Interview: Greg Pawson, CEO, Kina Group
How would you assess the outlook for Papua New Guinea’s capital markets in 2018?
GREG PAWSON: The economic situation and the lack of foreign currency are not helping to make the Port Moresby Stock Exchange (POMSoX) more dynamic. In 2017 we saw many shareholders selling their shares because they needed the money. Currently, there are no new listings on the horizon and it appears that the majority of future growth will be driven by the performance of extractive industries.
That said, the economy is still developing and with it, the middle class. It is small but growing, driven by changing demographics and the ongoing push from the government to get more children into school. Improving both the quality of education and increasing access to it will make PNG even more attractive as an investment destination and boost financial awareness among its citizens. The foundation for growth has already been established: since 2011 there have been 1m new students have entered the education system. The most promising potential for growth can be found in collective investment vehicles and the excess of liquidity that creates the potential for a bond market. Although the Australian government is helping with this, in PNG there tends to be an overdependence on debt investment and government securities. In addition to the major banks and superfunds, private investors are now able to buy government security bonds. These result in strong yields, which should be expected from a country like PNG.
What reforms are needed to improve the POMSoX’s appeal to investors?
PAWSON: We are still waiting for a complete update on the state of the new Capital Markets Act as the new legislation has not yet been gazetted. It will mainly change the ownership of the POMSoX, which is currently 66% owned by Bank South Pacific and 33% by Kina Securities, with the remaining 1% held by private investors. Owning and running the local stock exchange presents a challenge given the lack of depth in the market. Even if we relinquish some of our authority, it will not change the dynamics.
The preference is towards a broader and more diverse ownership, with foreign investors looking for assurance in the form of sound governance. The POMSoX is among the smallest exchanges in the world with 18 listed companies, so it needs a boost in trust. A global custodian would help to assure people that their assets are going to be kept safely. However, there is some positive change happening as the POMSoX goes live on the Nasdaq trading system and opens up the market to a new pool of international investors.
How could more initial public offerings (IPOs) be encouraged in the country?
PAWSON: Currently, the number of IPOs is extremely low. There is a pressing need to educate the market about what the local stock exchange is capable of doing. PNG has a unique economy with a local market that is characterised by multiple long-standing family-owned enterprises looking for opportunities to scale up, although, until now, the POMSoX has rarely been taken into consideration. If you want to issue an IPO, you go to Australia or New Zealand, with some companies listing dually with Singapore.
PNG might not have the scale to compete with the larger markets, but the POMSoX is more than capable of expanding. We need more confidence in PNG as a place to do business, and this will require more than regulatory changes. A significant step could be taken if state-owned enterprises were partially privatised. We have seen this be successful in several markets, including New Zealand. Furthermore, despite the market’s size, it is well-provided with local currency as banks have too much money and do not know what to do with it. With investment funds running out of opportunities, POMSoX presents the most viable option.
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