Papua New Guinea’s economy faces liquidity crunch

Papua New Guinea will be looking for non-resource growth to steer the economy forward in 2016, as the government steps up efforts to return the budget to a surplus by 2020.

A combination of lower commodity receipts and commitments to large-scale development projects has put greater pressure on the country’s cash flow, which is expected to see continued shortages in the near term, according to the Bank of PNG (BPNG).

After announcing plans late last year to launch a $1bn sovereign bond as a means of tackling the public debt and shoring up foreign reserves, the government finds itself under growing pressure to move forward with the offering.

Non-resource growth to lead in 2016

PNG’s non-resource growth is expected to reach 3.8% in 2016, according to the IMF, up from 1.5% in 2015, and outpacing forecasts for both resource-based expansion (0.1%) and broader GDP growth (3.1%).

While non-resource sectors are expected to continue to lead growth, challenges nonetheless remain, particularly given weak commodity prices. Agricultural and mineral output have also been affected by droughts triggered by the El Niño weather cycle, which has lowered crop yields and made river transport and hydropower generation more difficult.

PNG will also be looking for operations at the open-pit Ok Tedi gold, copper and silver mine ­to help offset weaker energy earnings. Extraction activities had been halted in August due to low water levels on the nearby Fly River but are scheduled to resume this month.

Cash flow concerns

According to government estimates, revenue from oil and gas was projected to reach PGK260m ($85.5m) in 2015, down from nearly PGK1bn ($329m) in 2011. This saw gross foreign reserves fall to PGK5.53bn ($1.8bn) at the end of 2015, down from PGK5.81bn ($1.9bn) in October, the BPNG noted.

Debt levels are also on the rise, with the 2016 budget projected to increase public borrowing to 35% of GDP, though this figure could be as high as 56% if the debts of state-owned enterprises and payment arrears are taken into account, according to estimates from the Lowy Institute for International Policy, an Australia-based think tank.

The cost of servicing PNG’s debt is set to triple between 2012 and 2016, as per local media reports: debt servicing currently accounts for around 10% of government expenditure.

The current shortage of liquidity, and foreign currency in particular, is also inhibiting more robust growth and development in the private sector, according to Alan Poulton, general manager of freight services firm GFS Limited.

“The lack of foreign currency in the market is affecting the thinking of the corporate landscape,” Poulton told OBG. “Expansion is not on the cards right now.”

The liquidity crunch comes as the government faces significant impending outlays, including the repayment of a $1bn loan from investment bank UBS, which was used to buy a 9.8% stake in Oil Search, an oil and gas exploration and development firm operating in PNG, in February 2014.

While repayment was originally scheduled for the end of February, the government struck a new funding deal with UBS and JPMorgan mid-month, which should give the country more fiscal breathing room.

International bond under consideration

In pursuit of additional sources of finance, in November the government announced its intention to tap international markets with a view to raising $1bn through a sovereign bond offering. PNG reportedly plans to use the funds to refinance existing short-term debt.

Such an issue would provide much-needed funds and give PNG an opening into broader global financial markets, according to Geoff Toone, CEO of Westpac Bank PNG.

“This formula has worked for other countries in a similar position,” he told OBG. “This international bond could help put PNG on the global investment stage and bring greater access to global markets after a long history of internal funding.”

However, PNG is likely to face higher borrowing costs. Concerns over the expanding deficit and falling state revenue prompted ratings agency Moody’s to place the country’s “B1” local- and foreign-currency issuer ratings on review for downgrade in late February. The prospect of such a move has the potential to drive up yields on any new bond issue.

The government has redoubled efforts to reduce outlays and narrow the widening budget deficit – measures Moody’s said could help forestall a downgrade. Observers will now be looking to see if public spending cuts and efforts to rein in wastage will bridge PNG’s revenue gap.

In the 2015 supplementary budget released in November the PNG government cut spending by some PGK1.38bn ($454m), with plans to trim the deficit from 4.9% to 3.8% of GDP under the 2016 budget. The administration budget was cut by some 22%, while transport and education were trimmed by 25% and 20%, respectively.

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