Sovereign bond an ‘important milestone’ for Papua New Guinea that should affect interest rates, says BSP’s Fleming

The US$500 million sovereign bond raising will improve foreign exchange cash flows, according to Robin Fleming, Chief Executive of Bank South Pacific. He tells Business Advantage PNG that it represents an ‘important milestone’ for Papua New Guinea’s financial system.

Bank South Pacific’s Robin Fleming says sovereign bond will make PNG’s financial markets more mature. Source: EMTV

The CEO of PNG’s largest bank sounds a note of caution for those hoping that the bond raising will have a direct effect on the availability of foreign exchange.

‘The sovereign bond should have a beneficial impact on PNG’s foreign exchange cash flows.
‘But it should be noted that the objective of a sovereign bond is not specifically to ameliorate foreign exchange availability,’ he tells Business Advantage PNG.

Fleming says the successful sovereign bond issue represents ‘an important milestone in the maturity of PNG’s financial markets.’

‘From an international financial markets perspective, this is a very good outcome for PNG.’

He notes that Fiji issued an inaugural bond ‘some years ago’ and in recent times has also issued a green bond on the international markets.

Budget

Fleming says one focus of the government will be on providing support for the National Budget.

‘Reliance on domestic sources has been affecting the pricing of PNG government debt.’

Story continues after advertisment...

‘Bonds of this nature are often used by developing and emerging markets for various purposes including, as is the case with PNG, funding support for approved budget appropriations.

‘The Government’s 2018 budget had contemplated one of the funding sources of its deficit as being a sovereign bond and part of the proceeds of the bond will be used for programs and expenditure to support the budget.’

Domestic sources

There have been indications that domestic banks are reaching their limits on taking government paper, meaning the Government has been under pressure to diversify its funding sources.

Fleming says the reliance on domestic sources has been affecting the pricing of PNG government debt.

‘Funding of the 2018 budget deficit has been from domestic sources primarily— historically—and ongoing reliance on the domestic market can, over time, result in funding rates for debt instruments such as Treasury Bills and Inscribed Stock increasing disproportionately to the underlying risk of the debt, due to capacity issues within the domestic markets.

‘Business confidence levels relating to the government’s capacity to implement its 2018 budget initiatives … should improve.’

‘Treasury Bills that the Government issues for its 364-day term are priced at around 8.07 per cent, compared with a domestic three-year Inscribed Stock of 9 per cent

‘This illustrates that the short-term debt pricing on a typical yield curve should be lower than is the case at present.

‘It also shows that the higher rate has been a function of domestic market capacity.

‘As the Treasurer Charles Abel indicated in his MYEFO statement, the Government was contemplating using up to US$300m of the sovereign bond proceeds to retire domestic debt, which should over time permit repricing of its Treasury Bills.

‘This in turn reduces the interest expense associated with domestic debt.

‘Given a component of the bond will be used for budget support, business confidence levels relating to the government’s capacity to implement its 2018 budget initiatives and meet its fiscal targets should improve as well.’

Speak Your Mind

*