BSP Financial : Pacific Economic & Market Insight Quarter 1 2023

PACIFIC ECONOMIC AND MARKET INSIGHTS

March Quarter 2023

BSP Classification: Internal Use Only

MARCH QUARTER 2023

Key trends at a glance

GLOBAL ECONOMY SLOWS DOWN

• Global inflation is expected to decelerate from 8.7% in 2022 to 7.0% in 2023. Advanced economies inflation rates are projected to slow down to 4.3% in 2023.
• Global GDP growth is expected to slow from 3.4% in 2022, to 2.8% in 2023. Monetary policy action is the key factor in global economic output forecasts.
• Apart from the Russian-Ukraine War and persistently high inflation, the recent financial system vulnerabilities pose a serious downside risk to global growth outlook.

COMMODITIES PRICE TRENDS

• Energy prices fell in Q1-23, as global supply and rising dollar impacted pricing outcomes.
• Precious metals inched higher in March as tightened supply and "banking crisis" fears pushed demand for safe haven assets.
• Cocoa prices continued their upward trend in Q1-23, driven by weather patterns affecting Ivory Coast cocoa yields.
• Arabica coffee prices declined, as positive weather conditions fueled crop prospects.
• Palm oil prices increased due to lower edible oil stocks.

PNG LOWER GROWTH IN 2023

• PNG's 2023 GDP growth projected at 2.4%,

lower than 2022 GDP of 3.2%. The downgrade is mainly driven by a delay in the restart of Porgera gold mine and anticipated lower output in the oil and gas sector.

• PNG's Balance of Payments in 2023 is anticipated to be at negative PGK1.1b, as a deficit in the capital and financial account

is expected to offset a surplus in the current account.

• There is some upside over the medium term outlook, as Papua LNG final investment decision is expected in late 2023 or early 2024.
• Inflation is anticipated to moderate to 5.0%, from 6.0% in the previous year. The decelerated inflation forecast for 2023 is mainly due to the easing of foreign inflation supplemented by improvements in the supply chain of energy and food commodities.
• PNG's economic productivity continues to be battered by its constrained FX supply where regular BPNG market intervention is a necessity.
• Gross foreign reserves declined from PGK14.2b in Dec-23 to PGK13.7b in Mar- 23.

SOUTH PACIFIC GROWTH EASES

• Growth in the Pacific for 2023 is forecast to slow down to 3.3%, from 2022's estimate of 5.2%, mainly due to PNG and Fiji growth downgrades.
• Growth in the Pacific is mainly driven by the tourism sector.
• Inflation for the region is expected to slow down to 5.0% in 2023.
• Vanuatu and Tonga are slowly recovering from natural disasters that weakened their 2023 growth outlook.

REAL GDP GROWTH

2022 2023 2024

+15.9% +6.3% +3.0%

-4.2% +3.0% +2.4%

-6.0% +4.8% +2.5%

-2.2% +2.5% +3.2%

+2.0% +1.0% +4.2%

+10.5% +11.2% +9.1%

Source: ADB Asian Development Outlook (ADO) Apr-2023

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MARCH QUARTER 2023

BSP's economic and market views

Mark T. Robinson

Group Chief Executive Officer

What are your thoughts on the impact of the IMF US$918 million (K3.2 billion) Extended Credit Facility and Extended Fund Facility on PNG?

• In March 2023, the IMF approved PNG's request for US$918 million under its Extended Credit Facility (ECF) and Extended Fund Facility (EFF). The 38-month IMF arrangement will support PNG's reform agenda, focusing on alleviating FX shortages, strengthening debt sustainability and enhancing governance.
• Although PNG recovered well from the effects of COVID-19, it is still faced with a constrained fiscal space, increased debt stock and FX shortages that often impedes business activity and discourages foreign investment. Addressing these issue's will need effective policy action under PNG's reform agenda.
• If the government can soundly implement its reforms and properly address issues the economy is faced with under this facility, it will be an impetus for future economic growth in PNG and underline government commitment to progressive policy action.

