An improved commodity outlook and renewed economic stability are combining to ease foreign currency shortages in Papua New Guinea, as the government looks to tap international money markets.
Foreign currency reserves totalled PGK5.60 billion ($1.72 billion) at the end of June, up from K5.56 billion ($1.71bn) at the end of March, according to a statement issued by the Bank of Papua New Guinea (BPNG).
The bank cited increases in international commodity prices, along with the resumption of production at the Ok Tedi and Porgera mines and the PNG LNG project following a February earthquake, as significant factors behind the rise in foreign exchange.
Furthermore, the commencement of corporate tax payments to the government by the operator of PNG LNG has further boosted foreign currency levels, the bank said.
While reserves are up on year-end 2017 levels of PGK5.39 billion ($1.65 billion) and a recent low of PGK5.23 billion ($1.61 billion) in 2015, they are still down significantly from PGK9.27 billlion ($2.84 billion) in 2011.
The foreign currency shortage experienced in recent years, caused in part by the reserve bank keeping the kina at artificially high levels to relieve inflationary pressure, resulted in private consumption being reined in and the flow of imports curbed, which has in turn impacted capital investment.
Credit facilities, bonds to further support forex levels
A series of loan deals with international finance institutions are slated to bolster reserves further.
Since August the government has been able to draw on the first tranche of a $100 million loan facility from the Asian Development Bank, while a $150 million credit agreement with the World Bank is currently in the final stages of consideration by the bank’s board, according to BPNG.
These developments follow the completion of a $500 million loan deal with Swiss investment bank Credit Suisse, of which the final $190m tranche was released in June.
PNG is also looking to tap international bond markets to bridge current budgetary shortfalls and increase foreign currency levels.
In early September Prime Minister Peter O’Neill told Parliament that Charles Abel, deputy prime minister and treasurer, was conducting a series of meetings in Singapore, London and New York to gauge international investor appetite for a dollar-denominated bond offering.
The sovereign bond – which would be Papua New Guinea’s first – could raise between $500 million and $1 billion depending on market conditions, according to the Treasury’s 2018 “Mid-Year Economic and Fiscal Outlook”, and would be used to fund government programmes, address foreign exchange imbalances and make more credit available to the private sector.
In early October Charles Abel, deputy prime minister and treasurer announced the trip was a success and a $500 million 10-year sovereign bond was raised, priced at 8.375 per cent.
Fluctuations in international money markets have seen the kina gain ground on a number of currencies this year, including a 7.1 per cent appreciation against the Australian dollar between end-2017 and mid-September, giving it an advantage in imports from its major trading partner, though it edged down marginally by 0.12 per cent against the US dollar, the reference point for much of global trade.
In its “Mid-Year Economic and Fiscal Outlook” report, the Treasury said the continued weakness of the kina against the US dollar reflected the persistent imbalance in the PNG foreign exchange market and the strengthening of the US dollar against most major currencies.
The report projected there would be further depreciation of the kina through to the end of the year, though any further erosion in value of the currency would likely be modest.
A less volatile kina is welcome news to the private sector. Stabilising the currency is the single greatest concern of the business community, according to the findings of the latest Oxford Business Group Business Barometer: PNG CEO Survey, released in June.
Currency stabilisation was identified as the most important factor in improving the country’s appeal as an investment destination by 31 per cent of the more than 100 C-suite executives polled.
Despite these concerns, general sentiment remains strong, with 71 per cent of CEOs saying it was likely or very likely that their respective companies would make a significant capital investment within 12 months.
– This Papua New Guinea economic update was produced by Oxford Business Group.