Foreign Exchange Inflows to Remain Tight in 1st Quarter 2020, after Strong End of Year Flows

Foreign exchange liquidity is expected to tighten, and volumes fall, after stronger Foreign Exchange inflows in December 2019.

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Rohan George, Group General Manager Treasury highlighted in BSPs Economic & Market Insight December Quarter publication, "FX inflows are expected to taper from the larger volumes seen in December 2019, into the seasonally subdued 1st Quarter of 2020."

He said reduced FX inflows and growing New Year import flows as importers restock, will see FX liquidity tighten and a consequent increase in outstanding orders in the PNG FX market. "Bank of Papua New Guinea will continue to intervene, supplying foreign currency to the market on a monthly basis, to assist in managing the mismatch between FX inflows and outflows," he said.

"FX inflows are forecast, at the end of the March quarter, to pick-up, reducing outstanding orders, aiding importers, with many of these importers, relying on BSP to fulfil their foreign exchange needs." Rohan George also expects the current slow, gradual, downward bias of the Kina against the U.S. dollar to persist in 2020.

The improvement in foreign currency inflows in March 2020 is likely to be supported the Palm Oil price, which has improved by 50%, in the past 9 months, and increased activity in the mining and agricultural sectors.

Palm Oil prices are expected to find support in 2020 with higher biofuel mandates in Indonesia and Malaysia seeing an end to a four-year low in July 2019. In January 2020, Indonesia rolled out a B30 biodiesel mandate, requiring diesel to contain 30% palm-based biofuel, up from 20%. Malaysia's biofuel mandate was also increased to 20%, from 10% previously. The implementation of the B30 mandate in Indonesia and the B20 mandate in Malaysia will translate to a 25% and 15% increase in biofuel demand according to analysts. Dry weather in 2020 will limit production volumes, whilst strong competition from soybean and sunflower oil substitutes and weaker oil prices will cap prices.

The Kina is likely to outperform against the Australian dollar (as was the case in 2019), with Australian exports of Iron Ore, Coal, Agriculture, Tourism and Education disrupted by both The Bushfires and The Coronavirus, and U.S. interest rate differentials weighing on the Australian dollar.

Gold continues to benefit from persistent global uncertainty in 2020, whilst analysts are predicting Oil and Copper prices will fall slightly, both suffering from weakening global growth and oversupply.

PNG exports of green coffee reached approximately 800 thousand bags in 2020.