Papua New Guinea is looking to the international bond markets to help bridge revenue shortfalls, announcing the launch of its first eurobond in tandem with wider moves to open up the stock exchange to foreign investors.
In late April Prime Minister Peter O’Neill announced the government planned to launch its first eurobond in the second half of the year, with the capital generated to help the country recover from the magnitude 7.5 earthquake in February, which killed more than 100 people and severely disrupted economic activity.
The bond, to be valued at US$500 million, will have a 10-year maturity, O’Neill told international media during a visit to London. A shortlist of potential book runners has already been drawn up and lead managers for the offer are expected to be announced in the coming months.
While production and shipments were resuming at the country’s main gas terminals, O’Neill said the interruption to liquefied natural gas flows had meant state revenue had fallen to zero in recent months.
Ratings downgraded amid pressures on the economy
One factor likely to impact pricing of the bond is the recent decision by ratings agency S&P to lower PNG’s sovereign credit rating from B+ to B.
The agency cited higher-than-forecast fiscal deficits, a result of falls in revenue and reconstruction costs stemming from the February earthquake, as contributing factors behind its April 14 decision.
On a more positive note, S&P upgraded its economic outlook from negative to stable, with the economy expected to rebound and its external vulnerability tipped to improve; however, there are concerns that government debt could be subject to volatility due to the country’s narrow revenue base.
In particular, the agency called for the government to broaden the base of the state borrowing programme, given that local lenders were facing capacity issues when extending credit.
“Domestic banks are around their internal limits for lending to the government, and the central bank is acting as lender of last resort when government bond auctions are undersubscribed,” the report said.
The lowering of PNG’s rating by S&P was followed by a warning from Moody’s on April 4 which said the government faced refinancing constraints due to limited liquidity in the domestic financial system.
In addition to pushing up the cost of this and subsequent issues, the developments are likely to affect the country’s overall investment attractiveness.
Government reforms to open stock exchange to investment
On top of developments in the bond market, the government is looking to attract foreign funds into the country by raising the profile of the domestic stock exchange.
In early April Wera Mori, the minister of commerce and industry, told a Port Moresby Chamber of Commerce and Industry event that the government was planning to introduce new legislation that aimed to open up the country’s capital markets to foreign investors.
Central to efforts to build stronger bonds between the public and private sectors is the Port Moresby Stock Exchange (POMSoX), with Mori outlining proposals to include listings of investment trusts such as special-purpose entities, to focus on major infrastructure and development projects.
The proposed reforms also include a review of the Securities Commission Act, which would see POMSoX become a clearing house for foreign equity and foreign direct investment.
“I am working with my department to eradicate loopholes preventing direct foreign investment,” Mori said.
Foreign investment key to capital markets expansion
As government highlights plans to open up POMSoX to broader investment, industry figures have placed importance on securing overseas funding.
At present, there are just 14 listed companies, with mining and energy firms accounting for a significant portion of those trading, while the exchange has just two major shareholders – funds management companies BSP Capital (66 per cent) and Kina Securities (33 per cent).
According to local stakeholders, the presence of a large, internationally respected custodian institution is key to attracting investment to POMSoX.
Agreeing with this sentiment, Gregory Pawson, CEO of Kina Securities, one of the exchange’s majority shareholders, told OBG that capital market development could help broaden and diversify the economy, especially if foreign and institutional investors can be attracted.
He said that given the size of PNG’s economy and its abundant natural resources, there is strong potential for capital markets growth and the development of a mature bond market.
“One of the advantages is that the market is flush with local currency liquidity,” he told OBG.
“This liquidity improves potential for the bond market.”
This Papua New Guinea economic update was produced by Oxford Business Group.