Domestic credit in Papua New Guinea sound, say finance executives

Businesses in Papua New Guinea may be finding it hard to get foreign exchange, but credit quality within the domestic economy remains relatively healthy. Finance executives and analysts tell Business Advantage PNG they are seeing only slight signs of deterioration, despite the weak economy.

The NDB’s Moses Liu says defaults have only slightly worsened.

Moses Liu, Managing Director of PNG’s National Development Bank, says he has not observed credit quality changing substantially, although he says ‘there has been a slight increase in the defaulting accounts last year and this year, due to the depressed state of the economy.’

Bruce Mackinlay, Managing Director of the industry-funded credit organisation Credit & Data Bureau, has likewise not detected any significant deterioration. He says that receivables in kina ‘may be creeping up slightly,’ but adds that it ‘does not present a huge problem, at least for us.’

However, Mackinlay detects a growing interest in the checking of credit quality in PNG, pointing to growth in ‘membership activity’ in the Bureau, which maintains a database of credit history in PNG and the Solomon Islands.

‘There is, and there has been, significant liquidity in the system for some time.’

‘Credit history checking will probably average over 20,000 per month this year,’ he says.

‘Default uploading continues to be steady; and member recoveries continue to grow. It is now over K241 million.’

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Resilience

Moni Plus’ David Kelso Source: Moni Plus

David Kelso, Managing Director of Moni Plus, believes one reason credit quality within PNG has remained reasonably strong is the lack of availability of foreign exchange.

‘There is, and there has been, significant liquidity in the system for some time—which is consistent with the lack of foreign currency to pay for imports.’

Kelso notes that ‘loan assets that are reliant on government/public sector cash flow are under stress.’

But he believes that the most of the economy is coping with the weaker economy.

‘The resilient companies in the private sector, whose dependency is not on government cash flow to service debt obligations, are holding their own in difficult trading conditions.’

Private sector

A further indicator of credit quality in PNG comes from Bank South Pacific. Its latest shareholder presentation notes that the provision for bad debts (loan provisions as a proportion of total loans) remains steady at 4.9 per cent.

‘Banks in PNG are quite conservative in their hunt for bankable projects.’

Credit growth may well also be stable in PNG because of tight lending conditions.

Economist Paul Flanagan believes banks in PNG are quite conservative in their hunt for ‘bankable projects’ in the private sector.’

‘The state development bank’s debts are poor, as is the case for many state development banks,’ says Flanagan. ‘But it is, thankfully a very small part of the credit sector.‘

The most recent IMF Article IV report on PNG confirms this picture. It notes structural impediments, such as ‘contract enforceability, property rights, and land tenure’, slow the expansion of credit.

‘The IMF predicts that domestic credit in PNG is projected to rise by 5.3 per cent in 2017, up from 4.9 per cent last year.’

‘Although some interest rates are low or negative in real terms, private credit remains constrained, as near-zero deposit rates are coupled with significantly higher lending rates, in part due to pricing of credit risk.’

The IMF predicts that domestic credit in PNG is projected to rise by 5.3 per cent in 2017, up from 4.9 per cent last year. Credit to the private sector is projected to rise by 8 per cent, up from 5.7 per cent in 2016.

This is sharply lower than during the LNG b0om; in 2012, domestic credit rose by 37.7 per cent and in 2013 40.9 per cent.

The IMF report comments that PNG’s ratio of domestic private credit to GDP is ‘well below the average for East Asia and Pacific developing countries, Pacific Island Small States, and other Middle Income Countries.’

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