Papua New Guinea’s Summit Host Submission

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Papua New Guinea, after a failed sales attempt two years ago, began a global road show for a $500 million inaugural bond to relieve a chronic foreign currency crunch, as emerging and frontier market issuance vanished in recent months with totals down 20% from 2017’s pace according to transaction trackers. Fund outflows persist for both debt and equity, which have each fallen below $20 billion in the latest data from US-based EPFR. Standard & Poor’s recently lowered the sovereign rating to “B” citing overdependence on hydrocarbons and mining industries, “weak institutions” and fiscal and monetary policy rigidity. Moody’s placed it on negative watch, and the downgrades overshadowed favorable publicity as the upcoming host for November’s Asia Pacific Economic Cooperation (APEC) summit.

Credit Suisse, chosen by the government as a lead underwriter, arranged a $500 million syndicated loan last year for infrastructure, including facilities for the APEC event. In 2016 the World Bank lent $300 million, and double that amount is owed China out of the $2.5 billion foreign debt total. Prime Minister Peter O’Neill and his economic team have scrambled to deal with declining revenue from Exxon Mobil’s flagship $20 billion gas plant, and severe drought and earthquake in succession. The Asian Development Bank, which began disbursing $100 million in support in August, predicts gross domestic product growth around half the original official 3% estimate. The worsening fiscal deficit sent public debt over 30% of GDP, approaching the 35% statutory ceiling. S&P noted that domestic banks had reached internal limits for government bond exposure, leaving the central bank as lender of last resort and forcing offshore borrowing. This recourse is also needed to overcome a backlog of requests under foreign exchange controls the business community ranks as the number one complaint in regular surveys.

The central bank governor criticized these protests in July, with the claim that import orders were met under a “reasonable timeframe” with recovering hard currency inflows from the liquefied natural gas and OK Tedi and Borgera mining projects. The 2018 budget also hiked tariffs on 250 items, with a 25% one introduced for previously exempt dairy products. The ruling coalition at the same time is reviewing the mining code to consider more foreign investor royalties and taxes, despite warnings from the Chamber of Mines and Petroleum that unilateral changes could backfire and put 80% of island exports and 20,000 jobs at risk. It urges devaluation of the local currency, now around 0.4 to the Australian dollar, as another option to gain competitiveness and earnings but the government rejects this route. The Prime Minister and Treasurer blame the predicament on global commodity prices outside their control, as they promote tourism, fishing, forestry and small enterprise diversification and infrastructure public-private partnerships against exchange rate overvaluation arguments. They condemn natural resource contracts predecessors signed as too lenient in allowing proceeds to stay overseas, and stress restructuring will ensure “responsibility” while calling for food import bans to “improve self-sufficiency.”

Better connectivity and transport were priorities ahead of the November APEC meeting in Port Moresby expected to attract close to 10,000 visitors, half the total projected for the year. In preparation a new mining project, Wafi-Golpu was rolled out amid an information campaign to increase direct investment from Australia, China, Southeast Asia, and Japan. Australia’s colonial ties have positioned it as the lead commercial and aid partner, but China’s $3 billion in trade in 2017 and project loans put it in second place. Chinese companies have pumped billions of dollars into copper, gold and nickel ventures, and timber exports are another bilateral mainstay although PNG pledges to phase out tropical logging by end-decade. With the planned 10-year external bond the government intends to extend maturities, while preserving the country’s no-default record. It also has a broader capital markets modernization strategy that includes opening the 15-company local stock exchange to foreign buyers. As preconditions basic securities laws would be revised, and an international bank custodian recruited to provide depository and safekeeping services. Shareholding and governance of the Port Moresby bourse, currently owned by two brokerages, could also be overhauled. Corporate bonds could eventually be added to the mix with initial placement success abroad, which will depend on mining ambiguous investor sentiment already the pattern domestically.

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