With the recent events unfolding around Silicon Valley Bank, Signature Bank and Credit Suisse, how is BSP positioned to withstand global headwinds?

• BSP has a strong balance sheet and prudent liquidity management to protect our customers. We continue to monitor external financial contagions and the domestic economy to ensure customers' deposits are safe.
• Our capital adequacy and leverage ratios stand at 24.6% and 9.9% respectively, which are well above domestic and international regulatory standards.

Are there any significant developments that could influence the PNG economy through the course of 2023?

• The US$10 billion (K35.2 billion) Papua LNG project has reached the front-end engineering and design (FEED) phase of the project, which is the last major stage before go-ahead is given. The project represents a significant investment in PNG and will serve as a catalyst for further economic growth.
• The final investment decision (FID) is expected in Q4-23 or Q1-24, which then triggers a construction phase that is expected to last four (4) years. Resource-adjacent sectors will see a sharp growth increase during this period, as their services are called on to support the construction phase.
• Barrick and the State have come to an agreement regarding the reopening of Porgera mine. It is estimated that Porgera reopening would result in an uplift of 1.4% in the economy.
• These two resource projects, and several more in the pipeline, represent significant tailwinds that will spur investment and activity in the medium-term. These projects provide the impetus for broader economic activity and solid foundation for long-term growth.

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MARCH QUARTER 2023

BSP's economic and market views

Peter Beswick

Group General Manager - Corporate Bank

How would you characterise current business sentiment and what's driving the latter?

• Business sentiment is robust following the announcement of the Papua LNG project reaching the front-end engineering and design (FEED) phase and Porgera's resumption progress announced by Barrick CEO early April.
• Papua LNG's final investment decision (FID) is expected to be reached in late 2023 or Q1 2024. This will deliver substantial opportunities through "local content" for landowner and PNG companies … either directly or through Joint Ventures, with global engineering procurement and construction contractors.
• On the downside, the delay of Porgera's resumption will prolong distress with FX supply over the short-term. Total foreign currency reserves fell from US$4.1b in 31st December 2022 to US$3.9b as at 29th March 2023, due to government debt repayments and increases in BPNG FX intervention.
• BPNG states that the IMF funding of US$918.2 million over the next three years for budget support, will have minimal effect on BPNG's international reserves, due to increases in intervention and government debt repayments. However, the medium-term outlook remains optimistic and will be dependent on the timely commencement of resource projects (Porgera, Wafi-Golpu, P'nyang, Twinza).

Do you expect inflation to be a major concern in 2023?

• Inflation still remains a primary concern for BPNG, businesses and consumers. Although, inflation is expected to recede in 2023, compared to last year, as lower global output, improvements with supply chain and lower commodity prices, especially on fuel, are to contribute to lower price pressures.
• Given inflation expectations, BPNG reported that it will pursue a neutral stance on monetary policy to September 2023. Although, it will remain vigilant on inflation levels throughout the course of 2023.

Rohan George

Group General Manager - Treasury

How was foreign exchange liquidity and the Kina in the first quarter of 2023?

• FX market turnover in the March quarter fell 2.4% from the December quarter 2022.
• A pullback in commodity prices, in particular Oil, Copper and Palm Oil and the January holiday season reduced FX market turnover volumes.
• FX turnover for 2023 increased by 8.9%, compared to the prior year. Outstanding FX orders with BSP increased seven fold (700%) in the past quarter, with post Christmas import orders increasing rapidly, whilst FX inflows fell.
• BPNG FX intervention in the March quarter 2023 was unchanged from the previous quarter, but rose 59% from one year ago.
• Despite increased Central Bank intervention, the PNG FX market continues to miss the foreign currency contribution from Porgera.
• The Kina mid-rate was stable against the US dollar at 0.2840. The Australian dollar fell 1.5%, reflecting weaker commodity prices, concerns of an economic slowdown and a pause in interest rate increases.

