The Papua New Guinea economy faces a conundrum: how to finance deficit spending as cheaply as possible. ANZ analysts suggest a global bond issue as a solution. At the same time, ANZ CEO Mike Smith urges a national discussion about how to capitalise on the Asian Century.
ANZ’s Mike Smith
‘I hold a bullish view about PNG’s future,’ declared Mike Smith, addressing the Port Moresby Chamber of Commerce and Industry last week.
‘Since my last visit around 18 months ago, PNG has achieved some significant milestones, including the first shipment of LNG in May this year. This is an extraordinary achievement, which has brought benefits to PNG and its people.’
He referred to last year’s ANZ report, Bold Thinking: Imagining PNG in the Asian Century, which showed the growth in exports between the Pacific and Asia had quadrupled in the decade to 2012, while imports from Asia into the region have risen by more than 10 times over the same period.
‘Across the Asia Pacific region, we’re already seeing strong trade flows, which have risen from US$1.7 billion in 2000 to almost US$10 billion in 2013,’ Smith said.
‘PNG can benefit from a more active conversation about how to make the most of the opportunity presented by the Asian Century.’
Bond issue
Meanwhile, ANZ economists report government expenditure is outpacing revenue receipts ‘by a considerable margin’ and the answer could be the country’s first bond issue.
In ANZ’s latest Pacific Quarterly Review, they argue that, while the level of deficit spending is appropriate, deficit spending ‘is likely to become more constrained as revenue appears likely to miss targets and domestic financing is becoming prohibitively expensive’.
As well as being a cheaper source of funding, a bond issue will provide exporters greater incentives to return to the foreign exchange market.
The fiscal balance is now expected to be -6.9% of GDP (K3bn), up from an initial target of 5.9% (K2.6 billion). And if K600 million in state asset sales do not eventuate, the fiscal deficit would rise to 8.3% of GDP.
‘If additional sources of financing are not tapped, expensive domestic financing and uncertain revenue receipts put the fiscal boost at risk this year, and possibly next. This would delay much needed infrastructure development to later in the decade,’ says the Review.
The reports authors say the time to consider a global bond issue is drawing close.
As well as being a cheaper source of funding, a bond issue will provide exporters greater incentives to return to the foreign exchange market.
The report says countries with the same credit rating as PNG (B1, Moody’s) have bond yields trading at 5–6%, while the local market yields at 12–13%.
USD 0.2634
AUD 0.4094
GBP 0.2127
EUR 0.247
NZD 0.4457
JPY 40.76
SGD 0.3586
Thanks for the full report.
It is worth noting that, there was no mention of how the government is not adequately fulfilling its local wealth creation policy through the investment of the local banks and retirement funds in Government Inscribed Stocks.
Suffice to say, these local banks and retirement funds not only return significant funds back to the government through tax but income taxes and also through many other ways. These money rotate within the country as opposed to bond coupons which tend to take the flights – one way out of the country.
One of the retirement funds, NASFUND has acknowledged this benefit in the National Newspaper today “The National Superannuation Fund recorded a net profit of K124.39 million compared to a budget of K68.60 million and K75.27 million for the same period last year. Chief executive officer Ian Tarutia said the main contributors to the income revenue in the first half year were interest on government bonds, treasury bills…” (http://www.thenational.com.pg/?q=node/74846 The National, p.54 3rd Sept 2014).
Coupled with underwriting fees, and other transaction related costs, the government stands to be commended for the approach taken so far.
Another interesting observation was the continued “over-subscription” trends in “Inscribed Stocks issued by the Treasury and the Bank of PNG” for the past one year (July 2013 to July 2014) with the exception of March 2014. This is an interesting and telling test for liquidity in the country.
The “similarly rated global bond issues” table (Fig.12) only shows bond volume (sizes) below US$3 billion. . If we can apply the local liquidity test, this volume can be comfortably catered for internally.
The slow pace of recovery from the subprime mortgage crisis and heightened conflicts in the Middle East and greater Europe, there is less incentive for PNG to expose herself with the suggested bond issue.
@CorneyKAlone
Hello,
I believe this is the full report:
https://anzlive.secure.force.com/servlet/servlet.FileDownload?file=00PD000000Ymzb4MAB
Interesting read about the bond issue.
I am wondering if the full report is available in the public domain for further independent analysis.
Would be nice to see what specific bonds are recommended for PNG (short-term, medium-term and long-term),
One would also be satisfied to examine the benefits of the bond interest payment arrangement, be they based around fixed, floating or at maturity rates?
I hope the report also indicates solid reasons why a local market yield of 12 to 13 % does not adequately fulfill the government’s stated policy of building wealth for the country’s own people through their retirement funds’ investments and local banks as is happening now.
Not long ago, the ANZ Bank and the World Bank have cited investment risks posed by security concerns. One would wonder what would be the likely scenario when credit rating agencies which are outside of PNG’s province of responsibility starts tweaking rating figures based on assumed fears and perceptions