The Governor of the Bank of Papua New Guinea, Loi Bakani, says the foreign exchange market is on track to return to normalcy. In an exclusive interview with Business Advantage PNG, he says the PNG LNG project has begun paying taxes for the first time, which is improving the Government’s budgetary position.

Central Bank Governor Loi Bakani says foreign exchange situation is improving

Bakani has told Business Advantage PNG that the bank’s plan is to bring the foreign exchange markets to normalcy ‘with the expected and current holdings of foreign exchange reserves’.

‘The US$500 million brings our reserve level to US$2.2 billion.

‘We have been going into the market on a weekly basis to support the market.

‘We are not going in with big chunks of US$100-200 million. It is more US$20-50 billion.

Bakani says the aim is to have payment invoices cleared within one month.

‘We are getting close to that one month. The only payment that takes longer to clear is the dividends [payments of profits to overseas companies].

‘We will focus on clearing dividend payments once import orders reach normalcy.’

‘‘The international markets have now had a good look at PNG and they can value loans to the state.’

Bakani identifies the factors that are helping to improve PNG’s foreign currency situation.

‘There has been a pick-up in forex inflows since the end of 2017, driven by good commodity prices,’ he notes.

‘Inflows from palm oil and Ok Tedi mining continue to be the biggest seller of foreign currency in the market.

‘The net effect of this is that banks are using it now to clear the backlog of payment orders.

‘The kina is also slowly depreciating, so importers get more in kina; while the effects of import prices are lower, this impacts less on inflation.’

Bond raising

Bakani believed PNG’s inaugural US$500 million sovereign bond raising last September will have a positive impact on PNG’s financial markets.

‘We started this process a long time ago. In 2016, we went out for a non-issue road show to meet investors and tell them PNG’s story.

‘It gives the government more options in the future.’

‘In 2017, we called it off; then, in 2018, we went out with the new lead manager. That has been a success.’

Bakani says there may be other international bond raisings in the future.

‘When we were asked that question [will you raise further bonds?] on the road show our response was “Yes —this is the first one.”

‘It gives the government more options in the future.

‘It also provides a benchmark for other corporates in PNG to go to international financial markets to raise funds.

‘US$500 million is small compared with those countries—they borrow in billions.’

‘The likes of Kumul Petroleum and Kumul Mining may be looking to borrow for project financing.

‘The international markets have now had a good look at PNG and they can value loans to the state.’

Small borrower

Bakani says PNG is a ‘small borrower’ when the debt is measured as a proportion of GDP.

‘US$500 million is small compared with other developing countries similar to PNG—they borrow in billions.

‘The PNG LNG project is paying taxes for the first time, starting in August 2018.’

‘Their debt-to-GDP ratio is much higher than in PNG. The good thing is that we are limited by the Fiscal Responsibility Act to 35 per cent debt-to-GDP ratio.

‘When we look at those emerging markets, they have ratios of well over 50 per cent.’

Taxes

Bakani says the PNG LNG project is paying taxes for the first time, starting in August 2018.

‘This means some of the assets of the project have been fully depreciated and it gives them a surplus that is taxable.

‘The taxes from the PNG LNG project that we have been waiting for have finally arrived, although it is still small.

‘This is changing the Budget scenarios.’