International credit rating agency Moody’s has changed its outlook on the Government of Papua New Guinea’s B2 rating from ‘stable’ to ‘negative’. What’s behind the move and what does it mean?

Moody’s notes that PNG exports fell ‘amid significantly impaired global economic activity in 2020’. Credit: ICTSI

The changed rating was due to ‘a marked weakening in PNG’s fiscal strength and debt position and elevated borrowing requirements,’ Moody’s said in a statement, citing ‘fiscal pressures, combined with an uncertain near-term macroeconomic outlook as the economy emerges from a large contraction.’

While the negative rating will have a impact on how PNG is seen by lenders internationally, and potentially increase the cost of borrowing, PNG’s continued B2 rating reflects Moody’s assessment that PNG also has upside potential, mainly due to the country’s resources sector.

‘While PNG’s domestic government liquidity and external liquidity risks remain credit constraints, these are somewhat balanced against credit strengths stemming from prospects for higher GDP growth potential over the medium term as investment in PNG’s natural resource wealth is realised, although a degree of execution risk in progressing large resource projects to fruition remains’

At the same time, it kept its ratings of PNG’s local and foreign currency country ceilings unchanged at Ba2 and B1, respectively. Such ceilings, in Moody’s words ‘typically act as a cap on the ratings … of other entities domiciled in the country,’ such as PNG’s banks.

Dampening effect

Moody’s announcement was accompanied by its assessment of the country’s economic health.

‘Even before the impact of the global coronavirus crisis, PNG faced a deteriorating fiscal position and a rising government debt burden.’ it notes.

‘PNG’s weaker fiscal outlook, combined with slower implementation of economic and fiscal reforms, are likely to increase uncertainty over the availability of external financing’

‘The global coronavirus pandemic has had a further dampening effect on the government’s revenue intake, as slower mining and petroleum activity and restrictions on other domestic economic activity curbed tax revenue.

‘Moreover, trade-related taxes declined as demand for PNG’s exports fell amid significantly impaired global economic activity in 2020.’

Moody’s expects the PNG government’s borrowing requirements to remain ‘high’. While the PNG Government has so far been able to source concessional loans to fund most of its debt, Moody’s suggests this may become harder in the future.

‘PNG’s weaker fiscal outlook, combined with slower implementation of economic and fiscal reforms, are likely to increase uncertainty over the availability of external financing, to cover substantial borrowing requirements.’

Can PNG improve its rating?

Moody’s says factors it will take into account when considering PNG’s future ratings include the management of government debt and deficit, ‘the outlook for execution on large investments in PNG’s natural resource wealth’, and the state of the country’s foreign exchange reserves.

‘Over the longer term, should implementation of key resource sector investments generate positive economic spillovers in the non-resource economy, the positive impact on growth potential would contribute to upward rating pressure.’ it says.