Debt dealing: The burden of arrears has spurred significant debate


In recent years, Papua New Guinea has sought to complete two key international transactions, and neither has gone as planned. The $300m facility from the World Bank’s International Finance Corporation (IFC) to provide dollar liquidity is still being discussed, while a $1bn-plus international bond has been at least twice delayed, in 2013 and again in 2015. The international bond deal is the subject of considerable doubt and criticism. It is hoped that the sale will allow the country to refinance high-cost, short-term local obligations into longer-dated and lower-cost international paper, but bankers have warned that the process may not be easy, that the lower yield may come at the price of higher risk and that paying in foreign currency could mean potential losses.

In Play

Despite the lack of headline progress, the two transactions have not been failures. They are still very much in the works, and some progress is likely to be made in some form or another. The $300m deal with the IFC is indeed a complex transaction that presents a challenge not only for the foreign banks in PNG (see analysis) but also for the IFC, which has received considerable criticism for moving outside of its mandate. According to some bankers, a suitable structure is still very much under discussion and will be put into effect if and when it can be agreed upon by the relevant parties. The goal is still to create a facility that will be able to step in when larger trades absolutely must get done. Mark Baker, managing director PNG at ANZ Banking Group, told OBG, “There are challenges on both sides, for the IFC and the foreign banks, so the structure is quite complex. But we are working with the IFC to come up with a structure that works, and we continue to work with the central bank to find solutions. We are not saying that there is nothing we can do. It is in everyone’s interest to bring stability to the foreign exchange markets, but we have to do that within the bounds of the expectations of our shareholders, as well as prudent risk management.” Robin Fleming, CEO of Bank South Pacific (BSP), echoed this sentiment, telling OBG, “The central bank is looking at other means to be able to create a circuit breaker so we can get dollars into the market.”

Still An Option

The situation with the international debt issue is much the same. In January 2016 Prime Minister Peter O’Neill told local daily PNG Today that he hoped that the first sovereign bond would be sold in 2016, and the offering is still a very real possibility. The most recent delay is largely perceived as unavoidable, as in late 2015 and early 2016 market conditions both in PNG and globally were so bad that it would not have made sense for the country to sell debt. It would have been too expensive.

Despite the difficulties in the economy, a sovereign issue from PNG could generate considerable interest given the country’s prospects and its lack of an existing international bond. Some executives argue there is demand in the market to buy at least $2bn worth of PNG bonds, but they note that the Treasury needs to agree upon a price that investors would be willing to accept. Baker told OBG, “The issuer, like any prudent issuer, is looking to see when the conditions are right. The issuer is looking closely at the market. It will come down to whether the price make sense. I think the idea that the bond failed is incorrect. The issuer is just looking for the right time to go. Going out early in 2016, the pricing would have been horrific.”

Similar criticism has been levelled at the sale of state-owned enterprises. Privatisation would help the country’s fiscal situation – and Air Nuigini, PNG Ports and PNG Power have all been mentioned – but the country has not had any major successes in selling assets since PNG Banking Corporation was privatised in 2001. There are many reasons for this, but one is simply the matter of concerns over price. Garry Tunstall, CEO of Nambawan Super, told OBG that many think that the Treasury wants too much for assets, and that investors are hesitant to overpay.