S&P Global Ratings has lowered its long-term foreign and local currency sovereign credit ratings on Papua New Guinea (PNG) to ‘B’ from ‘B+’, but it believes the outlook is ‘stable’. The rating agency points to bigger than expected fiscal deficits because of ‘a loss of revenue and reconstruction costs’ after the recent earthquake.

In spite of its downgrade of PNG’s credit rating, S&P is predicting the economy will rebound. Credit: BAI

S&P says PNG will remain a low-income economy ‘with weak institutions and limited monetary policy flexibility’ but on a more positive note says there is an ‘expectation that economic growth will rebound.’

PNG’s falling tax revenue Source: UPNG and ANU

The rating agency points to several factors working against the PNG economy:

• slower economic growth than expected compared with peers,
• lower-than-expected government revenues leading to fiscal deficits,
• rising government debt and debt service costs,
• ‘lower-than-we-expected’ tax revenues from PNG’s largest liquefied natural gas (LNG) project’s exports.

‘While the government has made some headway on the expenditure side by cutting some superfluous expenditure, weak controls over payroll costs somewhat offset these gains.

‘We project PNG’s general government debt to continue to rise above 30 per cent of GDP to about 40 per cent by 2021.’

‘These fiscal deficits, along with slower economic growth, have pushed the government debt to GDP ratio over the ceiling of 30 per cent, and we forecast it to increase to about 40 per cent by 2021.’

Development

The S&P report says the PNG government has attempted to respond to the revenue declines, but it is too reliant on a volatile revenue base.

The rating agency forecasts a higher level of government debt in the medium term. ‘Improving commodity prices have not translated to increased government revenues through the concessional arrangements from the PNG LNG project.

‘The government has aimed to focus on expenditure, enacting spending cuts.’

‘Through budgets and supplementary budgets since late 2016, the government has aimed to focus on expenditure, enacting spending cuts and targeted declining fiscal deficits to keep debt within its targets.

Debt

The S&P report says the picture on debt is improving, noting that the private sector holds the bulk of the external debt, mostly for the financing of large resources projects.

‘PNG’s external vulnerability is improving, but it remains exacerbated by high volatility in its terms of trade. Gross external financing needs are likely to be broadly steady at 50-70 per cent of current account receipts

‘We forecast PNG’s external debt position to continue to decline, with LNG production since 2014 resulting in repayment of external liabilities.

‘Domestic banks are around their internal limits for lending to the government.’

‘However, we note that potential future LNG projects could lead to further external imbalances arising during their construction phases.

‘The ongoing shortage of U.S. dollars within PNG is affecting the economy’s external transactions, and is symptomatic of a currency that is above the market-clearing exchange rate.’

Banks

S&P describes PNG’s banking system as stable, due to ‘limited competition and a strong reliance on deposit funding, which is supported by high levels of liquidity.’

It says financing fiscal deficits remains challenging, making debt servicing more difficult.

‘Domestic banks are around their internal limits for lending to the government, and the central bank is acting as lender of last resort when government bond auctions are undersubscribed.’

Key PNG statistics Source: S&P