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Study: Measures May Brings More Pressure on Gov Finances
by PNG Business News - May 18, 2021
According to an S&P Global Rating research update, measures introduced in the battle against the Covid-19 are likely to bring more pressure on PNG's government finances.
According to the study, the global pandemic has exacerbated PNG's systemic fiscal problems.
“Much weaker revenues, coupled with larger recurrent expenditure, are a feature of the fiscal landscape,” it said.
“Larger fiscal deficits and weak economic growth have propelled general government net debt, according to our calculations, to above 46.6 per cent of gross domestic product (GDP) in 2021.
“We forecast it to reach around 47.5 per cent in 2024 due to delays to the government’s fiscal consolidation efforts because of fallout from the Covid-19.
“It states that weaker tax revenues and dividends from State-owned corporations have substantially lowered revenue expectations since the start of the pandemic.
“On the expenditure side, significant overruns were incurred from a public sector wage bill because of increased wages and additional staff numbers.
“In response, the Government has cut capital expenditure, partially offsetting the weaker revenues.
“But this does not address vulnerabilities linked to PNG’s narrow tax base and it will continue to weigh on future growth.”
According to the study, the government started its staff-monitoring scheme with the International Monetary Fund in 2020, detailing its 20 institutional benchmarks.
“The incumbent government’s focus is on fiscal consolidation and lowering debt,” it said.
“We expect this focus to provide an anchor to the government’s economic and social reform agenda.
“Carrying out the agenda has been difficult because disruptions caused by the global pandemic have delayed targets. We estimate the general government deficits to average 3.3 per cent of GDP between 2021 and 2024.
“The 2020 fiscal deficit was higher than the Government had projected.
“The economic slowdown and low commodity prices led to lower revenue collections.
“Government expenditure, meanwhile, increased due to pandemic-related fiscal support.
“To mitigate some of the revenue shortfalls, the Government applied for additional Covid-19 financing facilities established by multilateral development partners.
“We expect multilateral and bilateral partner loans to finance fiscal deficits, with net debt increasing to about 46.6 per cent of GDP in 2021.”
The government has included debt from state-owned enterprises (SOEs) in its debt calculation, which is higher than our normal concept of general government debt, according to the study.
“A lack of disclosure means we are unable to separate the debt of SOEs from that of the general government,” it said.
“The Government continues to increase its reliance on external borrowing, with its debt strategy targeting a 50:50 split between domestic and external financing.
“Wider fiscal deficits in recent years have strained the ability of the domestic financial system to absorb large amounts of government debt, which is reflected in higher local interest rates.
“PNG has diversified its funding base via drawdowns from a Credit Suisse, Asian Development Bank, and World Bank credit facilities budget support loan from Australia as well as its US$500 million (K1.7bil) sovereign bond issuance.
“The Government has used some of these proceeds to retire short-term expensive domestic debt, lowering its average cost of debt domestically.
“We anticipate interest payments to rise as debt stock increases to about 23 per cent of general government revenues by 2024.
“PNG’s external position remains weak.
“The country’s terms of trade volatility have subsided over the past few years.
“External debt ballooned between 2010 and 2013 during the construction phase of a liquid natural gas project.
“Large current account deficits – financed by a combination of external debt and foreign direct investment – averaged about 30 per cent of GDP.
“The country’s external imbalances have contracted during the past few years, with LNG production since 2014 resulting in repayment of external liabilities.
“Future LNG projects could exacerbate external imbalances again during the construction phase.
“We project a moderation in current account surpluses in 2023-2024, rather than the double-digit current account deficits of 2010-2013.
“We forecast net external debt to be about 124 per cent of current account receipts (CARs) in 2021.”
PNG's net external debt stood at 370 per cent of CARs in 2012, according to the study update.
“We consider PNG’s strong current account surpluses to overstate its external position,” the report said.
“Project development agreements allow developers of mining projects to keep export receipts in offshore foreign currency accounts.
“These US dollar revenues deflate our external ratios, presenting a stronger external picture than would otherwise be the case.
“We expect net external debt to peak at about 250 per cent of CARs in 2024.”
Foreign exchange reserves have been stable over the past 12 months, remaining at about US$2.3 billion (K7.97bil) as of June 2020, according to the study.
“PNG held about US$4.4 billion (K15.26bil) in international reserves in 2011, declining to US$1.7 billion (K5.89bil) in 2017,” it said.
“This has also resulted in an easing of the shortage in US dollars in PNG, helping to lower the value and shorten the clearing time of outstanding foreign exchange orders.
“However, we believe PNG maintains extensive foreign-exchange restrictions.
“This is symptomatic of a currency that persists above the market-clearing exchange rate.
