Although the Port Moresby Stock Exchange ( POMSox) has been capable of offering debt instruments for some time, the debt market is largely undeveloped in Papua New Guinea. The government’s local-currency issues are illiquid, it has not yet issued an international bond and there is currently only one corporate debt instrument on the POMSoX. There is little available beyond primary issue government bills and bonds that must be held to maturity.
However, the market is starting to evolve, and it looks set to become more active and more useful to the economy as a whole in the near future. An international sovereign bond is currently under consideration, and reforms may be in the works that will allow for the secondary trading of debt securities. Furthermore, an international corporate debt issue is also being planned. If these sales and reforms happen, over the next few years the PNG bond market could gain the depth and volumes it needs. That would result in more fiscal flexibility for the country while private enterprise would have access to competitive and efficient funding.
Sizeable but Illiquid
The country has a large debt market already, and one that is growing due to deficit spending that is scheduled to continue through 2017 and could continue beyond. According to the Bank of PNG, total outstanding public debt stood at PGK14.7bn ($5.56bn) as of September 2014. Of that, PGK10.8bn ($4.1bn) was domestic and PGK3.8bn ($1.4bn) external. Most of the external debt is owed to international agencies (such as the World Bank, the Asian Development Bank and the Australian government), while the majority of domestic debt is in the form of long-term government inscribed stocks (GIS). As of December 2014, PGK6.1bn ($2.3bn) of the domestic debt was GIS versus PGK5.3bn ($2bn) of short-term Treasury bills.
Most of the domestic debt is held by banks and institutional investors, such as the superannuation funds and the insurance firms, but increasingly the central bank has been a buyer of the securities. As of September 2014, it owned 13% of the government debt outstanding, up from around 6% in September 2008. Press reports in early 2015 said that the bank had become the buyer of last resort for government bonds. In part because of the government’s need for funding and the fact that it has relied so much on the issuing of Treasury bills and inscribed stock, rates have started to climb. While the 2015 budget calls for a reduction in expenditure over time and the elimination of deficits by 2017, analysts say that this will not be possible. The government has started to recognise the need for higher than expected fund raising in the near term at the very least.
On the corporate side, demand for bonds is low. The banking system is liquid, and creditworthy companies have no trouble getting funding in the form of loans. Corporate bonds can be traded on the Port Moresby Stock Exchange, but only one issue is available: Bank South Pacific notes, listed in 2009.
Continuing to Build
The financial sector has a good foundation on which to build a more robust bond market. It has solid, well-capitalised banks, large institutional investors and a competent and well managed central bank. As the bond market develops, it will have a good range of customers and responsible and balanced oversight. The market infrastructure needed for the cash side of transactions is improving fast and is almost at the point where it could handle a full-fledged debt market. The country has been developing a payments system that will allow for real-time gross settlement (RTGS) and incorporate best practices for connectivity.
In 2013, a National Payments System Act was passed, which set the groundwork for a comprehensive payment network to be established. Under this act, the creation of a national payments system was mandated under supervision of the country’s central bank. Historically and until recently, the system was manual and not particularly efficient. The Port Moresby Clearing House would conduct three cheque exchanges a day, with four on Friday. At 4:45pm Monday through Thursday, settlement between the banks was conducted, while settlement would happen at In 2013, the settlements transformation began. The first phase of the Kina Automated Transfer System (KATS) was established in October of that year allowing for automated high-value interbank payments. By early 2015, the system had been expanded to allow for the clearing of cheques (which is now down to four days) and the immediate processing of low-value payments between customers. KATS is designed to be a world-class solution that can integrate well with the global markets and could allow for seamless international payments and settlement for international investors. It utilises SWIFTN et architecture, which is also used in Fiji to achieve RTGS.
The Bank of PNG has already worked to broaden the appeal of the bond market and make it more accessible to a wider range of investors. For example, for more than a decade, it has had the Central Bank Bill Tap (CBB-Tap) programme in place that allows non-institutional players to buy government debt on a small lot basis.
Under CBB-Tap, individuals, private companies and church groups can purchase short-term government securities ranging from 28 days to 365 days, with a minimum purchase of PGK10,000 ($3784). This is much lower than the threshold for bonds, with the minimum bid for GIS at PGK100,000 (37,840). Sign up is easy and straightforward, requiring only identification, a filled-out application and a bank cheque.
The maximum purchase size is PGK500,000 ($189,200) per customer and investments can be rolled over, but they cannot be redeemed early. Registered investors, such as banks, savings and loans and superannuation funds, are not allowed to participate in the CBB-Tap facility. In one auction in June 2015, a total of PGK1.14m ($529,760) of government securities were sold under the programme, with maturities of 63 days and 91 days.
The authorities are keen to improve the debt markets so that they can become more attractive to issuers and investors. The central bank has been working to extend the length of maturities in order to deepen the bond market by selling more long-dated paper. Another popular method of improving the debt market is to create a secondary market for bond trading, of both government and corporate securities, thus allowing owners of debt to easily sell if they want rather than having to wait for maturity. A secondary market also makes pricing information more transparent and readily available and is seen as improving the country’s standing in the eyes of international ratings agencies. The creation of a secondary market is an often stated goal in PNG, with the Treasury indicating that it is a priority, but no concrete steps have been taken in recent years, and PNG remains a buy-and-hold market.
One additional measure that could help the debt market significantly, as well as help the wider economy, would be the issuing of an international bond. A sale of this type would lower the cost of funding for the government while at the same time allowing the country to have a better, and real-time, sense of its value in the market. It could improve debt management, and it would avoid the complications that can arise in private debt deals, which are less transparent and harder to evaluate.
An issue of this type was attempted at least once before. In 2013, Barclays, JP Morgan and BNP Paribas were reported to be working on a dollar bond for PNG totalling $500m. The issue was never sold and the country raised money other ways. At the time, the issue was met with some scepticism by international observers. They commented that the country was too risky to be acceptable in the international markets. But PNG remains eager to do a sale of this kind and support is coming from the central bank and from international banks, such as ANZ, who understand the country and believe that a bond would be saleable at an interest rate far below domestic kina rates. The budget deficit may persist and the cost of domestic funds are becoming so high that it may be the best option for the country.
Private Sector Bond
While the government considers its options, an international private issue has also been discussed. In May 2015, the National Petroleum Company of PNG (NPCP), which owns 16.6% of PNG’s liquefied natural gas (LNG) project and has rights to buy into the Elk-Antelope development, said that it wants to raise debt in the market in order to participate in oil and gas projects.
The financing would include “plain” US-denominated debt. The NPCP is state-owned under the Independent Public Business Corporation. The company told Reuters that the sale could be in the billions and that it hoped to go to the markets in 2015 or 2016. In part, the need for debt is a result of reduced cash flow from the PNG LNG due to the lower LNG prices.