long-term sovereign credit rating from stable to negative. Standard & Poor’s maintains a B+ local and foreign currency long-term rating and a B short-term country risk rating.

PNG is entirely dependent on foreign capital and expertise to develop its resources. It cannot afford anything that encourages foreigners to shy away.

Before the latest political troubles, PNG was widely regarded as standing on the threshold of a major resources boom, due largely to a huge investment in major gas reserves by ExxonMobil. This project, which by some estimates could contribute to an increase of 15 per cent to 20 per cent in PNG’s gross domestic product (GDP) a year, will probably still go through. After all, it is partly supported by a US$350 million (S$441 million) loan from the Australian government. Investors with less political, economic and diplomatic clout, however, may be having second thoughts.

It all seemed so very different last November, when a World Bank report on economic conditions in the Asia-Pacific region included a glowing assessment suggesting that the coming resources boom could have positive implications for broader economic development. Growth last year, said the report, would reach 10 per cent. Economic expansion, it continued, was being spurred by three main factors: foreign investment-funded construction projects; soaring prices for Papua New Guinea’s exports; and bullish government spending.

But the international financial institution also expressed concern about several domestic and international developments. These included a possible reversal in commodity prices (leading to reduced willingness of foreigners to invest in related resources projects), supply constraints (particularly for skilled labour) and the quality and effectiveness of government spending programmes.

Of these, at least two (willingness of foreigners to invest and the effectiveness of government spending programmes) could be negatively impacted by continued political instability. And with local political leaders preoccupied with the struggle for power, less attention is likely to be given to rising inflation and finding ways to translate economic growth into what the World Bank describes as a “sustainable and broad-based improvement in living standards”.

The coming elections add to these uncertainties. Although some politicians like Mr Somare have been around for a long time, there is usually a very high turnover of parliamentarians at PNG elections, with up to 80 per cent of members losing their seats. And with no party ever having won an outright majority, governments have always been coalitions.

For decades, PNG has struggled to throw off its reputation as a politically dysfunctional and often lawless nation. Last month’s events have made that endeavour seem even more problematic

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.