Papua New Guinea’s foreign exchange and budget situation improving, says central bank Governor

Welcome,

The Governor of the Bank of Papua New Guinea, Loi Bakani, says the foreign exchange market is on track to return to normalcy. In an exclusive interview with Business Advantage PNG, he says the PNG LNG project has begun paying taxes for the first time, which is improving the Government’s budgetary position.

Central Bank Governor Loi Bakani says foreign exchange situation is improving

Bakani has told Business Advantage PNG that the bank’s plan is to bring the foreign exchange markets to normalcy ‘this year, with the forex we have now’.

Bakani says the aim is to have foreign currency invoices cleared within one month.

‘We are getting close to that one month. The only thing that is holding on a bit longer is the dividends [payments of profits to overseas companies].

‘‘The international markets have now had a good look at PNG and they can value loans to SOEs.’

Bakani identifies the factors that are helping to improve PNG’s foreign currency situation, which has been problematic since the Bank of Papua New Guinea, restricted the trading range for the PNG kina and the US dollar in June 2014.

‘There has been a pick-up in inflows since the end of 2017, driven by good commodity prices,’ he notes.

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‘They get a lot from palm oil. Ok Tedi is the biggest seller of foreign currency in the market.

‘The net effect of this is that banks are using it now to clear the backlog of orders.

‘The kina is also slowly depreciating, so they get more in kina.’

Bond raising

Bakani believes PNG’s inaugural US$500 million sovereign bond raising last September will have a positive effect on PNG’s financial markets.

‘We started this process a long time ago. In 2016, we went out for a non-issue road show to meet investors.

‘It gives the government more options in the future.’

‘In 2017, we called it off; then, in 2018, we went out with the lead managers. That has been a success.’

Bakani says there may be other international bond raisings in the future.

‘When we were asked that question [will you raise further bonds?] on the road show our response was “Yes —this is the first one.”

‘It gives the government more options in the future.

‘It also provides a benchmark for other corporates in PNG.

‘US$500 million is small compared with those countries—they borrow in billions.’

‘The likes of Kumul Petroleum and Kumul Mining will be looking to borrow for projects.

‘The international markets have now had a good look at PNG and they can value loans to state-owned enterprises.’

Small borrower

Bakani says PNG is a ‘small borrower’ when the debt is measured as a proportion of GDP.

‘US$500 million is small compared with other countries—they borrow in billions.

‘The PNG LNG project is paying taxes for the first time, starting in August 2018.’

‘Their debt-to-GDP ratio is much higher than in PNG. The good thing is that we are limited by the Fiscal Responsibility Act to 35 per cent.

‘When we look at those emerging markets, they are well over 50 per cent.’

Taxes

Bakani says the PNG LNG project is paying taxes for the first time, starting in August 2018.

‘This means they have covered their costs and are running surpluses now.

‘Some of the assets have been fully depreciated and it gives them a surplus they have to declare—and it is taxable.

‘The money from PNG LNG that we have been waiting for has finally arrived.

‘This is changing the Budget scenarios.’

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