The Government’s Mid-year Economic and Fiscal Outlook (MYEFO) statement has indicated that it is in the ‘advanced stages’ of negotiating the country’s first sovereign bond later this year. The strategy is being adopted to solve the nation’s foreign exchange shortages, but it does carry risks.

PNG’s debt service costs as percentage of total expenditure. Source: ADB

The MYEFO report, presented by PNG’s Treasurer and Deputy Prime Minister Charles Abel, said that the government is looking to raise between US$500 million and US$1 billion ‘depending on the international market conditions and our own financing appetite’.

It said it is aiming to raise the external funds to ‘shift our borrowings from the high cost and saturated domestic market’, which, it claims ‘has been a major cause of the increase in interest costs in recent years.’

‘The foreign exchange imbalance has been burdening PNG’s private sector.’

The report said the tactic would ‘allow for the foreign exchange imbalance to be addressed and for more credit to be available by the banks to our domestic businesses and citizens.’

Private sector

The report acknowledges that the foreign exchange imbalance has been burdening PNG’s private sector.

‘Our Central Bank has had to manage this through rationing, and there is still much work to be done in terms of securing financing for the 2018 Budget.

‘The government is hoping to bring forward the foreign debt raising.’

‘The earthquake has also impacted adversely on the current account balance in 2018 which has maintained pressure on the existing foreign exchange imbalance, thereby continuing to subdue business conditions.’

Tranches

Country comparison of debt service as percentage of GDP. Source: ADB

The MYEFO report said the government is hoping to bring forward the foreign debt raising.

‘The US$500 million bond program was originally programmed to be raised in three tranches over the 2018-20 period, but now is expected to be undertaken in one issuance in 2018.’

The report outlined two scenarios: if the money is raised and if it is not.

If it is not raised, the report acknowledges that it will increase pressure on the Government’s finances.

‘If the planned sovereign bond (external) financing (assumed in the 2018 Budget to be US$200 million in 2018 and US$300 million in 2019-20) does not materialise in 2018, as budgeted, additional pressure will be exerted on domestic financing, necessitating even greater and unplanned fiscal restraint.’

But the report said that if the US$500 million sovereign bond proceeds are received in 2018 in one raising, that would be ‘US$300 million greater than budgeted for in 2018.’

‘Increased interest costs that are encouraging the Government to look offshore.’

In that event, the additional amount would be held in a foreign exchange account in the Bank of PNG to cover planned fiscal expenditures in 2019-20.

Backlog

According to Edward Faber, PNG Country Economist for the Asian Development Bank, PNG’s foreign exchange reserves are US$1.6 billion, which equates to five months of imports.

He says the backlog has reduced to about US$500 million, which may in part be due to businesses no longer attempting to get foreign exchange and turning instead to local options.

Faber says that although PNG’s debt, which is running at about 32 per cent of GDP, is lower than most of its peers in the Pacific Islands and South East Asia, interest costs have increased from about 4 per cent of total expenditure in 2013 to 11.4 per cent of total expenditure in 2017.

It is these increased interest costs that are encouraging the Government to look offshore. Much will depend on getting lower interest rates on the foreign loans. However, if they are denominated in US dollars, they will also add a foreign exchange risk (when the kina falls, the foreign debt and value of the interest payments increase).

Faber says interest costs as a percentage of GDP are high in PNG compared with its peers.

‘PNG needs to reduce interest costs and diversify the debt profile,’ says Faber.

He added that a loan this year from the ADB for US $100 million, and from the World Bank for $150 million will help achieve this.

Country comparison of public debt as percentage of GDP. Source: ADB