The impact of the COVID-19 crisis on Papua New Guinea’s financial markets has been muted so far. However, the crisis provides an opportunity to create new investment opportunities that will provide local businesses with much-needed capital.

The coronavirus has hit global markets hard. Credit: Pexels

It’s a tough time for business in Papua New Guinea right now. In Lae, the local chamber of commerce is reporting staff reductions of 35 per cent across its membership. Even those businesses being kept busy during the country’s State of Emergency are sometimes finding it hard to secure the funding they need to manage cashflow and fund inventory.

The impact of the COVID-19 crisis in Papua New Guinea’s financial markets may represent an opportunity to develop all aspects of the country’s domestic financial system.

PNG’s stock exchange provides part of the solution for both investors and capital-starved companies.

David Lawrence, Chairman of PNGX Markets (formerly the Port Moresby Stock Exchange), says its focus is on maintaining trading during the State of Emergency.

‘The PNGX market has been insulated to date from the effects of COVID-19 and global markets turmoil,’ he says. ‘We are liaising closely with listed companies, brokers, share registries, Treasury and the Australian Securities and Investment Commission (ASIC) to keep the market open throughout this challenging period. No doubt it’s going to be very challenging in PNG.’

Leahy Lewin Lowing Sullivan Lawyers’ Michael Sullivan [left] and PNGX Markets’ David Lawrence [right]. Credit: BAI

Lawrence believes that PNG ‘has a pretty good upside if they can get the resource projects fired up on the other side of this crisis.’

Bonds

The stock exchange can only do so much, however. Many PNG businesses are experiencing capital starvation because they have too few places to go to get funding, even for working capital.

Deepening PNG’s domestic capital markets is a priority. In the short term, the Bank of Papua New Guinea has moved aggressively to improve liquidity (the availability of money) by lowering interest rates, buying back its own bonds (known as quantitative easing) and stimulating interbank lending.

‘The aim is to kick start a corporate bond market, which would give PNG’s bigger businesses another way to raise capital.’

But in the longer term, PNG’s internal capital markets need to be developed more, with measures such as creating secondary bond markets (markets in which bonds can be traded rather than always held to maturity).

The International Finance Corporation (IFC), a sister-organisation of the World Bank, has ‘been working behind the scenes on modernising both the corporate and government bond markets, with the aim of helping business gain access to short and long-term funding.’

The IFC is planning to create, and has received approval for, an IFC-issued bond in PNG that will be backed by the IFC’s balance sheet and rated AAA – the highest rating. The aim is to kick start a corporate bond market, which would give PNG’s bigger businesses another way to raise capital.

David Brown. Credit: BAI

PNG’s government has a strong track record of paying its debts, which has made government securities such as treasury bills and inscribed stock an attractive investment. David Brown, the former Chief Investment Officer for Nasfund, says the bond yield (interest paid on government bonds) ‘was basically the mainstay of returns’ for the super fund.

Brown observes there is a ‘big savings pool’ within PNG (partly because of the difficulty getting money out of the country) but an ‘absence of savings vehicles’ to take advantage of it.

‘That is why the net interest margins for banks are so strong. People have their money in the cheque account – it is [a repository for] the cash. The banks are lending it out at six per cent while paying zero for it.’

Brown says to develop PNG’s internal capital markets there needs to be a well functioning Security Commission. ‘You have to have confidence in the industry. A Trust Regulator that actually enforces things would be good.’

He believes PNG should have removed barriers to foreigners buying government bonds in the domestic market.

‘They have never defaulted on their bonds and it was a fantastic yield. In the world we used to have, there was money around the world buying into frontier bonds. But I think they have missed the boat.’