What's the outlook for FX inflows for the upcoming quarter and how should Corporate and Retail customers manage volatility in foreign currency inflows?

• After subdued FX inflows in the March quarter, we do not expect a pickup in FX inflows in the June quarter. BPNG will continue to support the market, however subdued commodity prices and the uncertain global environment will see outstanding FX orders remain at high levels and subsequent FX order execution times lengthy.
• To manage volatility in foreign currency flows, businesses should place FX orders (with correct documentation), as soon as possible, ensure orders are cash backed whilst awaiting execution, tax clearance certificates are current and reflect the expected FX order execution time.

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MARCH QUARTER 2023

Global growth outlook

Global output is expected to decrease on the back off a progressively tighter monetary stance by Central Banks. However, looming uncertainty about the health of the financial system poses a downside risk to global economic outlook.

IMF WORLD ECONOMIC OUTLOOK- REAL GDP GROWTH (%)

	IMF Prior Forecast	IMF Current Forecast	% change
	(January-2022)	(April-2023)
	2022	2023		2022	2023		2022	2023
World	3.4	2.9		3.4	2.8		0.0▲	-0.1▼
●Advanced Economies	2.7	1.2		2.7	1.3		0.0▲	0.1▲
United States	2.0	1.4		2.1	1.6		0.1▲	0.2▲
Euro Area	3.5	0.7		3.5	0.8		0.0▲	0.1▲
Japan	1.4	1.8		1.1	1.3		-0.3▼	-0.5▼
United Kingdom	4.1	-0.6		4.0	-0.3		-0.1▼	0.3▲
●EMDE's1	3.9	4.0		4.0	3.9		0.1▲	-0.1▼
―China	3.0	5.2		3.0	5.2		0.0▲	0.0▲
―India	6.8	6.1		6.8	5.9		0.0▲	-0.2▼

Source: IMF World Economic Outlook (Jan-23 and Apr-23)

• 1 Emerging Markets & Developing Economies

• Global output is expected to reduce from 3.4% in 2022 to 2.8% in 2023, as higher interest rates cool activity. Global Inflation is projected to recede from 8.7% in 2022 to 7.0% in 2023.
• Growth in advanced economies is projected to decline by about 50% in 2023 to 1.3%. Driven by the tighter monetary stance by many advanced economies, before rising to 1.4% in 2024. Inflation for advanced economies is expected to decelerate from 7.3% in 2022 to 4.3% in 2023.
• Stronger growth is projected for Emerging Markets and Developing Economies (EMDE). Growth of 3.9% is anticipated for 2023, a modest decline from 4.0% in 2022, before edging up to 4.2% in 2024.
• The lurking financial system vulnerabilities pose a downside risk to the global growth outlook. The IMF has warned that further financial stress could see global growth decline to about 2.5%, with advanced economies growth falling below 1%.

Developing Asia

GDP (%) Inflation (%)

4.2 4.8 4.8

4.4 4.2

3.3

2022 2023 2024

Source: ADB Asian Development Outlook (ADO) Apr-23

• The Developing Asia region is expected to expand by 4.8% in 2023, from 4.2% in 2022.
• The reopening of China markedly improved both the region and global economy's prospects for the year. East and Southeast Asia are to benefit from increased domestic demand with growth in the Pacific to be fueled by the return of tourists.
• Inflation forecast for the region stands at 4.2% for 2023, before easing to 3.3% in 2024, as it inches back to pre-pandemic levels on dissipating supply- side pressures.
• The Asian Development Bank forecasts growth in the Pacific to decline from 5.2% in 2022 to 3.3% in 2023, as lower growth forecasts for Papua New Guinea (PNG) and Fiji are expected to weigh down the sub-region's growth outlook for the year.

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