Viewpoint: Garry Tunstall
The current economic slowdown highlights several opportunities to prioritise and improve processes and procedures within the PNG financial sector. We have access to the technology and tools that can increase efficiency in fundraising and in operating the financial sector. PNG as a country has never defaulted in its history, so it has a sound track record that should place it high in terms of investor confidence. Unfortunately, this is not necessarily the case, mainly due to a lack of intensive marketing and the fact that it is one of the lowest-ranked economies on the Transparency International Corruption Perceptions Index.
The recent supply of Bank of PNG (BPNG) bonds has increased significantly, a trend that is in line with GDP growth. However, local institutions cannot fund the recent expansion in supply, and while domestic inflation is impacting yields, excess supply remains the dominant issue. PNG is finding it difficult to access global bond markets for inflows in support of the kina bond positioning, and one has to ask why this is the case. One could argue that the currency is overvalued, with kina to US dollar exchange rates reflecting an artificial level of value that has been promoted by regulators rather than being driven by global demand and supply. This of course is a critical issue for investors, as they take currency valuation very seriously when considering investments in any bond market. Another major issue is currency transaction costs being elevated due to low currency turnover, leading to a lack of adequate support for global investors hedging foreign exchange.
BPNG is aware of these matters and is working on upgrading its systems and processes from the current outdated mode of registry settlement to a more secure electronic settlement system that can be used by global institutional investors. These players use electronic systems not just because they adopt best practice standards, but also because compliance regimes make other types of settlement difficult, if not impossible. International entities want to maintain processes and procedures that are secure and follow best practice, and therefore do not settle through local registries. The PNG financial sector needs a globally recognised electronic system of settlement such as Austraclear – the Australian settlement system – which has relevant time zone connectivity and support for PNG. An efficient system such as this will assist with long-term cost reduction and in the pricing of kina currency trading.
From a marketing and promotion perspective it is essential for a BPNG panel of global investment banks to be established and to be paid to distribute BPNG bonds, a practice used by many Australian semi-government issuers and other sovereign issuers. At present, the PNG government undertakes a periodic road show when it wishes to raise debt. This leads to a lack of regular and systematic engagement with the investor community through regular updates on funding programmes and other interactions.
From a practical viewpoint, a website should be established and operated by BPNG or the Treasury for the benefit of global investors so that they can access information on bonds. This would include long-term historical data, institutional presentations, relevant economic statistics and information on expected supply. The time and capital needed to address the issues outlined have a cost; however, the potential benefits will far outweigh any outlay.
Having immediate access to a group of global investors that are keen to provide funding and fully understand the real risks of investment in PNG cannot be underestimated, and in financial terms, for every percentage point saved on a five-year modified duration issuance programme, BPNG could save approximately 5%. Furthermore, on an issuance programme of PGK1bn ($341.4m) a saving of PGK100m ($34.1m) could be made at the point of issuance for every 1% that BPNG issues at a lower fixed rate.
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