Papua New Guinea was well prepared for the 2008 financial crisis, as it had reduced its debt and had some room to manoeuvre. The country’s obligations dropped from around 70% of GDP in the early 2000s to about 20% a decade later. This, in part, explains why the crisis was so short lived, according to the Asian Development Bank (ADB). However, after 2012, the government took an expansionary stance and started to accumulate debt. The total owed more than doubled, from PGK8.5bn ($2.7bn) in 2012 to PGK20.8bn ($6.6bn) in 2016, while total external debt rose from PGK2.4bn ($761m) to PGK6.4bn ($2bn). As a percentage of GDP, the obligations went from 19.1% in 2012 to an estimated 33.5% in 2016. As global commodity prices dropped, the kina came under pressure, reserves were depleted and the economy became stressed. Getting the debt under control is seen as vital to the fortunes of PNG. Lower debt levels will reduce servicing costs and give the government the flexibility it needs to navigate headwinds. However, this will not be easy, as the country has few options for quickly reducing what it owes.
In 2016 domestic debt issuances were much higher than expected. The original budgeted amount for new domestic borrowing was PGK8.2bn ($2.6bn), but the government ended up borrowing PGK14.1bn ($4.5bn) from within the country. According to the ADB, the increase was not only the result of general economic conditions, but was also attributed to PGK725m ($230m) of asset sales that did not happen as planned, a sovereign bond that was issued after unfavourable markets conditions and a delay in the disbursement of the second tranche of financing Credit Suisse. Most of the money raised – totalling PGK11.6bn ($3.7bn) – went to repayments.
The situation is particularly critical on the domestic side as appetite is weak, with local institutions reaching their holding limits. The central bank has become a large buyer. By the middle of 2016 it was holding 20% of the country’s domestic debt, the highest level since 2002.
In 2016 overseas borrowing was much lower than expected, totalling PGK1.7bn ($539m), compared with the original budget estimate of PGK3.7bn ($1.2bn). This reflects the lack of the sovereign bond and the delay in the Credit Suisse disbursement. While international investors are said to have interest in PNG paper, the sovereign bond has been put on hold several times due to market conditions and technical considerations.
Changing The Denominator
The exact debt level and the significance of the debt are a matter of debate. Confidence has been expressed by the government, which has repeatedly said that the obligations-to-GDP ratio is under the 30% limit set by the Fiscal Responsibility Act 2006. It also points out that the country’s overall debt is low by global standards. The opposition disputes the figures, while the 2017 budget does not see the obligations falling below 30% of GDP until 2021.
A recalculation of the GDP is confusing matters. The adjustments were published in March 2016 by the National Statistics Office and involved a revision of nominal GDP. Industrial classifications were updated. Tax, business survey and balance of payments data were utilised, as was the 2010 household income and expenditure survey. Differences between the old and new figures are significant. Previously, the nominal GDP in 2013 was PGK34.6bn ($11bn). Revised, it was PGK47.5bn ($15.1bn). Critics have remarked that the revaluation of the GDP is suspicious, as it could help the country lower its debt-to-GDP ratio without having to lower the all-important numerator in the equation.
Some observers are comfortable with the situation, with the IMF’s debt sustainability analysis forecasting a low risk of distress. But many see the country in a difficult position in terms of borrowing, pointing out that PNG is counting on a sovereign debt issue in 2017 – the same issue it has not yet managed to sell. “The government has reached its limit of borrowing,” Ernest Abel, programme manager of trade affairs and investment facilitation at the EU Delegation to PNG, told OBG.
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