Will Papua New Guinea’s successful sovereign bond issue improve the foreign exchange situation for business?

Papua New Guinea has completed its first international bond issue and Paul Barker, Director of PNG’s economic think-tank, the Institute of National Affairs, believes some of the funds should be used to help the private sector get better access to foreign exchange. He tells Business Advantage PNG that businesses are running out of credit.

Treasurer Charles Abel

In the National Government’s Mid-Year Economic and Financial Outlook (MYEFO), the Treasurer, Charles Abel, said raising funds from a sovereign bond will ‘allow for the foreign exchange imbalance to be addressed and for more credit to be available by the banks to our domestic businesses.’

Abel said the funds would be used in several ways:

  • retire high cost short-term domestic debt,
  • convert short-term debt to longer-term debt,
  • bring in foreign exchange,
  • fund expenditure in the 2018 budget.

The 10-year bonds have a yield of 8.375 per cent.

The successful offering reportedly drew more than US$3.3 billion in orders, most of which came from the United States.

Business in PNG has had to wait longer for foreign currency since a trading band was imposed on the kina by the central bank in 2014.

Barker says businesses are ‘unable to get credit from suppliers so (they) are paying premium prices for imports, including essential replacement plant and equipment.’

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He believes that paying debts has become ‘pretty critical.’

‘Firms are paying through the nose for costs and they’re having to pay upfront, which means paying, consistently, premium prices for all products being imported from China or elsewhere.

‘The raising will better balance our loan book.’

‘We’ve got allow firms to pay off some of their outstanding costs in a more timely manner.’

Diversification

The sovereign bond would mean that about 7 per cent of PNG’s government debt would be in US dollars, an important diversification away from the government’s dependence on domestic banks.

Many domestic financial institutions are reportedly reaching the limits of their capacity to buy government paper.

Abel said that the raising ‘will better balance our loan book’.

‘It is an achievement to have gained market attention.’

The raising does, however, create currency risk (if a currency falls, it raises the relative amount of debt).

Although this would be only on the margin, given that most of PNG’s debt will still be in kina, it is a new challenge.

Interest rate

Barker also believes the interest rate is high. Last year, Nigeria raised US$3 billion in 10-year bonds at a yield of 6.5 per cent, and Mongolia raised US$800m in 5-year bonds at 5.6 per cent.

The INA's Paul Barker

The INA’s Paul Barker

‘The percentage rate is not a particularly good rate, when you take into account the additional service costs.

‘However, it is an achievement to have gained market attention, which was not possible when the bond proposal was mooted initially in late 2015.

‘It is a lot of money the government is going to be forking out in service costs for a 10-year period.

‘How much better if PNG could be enjoying revenue from investments in a Sovereign Wealth Fund by now, as in various other resource rich countries, such as neighbouring Timor Leste.’

Maturity of capital markets

The sale of a sovereign bond is an important step in developing more mature capital markets in PNG.

PNG has a large deficit on the finance account, largely because of a ‘build up in offshore foreign currency account balances of resident mineral companies’ according to the Bank of PNG.

‘Borrowing costs have been rising.’

These outflows have severely restricted the availability of foreign exchange because there has been no counterbalancing demand for PNG financial assets.

Another problem is a flat yield curve on government debt: the difference between short and long-term interest rates is unusually low. This is why Abel is proposing to reduce ‘high cost’ short term debt.

‘PNG will be looking to establish its brand and yield curve in the international market for the future,’ said Abel.

Creditors

Barker notes that most of the Government’s current debt is from domestic sources.

‘Borrowing costs have been rising and there’s a need to diversify sources and refinance, preferably with concessional funding.

‘There is also an urgent need for foreign exchange, with the surprisingly limited remittance of forex (or revenue) back to PNG from the country’s major resource exports.

‘Government and companies have long outstanding creditors to pay, even though companies have the kina assigned for these payments.

‘It is recognised that the discouraging level of imports has been a necessary strategy over the past couple of years, as foreign exchange earnings have dried up—hopefully only temporarily’.

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