Sovereign bond issue will ‘test’ Papua New Guinea’s market access, says Standard & Poor’s

The Papua New Guinea government has begun spruiking its sovereign bond issue with a series of meetings with investors in Singapore, Hong Kong, London and the US, led by Treasurer Charles Abel. Standard & Poor’s has given the issue a ‘B’ stable rating, but the government may have to offer a premium to attract investors.

Treasurer Charles Abel is spruiking a PNG sovereign bond.

Abel says he’s hoping the sovereign bond issue will raise K640 million (US$ 196 million), which will help manage the country’s deficit of K1.97 billion (US$604 million), through debt restructuring, replacing short-term domestic debt ‘with longer term, cheaper concessional foreign debt’.

Credit Suisse and CitiBank are managing the issue, arranging meetings between Abel and international investors.

Global Analyst with Standard & Poor’s in Singapore, Andrew Wood, tells Business Advantage PNG that the bond issue is a test ‘for its [PNG’s] own market access, along with broader market conditions’.

He warns that there is currently ‘some caution towards emerging market assets’ among international investors.

Analyst with Nomura International Hong Kong, Nicholas Yap, has described the sentiment towards ’emerging’ markets such as PNG as ‘still quite fragile’.

‘Two other resource-based economies, found they were able to issue sovereign bonds.’

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He told Bloomberg: ‘We believe PNG will have to offer investors a sizeable premium to get any deal done.’

Not responsive

PNG sought to drum up investor interest in a sovereign bond two years ago but it never got off the ground.

‘They previously found the market was not responsive,’ says Paul Barker, Executive Director of the Institute of National Affairs.

‘Then, late last year, both Nigeria and Mongolia, two other resource-based economies, found they were able to issue sovereign bonds at a relatively competitive rate and the market welcomed it, so they are moving on the back of that.’

Treasury Secretary Dairi Vele has acknowledged that the market is ‘competitive’. But he believes the timing may be right.

‘Papua New Guinea’s considerable resource wealth suggests still strong macroeconomic potential over the medium term.’

‘When we were looking at this two years ago, the oil price was down at US$40 (K130),’ he said in late August.

‘Now, look at this good story with the recovering price around K228 (US$70).

‘There are other people out there trying to seek financing for their country—but PNG has a good story to tell, especially with the reforms we have taken and the major resource projects coming up.’

Currency risk

S&P’s Andrew Wood. Source: Bloomberg

Wood says S&P’s ‘B’ rating is lower than the B+ it gives for the two Pacific Island sovereigns for which it also provides ratings: Fiji and the Cook Islands.

Fiji last year issued bonds for US$50 million.

Other single B-rated sovereigns in the broader region include Mongolia (B-), Pakistan (B), and Sri Lanka (B+).

‘A number of sovereigns rated in the single-B range have executed successful sovereign issuances over recent quarters,’ he says.

Wood notes that foreign currency risk is always a consideration for investors.

He says ‘while there are some concerns regarding the valuation of the kina,’ he believes the country should also enjoy continued foreign currency inflows over the coming years from its major gas and mineral projects.

‘Papua New Guinea’s considerable resource wealth suggests still strong macroeconomic potential over the medium term,’ he says.

‘This potential is counterbalanced by the structural constraints inherent in a lower-middle-income economy served by weak institutions, restricted monetary policy flexibility, and increasing government debt.’

Domestic support

It is proposed that the bonds will be issued in US dollars for either five or 10 years.

Most of the PNG government’s debt is currently being purchased by local financial institutions, but some banks are reaching internal limits for holding government securities.

Tellingly, domestic support for the bond issue has come from the country’s major bank and buyer of domestic bonds, Bank South Pacific (BSP).

When the bond issue was being formulated, BSP CEO Robin Fleming told Business Advantage PNG that it was ‘a critical piece of financial infrastructure and it becomes more so with the passage of time.’

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