There is some relief ahead for businesses struggling to access foreign exchange, according to the CEO of the country’s biggest bank, BSP. Robin Fleming says investment in the mining and petroleum sector and a new Sovereign Bond are the keys to boosting foreign exchange inflows.

BSP’s Robin Fleming

Since June 2014, Papua New Guinea businesses have been struggling to gain access to foreign exchange, with an estimated K$1.2 billion waiting to be converted.

But the CEO of Bank South Pacific, Robin Fleming, is optimistic that access will begin to flow during 2016.

‘If the Ok Tedi mine reopens in March—and that in itself will start providing another US$30 to US$40 million into the market per month—the pressure will start to ease,’ he told Business Advantage PNG.

‘And there is talk that the Wafi-Golpu project will be getting close to agreement on financial terms, and that could introduce an additional US$200 to US$300 million during 2016. There is also possibly some early works for the [Total-led] Papua LNG towards the end of 2016.

‘And there are bigger sums coming in 2017 and 2018,’ he says.

Backlog

The closure of the Ok Tedi mine in August, Barrick’s 16-day suspension of its Porgera gold mine in November and Newcrest’s suspension of its Hidden Valley mine following the death of a worker has meant a loss of taxes and royalties for the government, he points out.

‘If the Ok Tedi mine reopens in March—and that in itself will start providing another US$30 to US$40 million into the market per month—the pressure will start to ease.’

All this, coupled with most businesses continuing to import at exactly the same levels and not reducing demand, has seen the backlog of foreign exchange demand reach about K1.2 billion, he estimates.

He says the Bank of Papua New Guinea has taken a ‘conservative’ approach to managing its reserves, still about US$1.9 billion or seven-to-eight months of import cover (or 12-to-14 months of non-mining import cover).

‘It doesn’t want those reserves to be exhausted.’

Bond to the rescue?

Fleming describes the PNG Government’s prospective Sovereign Bond, currently being formulated, as ‘a critical piece of financial infrastructure and it becomes more so with the passage of time.’

‘If they are able to broaden the investor base beyond just Papua New Guinea, it would enable the Government, from a debt perspective, to alleviate any concerns of another deficit budget in 2016.

Wafi Camp. The feasibility study for the major Wafi-Golpu gold project is due by the end of December 2015.

‘It puts a ceiling on interest rate rises. If you’re getting 12% or 13% in bonds and the like, you may well be more likely to invest in that than in lending. So, it should alleviate concerns in terms of businesses crowding out of investment opportunities, and also provide some relief on interest rates.

‘My advice is to plan ahead and ensure that we do have the documentation to place the orders in advance.’

‘Some observers say a sovereign bond could offer seven to eight percent return. When you have a look at some of the bond rates and interest top rates from last year, they were getting up to 14%. It would certainly be a cheaper way for the Government to raise debt, and be attractive to international investors.

‘The feedback I get talking to potential overseas investors is that they feel that there is certainly an appetite for this type of debt. And, in an emerging market, debt has been one of the performers in the bonds markets overseas, and therefore it continues to remain of interest, particularly when you do the analysis and see the future revenue streams that are available to PNG, with two world-class LNG projects with lives of 40 to 50 years.’

Advice

Fleming says despite the central bank’s imposition of a kina trading range, the kina’s value has been ‘coming off’ 1.5% to 2% per month. So, with the Bank of PNG Governor, Loi Bakani, adamant he will not allow the kina to depreciate rapidly (as it might if he allowed a totally free float), what advice does Fleming have for businesses queuing up for foreign exchange?

‘My advice is to plan ahead and ensure that we do have the documentation to place the orders in advance. The more notice we have, the more capable we are of being able to fill those orders.’

‘Some observers say a sovereign bond could offer seven to eight percent return. When you have a look at some of the bond rates and interest top rates from last year, they were getting up to 14%. It would certainly be a cheaper way for the Government to raise debt, and be attractive to international investors.’

He agrees businesses are faced with a conundrum: if you ‘continue to place orders to generate services to meet customer and consumer demand and generate profit’, you can also run ‘the risk of not necessarily being able to pay your suppliers.’

That said, he notes there are unpleasant side effects from relaxing currency controls completely:

‘If the kina did depreciate more rapidly, then prices would increase, consumer demand would reduce and profitability would reduce,’ he tells Business Advantage PNG.

Christmas present?

‘So, one way or another, businesses will be suffering until such time as relief is provided on the foreign exchange,’ he suggests.

‘I think the Bank of PNG’s view is: if they get closer to some form of bridged bond or some form of confidence in the level of investment appetite, then some of the reserves will start to be released to provide businesses with some relief, particularly in this lead-up to the Christmas/New Year period.’

It’s not quite the Christmas present that PNG business is looking for, but does offer the prospect of some glad tidings in 2016.