BSP financial report cited increased tourism and...

BSP financial report cited increased tourism and resource/infrastructure projects likely to see increased profits.
A stronger Kina in relation to Aud would help us see more profits in our hand. Imagine a 1:1 rate, return to shareholders would more than double considering FY22 rate was 1 Kina for $0.4 AUD. It has weakened by about 5% since then. Now how would Influx of capital from tourism and for projects influence the FX rate? I would expect strength in the economy to fuel influx of capital which would fuel inflation causing need to raise Interest rates (IR) which would inadvertently see greater amounts of capital influx on bank deposits, which is great for PNG banks. This is assuming interest rates to be disproportionately higher than most other nations. Higher interest rate = stronger currency, but this weakens the economy which is a representation of the currency.

In part I see that the drop in the FX rate has to do with Australia's more dire economic condition than PNG. Here, we have seen more rate rises and higher inflation than PNG resulting in strengthening of the AUD in relation to the Kina. But USA was more severe than AUS and UK even more so. This goes back to the level of indebtedness that each nation has per capita. The flip side of the coin is that when AUS starts lowering IR on worryingly low inflation (which I think is likely in the next 6-12 months) this will likely lift the Kina, as long as the PNG gov keeps their IR slightly higher, or at least, lowers them more gradually. But then why would they? Influx of tourism/project work should keep inflation higher? But not necessarily so, currently, PNG inflation was at 1.4% in June 2023 and now up to 2.2% in Q3 2023, this, for any western style economy, is dangerously low, and is a representation of what is to come to us. This signals stimulus/tax cuts on the horizon as historically, PNG has historically average inflation at 5-6% for the last 20 years, at a time when FX rate to AUD was higher.

So here, low FX=low inflation or vice versa. But PNG benchmark interest rates are the lowest on record in the last 20 years, now at 2%. So now we have low inflation, low interest rates and a low FX rate! What is the PNG government to do? Although out of the 3 variables, the only negative one is the FX value, which is not a very high negative considering it has only devalued 5% of recent highs, it could go further like it has in the past. Exports will benefit greatly with the weak Kina, especially compared to the strong USD, which is the lowest it has ever been, at 0.26 compared to 0.46 10 years ago. Although the AUD was not much different then, at 1AUD = 1.06USD whereas now 1AUD = 0.66USD.

We can see the low IR as a contribution factor to the low FX rate, and I would say that it is unlikely to go up if inflation remains as low as it is. Arguably, PNG is economically where Australia wants to be. We could expect further weakening of the Kina, which would be a problem for imports and rising cost of living in PNG cities, but it will also boost tourism and foreign investment is cheaper for the foreigner when dealing the people of PNG. This influx ought to stop the drop to an extent, but the government, with pressure from the people, would be inclined to strut its stuff and provide economic stimulus, especially from extra profits following its raid on the banking sector (especially on BSP).

With low inflation and record low interest rates, one would expect the PNG people to be borrowing with an appetite. Although, on the other hand this will reduce banking profit margins on top of the increased tax rate. Will volume make up for loss of interest income? Statistics show that GDP per capita is rising and overall GDP is up extraordinarily over the last 24 years. Rising from US$5B to US$31B in 2022. Now this is in USD terms we know that Kina value has fallen in comparison to USD. Australian GDP growth was weaker, rising 400% in the last 24 years compared to PNG 500%. It is close, but I see this is the advantage of size. Smaller is more manurable, adaptable, manageable and scalable. Much the same reason I prefer a smaller bank like PNG that is prudently managed. Looking forward to FY results.