Moody’s recently downgraded its sovereign rating on Papua New Guinea to B2 from B1. But Christian de Guzman, a Senior Analyst in the Sovereign Risk Group for Moody’s Singapore tells Business Advantage PNG that the agency is ‘quite confident’ about the overall economy’s prospects over the medium-term.

Moody’s Christian de Guzman. Source: Moody’s

De Guzman says Moody’s principally focuses on an assessment of PNG’s government finances. But it also looks across the broader economy.

‘Our sovereign ratings are on the government’s ability and willingness to service their debt,’ he says. ‘We make an assessment on the financial health of the government but we also make an assessment on the overall health of the economy.’

Foreign currency

Moody’s report noted that PNG’s gross foreign currency reserves were $US1.69 billion (K5.32 billion) at the end of 2015, which was ‘sharply’ down from $US4.26 billion (K13.42 billion) in 2011.

The large financial account outflows ‘have overwhelmed the supply of hard currency available to the central bank, the Bank of Papua New Guinea,’ the report said.

The outflows are related to a sharp rise in private debt over the past few years, which has exposed the PNG economy to new pressures. The World Bank estimates that the ratio of PNG’s private debt to GDP is approximately 100 per cent.

De Guzman says the increase in private debt coincided with the financing of the PNG LNG project.

‘It has to be looked at globally; with what is going on with lower oil prices.’

‘Part of the reason for the larger than expected outflows has been an acceleration of debt repayments. Many companies can depreciate their assets in an accelerated fashion, allowing them to repay the debt a little faster.’

Commodity prices

De Guzman says the outflows would not have been a problem had commodity prices behaved as anticipated.

‘It has to be looked at globally; with what is going on with lower oil prices,’ says de Guzman. ‘When everybody was looking out to 2016 back in 2010, no one expected oil prices to be this low.

‘It is about lower commodity prices for pretty much all of PNG’s export commodities: gold, petroleum.’

‘The baseline assumption was that oil prices would hold up at $100 per barrel, which would mean that PNG’s current account and balance payments would be in a much larger surplus than it is today.

‘As such the outflows that we are looking at with regards to debt repayment would be easily accommodated by that large current account surplus. The reality is that oil prices are nowhere near that and the current account surplus isn’t strong enough to offset some of the outward debt servicing flows.’

De Guzman says it is not just the lower LNG prices that have hit the PNG economy. ‘It is about lower commodity prices for pretty much all of PNG’s export commodities: gold, petroleum.

‘We are actually quite confident with regard to the medium to longer term outlook.’

‘Also, let us not forget that 2015 was particularly rough because Ok Tedi went off line. That did put a lot of top line pressure on the current account in terms of exports not being where they needed to be.’

Strong outlook

Despite the short term pressures, de Guzman believes the outlook for the economy is strong.

‘We are actually quite confident with regard to the medium-to-longer-term outlook. It does look like these kinds of investments are quite competitive if you look at per unit pricing.

‘It would seem that the Total [Papua LNG] project can be equally competitive to the PNG LNG Project.’

Balance

De Guzman says the Bank of Papua New Guinea needs to strike a balance between exchange rate flexibility and maintaining reserves.

‘They are bleeding reserves; they’ve said as much in their latest monetary policy statement. It is important that they do find some sort of new financing. The government has been waiting in the wings to access international markets for a sovereign bond issuance.

‘But that won’t be a panacea at all to their problems. There are still fundamental reasons why there continue to be stresses on the balance of payments.’