Term deposit rates hold

 

Term deposits include investments offered by the commercial banks and financial institutions of Papua New Guinea. The terms range from 30-day deposits to 364-day deposits. According to the Bank of PNG (BPNG), the country has four commercial banks and 11 authorised deposit-receiving financial institutions.

Indicators 

Broad money supply grew by 2.3% in the final quarter of 2016, compared to 5.1% the previous quarter. Growth was attributed to the increase in average net credit to private sector institutions, the central government and other financial corporations. Reserve money was up by 8.2% during the fourth quarter of 2016 due to significant increases in commercial bank deposits held at the central bank. This followed the retirement of central bank bills (CBBs) held by commercial banks up to the end of the year.

Broad money supply is forecast to grow by 10.3% in 2017, compared to 10.9% growth in 2016. The increase in net domestic assets will come from growth in net credit to the government and the private sector. The growth in net foreign assets will be driven by external budget financing, favourable export receipts and dividends from the mineral According to the BPNG’s “Quarterly Economic Bulletin” from March 2017, headline inflation between March 2016 and March 2017 was 6%, compared to 6.6% in the 12 months to December 2016. The increase was driven by growth in the alcohol beverages, tobacco and betel nut expenditure group, which saw a 24.1% increase over the 12 months covered, followed by an 8% increase in the housing category, 4.1% growth in household equipment, and 3.5% growth in food and non-alcoholic beverages.

KFR 

The persistent high level of liquidity in the domestic banking system is contributing to the weak transmission of the policy signal rate, known as the kina facility rate (KFR), to market interest rates. The central bank is currently assessing an alternative policy mechanism with various stakeholders, both domestic and external. The aim is to have a policy that reflects the cost of funds and inflation expectations, and a supporting mechanism that will improve transmission to market interest rates. The central bank will continue to maintain its neutral monetary policy stance by keeping the KFR at 6.25%.

The KFR was originally launched in February 2001 by the BPNG as an official rate to indicate its stance on monetary policy. The KFR is determined and published monthly, and any changes to it should translate to market interest rates. Changes to the KFR are based on the assessment of economic fundamentals. The initial KFR was set at 15.5% when introduced in 2001, which was based on the 28-day Treasury Bill weighted-average rate at the time. The KFR has remained unchanged at 6.25% since 2013.

Liquidity 

In the final quarter of 2016 the central bank utilised its open market operations tools to manage liquidity by offsetting its stock of CBBs, a net of PGK245.2m ($77.7m), while the government made a net issuance of PGK1.1bn ($348.7m) in Treasury bills and PGK168.8m ($53.5m) in Treasury bonds. A new tap facility for Treasury bills and Treasury bonds was also introduced in April 2017 to assist in the management of liquidity.

Since 2015 the yield curve for shorter-dated securities has remained stable, with minimal changes, as most banks in the country continue to have sufficient cash. The 28-day CBB has settled around the 1.75% mark, down from a high of 7% in 2008, similar to the 30-day average term deposit tracking the developments in the domestic money market. This rate is anticipated to remain steady for the next 12 months.

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The Report: Papua New Guinea 2017

Capital Markets chapter from The Report: Papua New Guinea 2017

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