Low PNG Kina may not attract investment

WESTPAC Bank says the flows into the foreign exchange market increased in May and June before easing in July. The bank in releasing its PNG Economic Outlook-August 2016 yesterday attributed the increase due to increases in exports in the tree crop sector in coffee and cocoa. “The increase in currency coming into the country due to the coffee and cocoa exports coincided with a slowing in the rate of depreciation in the Kina. Economists from the bank said the benchmark PNG Kina US Dollar rate had been falling by approximately 40 points per month up until mid-may where the official Bank of PNG rate held at 0.3155. Pertinent questions that were posed in the report were “should the Kina continue lower and if so how low?

 “The textbook answer is PNGKUSD needs to depreciate to lower levels to test the sensitivity of foreign investment to the lower exchange rate.  “Our view based on the slowdown in the economy and in import demand–putting to one side for the moment the back log of import orders-is that the Kina should be trading somewhere around 25 cents against the US dollar.”

Further questions raised were  if  the currency was at that level if it would increase foreign investment sufficient to clear the back log of orders, given where the country is in the commodity cycle? Its response was “probably not”. The bank said given that PNG’s economy is predominantly natural resource based that foreign investment into PNG is more sensitive to higher commodity prices than to a materially lower Kina. Meanwhile Westpac in its report stated that Kina had closed only five points lower over the last two months following on from a 15 point depreciation against the US dollar in may to 0.3160 compared to 50 points lower in April from 0.3210 and a 45 point deprecation in March frp, 0.3255. “It is debatable whether a materially lower Kina will attract increased foreign currency inflows but the current supply/demand mismatch will continue to see the PNGKUSD under pressure.”  It forecasted a moderation in decline in PNGKUSD and with the recent strength in Australian dollars revised its forecasts for both PNGKUSD and PNGKAUD. Post Courier/ ONEPNG