PNGX, Papua New Guinea’s renamed stock exchange, has announced proposals to establish trade in government and private debt. It may lead to a significant deepening of the PNG financial system. David James explores.
PNGX is proposing the development of a secondary market. Credit: Pixabay
According to a statement from the PNGX, the new name for the Port Moresby Stock Exchange, the proposal is in response to the government’s Financial Sector Development Strategy (FSDS), which ‘recognises that a key building block to redeveloping PNG’s capital markets is the development of a secondary market in government securities.’
A secondary market allows buyers of debt securities to trade amongst each other before the term of the loan expires. At the moment, government bonds (Treasury bills and Inscribed Stock) have to be held to maturity and therefore cannot be traded.
Secondary bond markets are commonplace in the financial markets of developed economies.
Investment options
A secondary market, if introduced into PNG as PNGX suggests, would add another investment dimension to buying bonds.
Investors would be able to sell them before maturity, giving them greater flexibility, especially in relation to any liquidity (availability) requirements.
‘About two thirds of government debt is held locally, mostly by pension funds.’
It would also introduce a new type of investment option not previously available in PNG.
Bond investors in developed markets do not just assess the interest rate on the bond, they also consider the yield curve—the plotted relationship between shorter term and longer term interest rates. Investing according to the yield curve becomes part of their investment strategy, giving them another option when diversifying their investment portfolios.
According to Australian National University analysts Rohan Fox and Matthew Dornan, domestically-held debt in PNG ‘dominates government borrowing—something that is explained in part by the activities of domestic pension funds.’
They estimate that about two-thirds of government debt is held locally, mostly by PNG’s pension funds, including Nambawan Super and Nasfund.
It is these pension funds that are likely to be the first entities to start trading government debt securities on a secondary market.
New opportunities
A further potential advantage of establishing a PNG secondary bond market is that it would remove the currency risk involved in raising debt capital offshore, which is affected by the strength or weakness of the kina against other currencies.
‘Papua New Guinean investors looking to receive a steady stream of income have had a limited range of choices,’ the PNGX statement says.
Break up of national debt owed, by lender. Around 12 per cent of the total debt owned by Pacific nations is held by China. Credit: DevPolicy
‘Government and private sector bonds traded on PNGX will present an attractive alternative.
Business benefit
This new market could also benefit businesses looking to raise capital in PNG:
‘A new secondary market for government and corporate debt opens new opportunities for government and business to access domestic debt financing, an important development for mobilising capital in the PNG economy.’
According to the PNGX, once progress has been made on developing a secondary market in government securities ‘attention can turn to the steps needed to further develop the secondary market in private sector debt securities and equity securities.’
The initiative is designed to deepen the PNG capital markets; to make the PNGX ‘at least as attractive a centre for PNG firms to raise debt and equity capital as is Sydney.’
What this may mean for business
- Over time, it is likely to increase demand for PNG financial assets, the lack of which is a main cause behind the current foreign exchange shortages.
- It will create more options for investors and businesses looking for spare cash.
- It may improve the liquidity options of PNG banks and other financial institutions.
- If developed for private debt securities, it may create more funding options for PNG businesses.
PNGX Chairman David Lawrence will be speaking at the 2019 Papua New Guinea Investment Conference in Sydney on 19 and 20 August. For further details, visit www.pnginvestmentconference.com.
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