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International relations

Papua New Guinea's premier faces balancing act between Australia, China

Budget woes continue as economy hit hard by sagging resource prices

SYDNEY -- Papua New Guinea's prime minister and his party will likely retain their ruling status in the upcoming general election. But even if they win, they will continue to face a balancing act as they try to please rivals China and Australia, whose support the country desperately needs in reining in a snowballing budget deficit.

The once-every-five-years election, from late June to early July, will be contested by over 3,300 candidates for 111 seats in the unicameral parliament, and the People's National Congress party is expected to win and its leader, incumbent Prime Minister Peter O'Neill, to be re-elected.

Saddled with a huge budget deficit, the O'Neill government has increasingly turned to China for aid, even as Beijing has irked Australia by expanding its influence in the Oceania, eroding the presence of Australia, a strong regional power, in the process. Even after the expected victory, a key challenge will be making both countries happy as PNG pursues development through exports of its abundant liquefied natural gas resources.

In a joint press conference after his April 8 meeting with visiting Australian Prime Minister Malcolm Turnbull, O'Neill rhapsodized about the two countries' close relations, and said the two leaders had discussed a wide range of subjects, from trade to investment. Their bilateral ties are growing closer by the year, and Australia is by far the largest foreign investor in PNG, he said.

Turnbull said financial aid to PNG is the largest of Australia's foreign aid programs at 500 million Australian dollars ($374 million) annually. He added that he will seek to build on the bilateral relations with Australia's closest neighbor.

The prime minister promised Australia's support in areas including health care, education and infrastructure projects.

Although PNG and Australia historically have had close ties, O'Neill has recently taken his country closer to China as he sought to improve his nation's deteriorating finances.

Natural resources

PNG has grown by exporting natural resources, including LNG to Japan. China has aggressively invested in the country's mining and telecommunications sectors.

When he met with O'Neill last year, President Xi Jinping said China will provide support to PNG as it prepares to host the Economic Leaders' Meeting of the Asia-Pacific Economic Cooperation forum in 2018.

PNG's deteriorating budget is a reflection of its economy's vulnerability due to its heavy reliance on natural resource exports. According to the Asian Development Bank, the country's economic growth rate reached 13.3% in 2014, led by growing LNG exports, after the country focused on the development of the resource, supported by European and U.S. cooperation. However, growth suffered from a global slump in the resource and energy markets, falling to 12% in 2015 and further deteriorating to 2% in 2016.

The PNG economy has also been hit hard by inflation, which has soared past 7%, severely affecting people's livelihoods. This has led to social unrest in the form of riots and theft, and the public's disappointment with the government has grown.

The government has appeased the public by enhancing education and health care services, but the country's accumulated debt has grown so that it now exceeds 30% of gross domestic product. The situation has forced the government to turn to China for support.

The move did not sit well with Canberra.

Concetta Fierravanti-Wells, Australia's Minister for International Development and the Pacific, recently rebuffed PNG's request that Australia's program-specific aid be directly channeled into the country's budget. "Aid is not charity," she told local media.

Australia has grown wary of China after a recent series of attempted major asset purchases in the country by Chinese businesses.

Canberra is also concerned about China's attempts to increase its influence in Oceania. This has a lot to do with the bitter memory of having allowed China to increase its sway on the South Pacific island nation of Fiji, after Australia withdrew aid following a military coup in 2006. China was quick to fill the aid vacuum left by Australia, an Australian government official noted.

O'Neill surged to the premiership in 2011 after serving as a cabinet minister under then-Prime Minister Michael Somare, in what Somare's supporters called a coup. O'Neill has been praised for achieving a degree of stability in the country, which is prone to ethnic conflict.

PNG gained independence in 1975 after it was colonized by Germany and Britain in the late 19th century, and later ruled by Australia.

By approaching China, the PNG government is running the risk of souring relations with Australia, which could in turn lead to increased unrest in the country, where enhancing law and order remains a major issue.

As the rivalry between Australia and China escalates as they work to expand their respective spheres of influence in Oceania, how O'Neill steers his country will effect the power dynamics in the region.

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