What is the future of Papua New Guinea’s stock market? PNGX Chairman David Lawrence believes there is an opportunity to expand the country’s capital markets, while changes to the regulator are also expected. David James explores.

In December 2018, Bank South Pacific sold its 62.5 per cent share in the Port Moresby Stock Exchange to Pacific Capital Markets Development (PCMD). PCMD became the new owner of Papua New Guinea’s stock market, which has been renamed PNGX.

The move has created an opportunity to ‘tap into the potential represented by PNG’, PNGX’s Chairman David Lawrence told the recent 2019 Business Advantage Papua New Guinea Investment Conference.

A first step to tap into this potential, Lawrence said, is listing debt securities, such as government and corporate bonds, on the exchange.

‘If you look at a normal development cycle for an emerging market, you develop the government bond market first, then the corporate bond market and then the equity market.’

Training wheels

One initiative being considered by PNGX is listing government debt securities (Treasury Bills, for instance), which would create a secondary bond market (at the moment investors cannot trade government bonds, they must hold them to maturity).

By making these available on a modern, internationally-accessible trading platform, it could open the way to greater foreign investment in PNG government debt.

Another initiative is to allow Papua New Guinean companies to list debt securities—corporate bonds—on PNGX. Lawrence likens this to ‘a listing with training wheels’ for companies seeking to become publicly-owned.

‘PNG had an equity [share] market for 20 years, so it’s going to basics, working with the Bank of PNG to develop the corporate bond market.

‘On PNGX, the daily turnover is typically below K200,000 and on some days there are no trades at all.’

‘I think there’s an opportunity over the next couple of years for companies to come to market through the corporate debt facility. That would be the typical type of development path and then you develop the equity (share capital) after that.’

There is certainly a large potential upside. Activity on the PNG stock exchange remains low. The Australian Securities Exchange (ASX) has an average daily turnover of A$4.68 billion (K11.2 Billion). On PNGX, the daily turnover is typically below K200,000 and on some days there are no trades at all.

Indices and identifiers

PNGX’s David Lawrence [right] with Leahy Lewin Lowing Sullivan Lawyers’ Michael Sullivan. Credit: BAI

‘We can now get access, greater access, to international investors. It is a small but important step forward.’

He said the next priority in developing the market’s infrastructure is to roll out a series of six indices for the PNG market. (At the moment, PNG has two indices, produced by stockbroker Kina Securities: the Kina Securities Index (KSi) and the KSi Home Index, which includes shares listed only on PNGX.)

The Indices provide investors with measures of market capitalisation (the total value of the shares) and of free float (the extent to which the shares are freely traded).

‘The new owners of PNGX have a ‘five-year development path before we see a well functioning market’.

‘The indices will give a measure of how the market’s evolving and give institutional and foreign investors a benchmark to measure performance,’ said Lawrence.

The new owners of PNGX have a ‘five-year development path before we see a well functioning market’.

When it was founded in 1999, the exchange’s listing criteria were largely inherited from the ASX in Australia. Describing the PNG market as a ‘shoe-horn market based on the Australian design’, Lawrence said PNGX’s criteria are being rewritten to make it more suitable for the PNG environment.

‘For example, if you want to protect national ownership requirements, we can write rules and build that into a market structure – the aim will be to create a stock exchange more suited to PNG.’

Regulator

Commerce MInister Wera Mori

Achieving these structural and governance changes on the PNGX will require an appropriately-resourced and independent regulator.

Wera Mori, Minister for Commerce and Industry, has stated that the government intends to make the Securities Commission of Papua New Guinea an independent, stand-alone regulator for the capital markets.

‘We would like to have the Port Moresby Stock Exchange up and going, independent without any influence from the Government or from anyone. It must have the integrity and the level of confidence where we can simply go and invest,’ Mori told 2019 Business Advantage Papua New Guinea Investment Conference in August.