January 29, 2013

Papua New Guinea: Overlooked Opportunity For Emerging Markets Bulls


Papua New Guinea is an investment opportunity often overlooked by emerging market bulls. What do they commonly look for? High growth, steady government, abundant resources.
The economy of PNG is steady and growing quickly on the strength of the agriculture, mining, and oil/gas industries. The country is one of the worlds most unexplored and this thought to still be home to numerous undocumented plants, animals, insects, tribes, and languages.
This underdeveloped economy is ready for growth and appears surprisingly open to foreign investment. Like every nation on Earth, there are problems (which I will outline), but what makes investment in PNG special is the how surprisingly overlooked and underdeveloped the country and economy is despite the vast natural resources and economic and political stability.
(click to enlarge)
GDP Growth
PNG's GDP was 16.9 Billion in 2011, a growth of 8.9% (12th in the word according to the CIA) from 7.8 and 6.1 percent in 2010 and 2009 respectively. The Debt-to-GDP is a surprisingly low 22.9%. The government is pro-investment in a country that has good reason to want to protect its incredible wealth of natural resources. ExxonMobil recently led an approved 16 billion dollar liquefied natural gas deal.
Chinese investment is "just beginning" according to The Australian, yet state-owned Chinese firms have already broken ground in numerous mining projects including the 1.4$ Billion dollar Ramu nickel project. Malaysian logging companies export to China. Canadian company Talisman Energy is making bets on PNG. The Industrial Production Growth Rate, as measured by the CIA World Factbook, was 10% in 2011. The country is open to development and GDP growth is already excellent.
(click to enlarge)
Sri Lanka is the other country besides PNG revised up 1% from previous projections. PNG was revised up 2.2%.
Geographic Positioning
PNG is neighbors with the Philippines, Japan, Malaysia, and Indonesia (whom PNG shares its sole land border with). Long-term support in trade, defense, and diplomacy is near-guaranteed from neighbors and fellow Commonwealth members Australia and New Zealand. Apmple trade can be expected from all neighbors as well as Russia, India, China. It is clear that Papua New Guinea is well positioned to benefit from rising number of accessible creditors and trading partners in Asia.
Unexploited Resources
The Wall Street Journal writes: "once a frontier region for exploration, Papua New Guinea has been transformed into a playground for the energy industry's big beasts seeking gas reserves that can be developed and shipped to Asia's booming economies." The country is known to many mining investors and has huge proven oil and natural gas patches. Papua New Guinea is also still largely unexplored with oil and gas in mind, and more opportunities are surely undiscovered.
PNG also has one of the largest remaining tuna stocks in the world, and is an exporter of crayfish and prawns. Most of PNG is covered in dense rainforest that ranks as the world's third largest. This is extremely fertile land. The agriculture sector is unsurprisingly subsistence based, and more than most, but we can see this as an opportunity to introduce advanced farming equipment and techniques. The agriculture sector is trending up and the citizens of PNG are set to benefit from their knowledge and expertise; according to the CIA, 85% of the working population works in agriculture.
The country is one of the few remaining commonwealth realms with considerable land mass alongside Canada, Australia, and New Zealand. One could point to this as a stamp of stability. It is important to note that PNG consists of almost a thousand languages and many ethnic groups. The government is a great unifying element the people need to lead Papua World Guinea into the world economy.
Cons That Aren't Really Cons
Land issues
Currently 97% of PNG land is on 'protected reserves' of hundreds of fragmented tribal communities, but this is changing. The hundreds or thousands of languages and ethnic groups in PNG are rapidly disappearing. People are moving to cities. The tribal land system is written in the PNG constitution, and some foreigners have become entagled in land disputes. The tribal land system, for good or bad, is showing signs of break down or compromise. According to Greenpeace, land is being signed over to investors with relative ease on 99 year leases. Offshore concessions are accessible.
High Crime Rates
High crime rates land the capital city Port Moresby the 139th out of 140 most "unlivable cities" according to The Economist. The government isn't spending a whole lot of money on infrastructure or relieving social ills, which is good or bad depending on the school of economics you adhere to. PNG is actually paying off its defecits. After a period of sustained foreign investment the improved infrastructure, job opportunities , and standard of living should substantially lower crime rates. Should a stable emerging market be in leagues with the countries below?
(click to enlarge)
(click to enlarge)
Inflation Rate
Although inflation was 8.4% in 2011, The World Bank suggested in a report on PNG the same year that "PNG's inflation has shifted to being domestically-driven, caused by capacity constraints in the face of the large increases in demand, in contrast with the historical pattern of inflation outbreaks being due to rising import prices." The nation's currency, the Kina, is also making a consistent and notable rise in value against the American dollar.
(click to enlarge)
Where to Invest
PNG is home to possibly the most rural population in Asia (at 82%) and as more people move to cities there is a need for residential housing, grocery stores, and other service sector opportunities. In energy we can get direct exposure from InterOil (IOC). PT Telekomunikasi Indonesia (TLK) is taking stakes in firms outside Indonesia, and could have good reason invest in its land neighbor. Mining access on the public markets include Australia-based firms like Highlands Pacfic, Peabody Energy Australia, and international firms Papua Mining PLC and Papuan Precious Metals Corp. ExxonMobil (XOM), Talisman Energy (TLM), and Xstrata also have natural gas rights in PNG. New Guinea Energy is more direct. The Papua New Guinean Kina (PGK) could be an option as well, and has made consistent gains against the US dollar (42% over 5 years).
Source: Seeking Alpha 

Author: verified_user