In spite of a ‘challenging’ 2015 and tough market conditions, the latest Bank South Pacific analysis suggests that the ‘worst period may be over’ in Papua New Guinea. However, the bank is cautious about the prospects for the government’s planned US$1 billion ‘circuit breaker’ sovereign bond issue.

In its Pacific Economic and Market Insights report for the December quarter, Bank South Pacific (BSP) described 2015 as ‘a challenging year’, with GDP projections lowered from 15.5% to around 10%.

‘The government plans to reduce expenditure by K1.4 billion and raise additional funds to K1.1 billion via a sovereign bond,’ said the report.

It noted the PNG kina fell by 13.7% against the US dollar, and 2.2% against the Australian dollar, over the 2015 year, caused by low commodity prices and a shortage of foreign currency.

In spite of efforts by the bank of Papua New Guinea (BPNG) to support the market, lower commodity prices and the recent El Niño weather phenomenon continued to affect foreign currency inflows, says the report.

‘For the short term, a circuit-breaker is required and the sovereign bond will assist with this,’ said BSP CEO, Robin Fleming.

He said the bond would raise US dollars to retire kina-denominated government debt, which would help reduce the prospect of government budget deficit funding crowding out lending activities.

It would also provide a source of US dollars to replenish reserves and settle private sector import accounts.

‘The El Niño phenomenon has had a major impact on the livelihood of many people. The economic impact on inflation, agriculture production and real output is expected to be significant and severe.’

The factors influencing investor interest in a sovereign bond issue will include emerging markets’ debt margins, the recent PNG sovereign credit rating downgrade and the state of the global market, it says.

Drought impact ‘severe’

Despite business confidence and optimism at the start of 2015, the year proved to be challenging and tough, says the bank.

‘The government’s plan to issue [a] sovereign bond of $1.0 billion in 2016 will be challenging.’

‘The El Niño phenomenon has had a major impact on the livelihood of many people. The economic impact on inflation, agriculture production and real output is expected to be significant and severe.’

On a positive note, ‘the worst period may be over’, says the bank.

Business concerns

BSP noted some of the business worries include the foreign exchange trading band setting and its impact on availability of foreign currency; the temporary suspension of Ok Tedi Mining Ltd (OTML); mine site disruptions at Porgera and Hidden Valley; moderation in property valuations; and a slight decline in market yields.

The end of the PNG LNG construction phase has affected business spin-offs as well, it said.

BSP Summary of Economic Indicators (2015)

GDP: 9.9%

Non-mining GDP: 2.4%

Inflation: 5.1%

Budget Balance (% of GDP): -4.9%

Debt to GDP ratio: 34.7%

Deficit (9 months to September): K1.940 billion

Kina depreciation: 13.7% (annual)