PNG’s exchange rate arrangements were “crawl-like”, according to the International Monetary Fund.
“During the past few years, the PNG Kina has depreciated against the US dollar, falling around 15 per cent since 2015,” the report said.
“More broadly, the Bank of PNG’s weak monetary policy flexibility is a rating constraint.
“This weakness mainly reflects the limited transmission of monetary policy settings to the interest rates faced by borrowers, largely because of the high level of liquidity in the banking system.
“PNG’s banking system is stable, with limited competition.
“It relies heavily on deposit funding, which is supported by high levels of liquidity. It also has a small net external asset position and limited linkages to global markets.
“That said, the country’s low-income levels and credit concentrations increase banking system risks.
“Legal infrastructure and judicial system delays also pose challenges to enforcing creditor rights.”
PNG Business News - February 09, 2021
Kina Drops By 2.9 Per cent Against the US Dollar
According to the Bank South Pacific (BSP) chief executive officer Robin Fleming, the kina depreciated by 2.9 per cent against the US dollar in 2020.“During the course of 2020, the Kina depreciated by 2.9 per cent against the USD, therefore, the cost of goods increase associated with the exchange rate for USD denominated imports would have been around 2.9 per cent,” he said. “For Australian dollar imports, this may have been somewhat higher as the Australian dollar appreciated by 16 per cent against the Kina from last June, predominantly due to movements in the USD and AUD cross rates. In respect to inflation, the most recent publication from the Bank of PNG (BPNG) released in January was that its September 2020 monthly economic review suggests overall inflation is still low.He added, “BPNG’s September 2020 monetary policy has inflation around 3.3 per cent and the Department of Treasury 2021 budget papers indicated inflation for 2020 around four per cent. The BPNG Sept 2020 monthly economic review showed that inflation annual headline retail price index (RPI) to Sept 2020 increased by 0.5 per cent.”This was driven by price increases in alcoholic beverages, among others. According to the BPNG statement, the annual headline inflation decreased from 4.8 per cent in December 2018 to 3.1 per cent in March 2020. This was due to stable or low-income prices in seasonal produce, low imported inflation and high competition. BPNG Governor Loi Bakani said that the import of costs was below 25 per cent.
PNG Business News - February 04, 2021
Barker Says Forex is Very Tight
According to Institute of National Affairs (INA) executive director Paul Barker, foreign exchange (forex) has stayed very tight since 2017, considered to be one of the major hindrances to investments and businesses in PNG. He added that his concern was the imbalance in the markets, partly linked with rigidities in the setting of exchange rates, and the unusual scene of a strong positive current account balance where a section of exports get remitted to PNG. “While servicing major commercial overseas debt prevails, it combines increasingly with the need for servicing the growing foreign public debt,” Barker said. “The foreign exchange that has been available has effectively been rationed, with priority expenditure taking precedence, including fuel, food and debt servicing, while remitting dividends overseas has largely been on hold for several years.”On “certain privileged persons able to secure precedence, Barker said he won’t comment further on that.He said that most businesses need foreign exchange for different reasons.“Even exporters needed to pay for replacement plant and equipment, sometimes for technical inputs,” he said. “And undue constraint can also handicap their capacity to produce and export. It becomes a vicious circle.”Although the situation was improving in 2018 and 2019, Barker said, “But 2020 saw the collapse in prices of several major export commodities. This included liquefied natural gas/oil, copper and vegetable oil at the start of the year. It was associated with the severe fall in demand linked to the Covid-19 pandemic and was not balanced by the strengthened gold prices, particularly following the closure of the country’s second-largest gold mine, Porgera.”
PNG Business News - February 15, 2021
Foreign Exchange Liquidity Is Expected To Rise In 2021
The foreign exchange liquidity in the country is predicted to increase this year. According to the Bank South Pacific, this could happen although the first quarter may be tight. In the BSP Economic and Market Insight December 2020 quarter publication, group general manager treasury Rohan George said that the foreign exchange inflows were expected to decrease by 13 per cent with the support of the Bank of PNG (forex) intervention and 20 per cent without its forex support, from levels enjoyed in the last quarter of 2020. He predicted that these were all because of the effect of the fire at Ok Tedi, the Porgera mine shutdown, Government businesses and State-owned entities strong end-of-year inflows “are likely to be partially offset by increased forex intervention by the Bank of PNG”.“The Kina is likely to continue its gradual fall against the US Dollar (10bps/month), while persistent Australian dollar strength will see larger falls in the Kina against the Australian dollar cross-rate,” he said.The high import demand is also on downward pressure on the Kina exchange rate against the US dollar. “A look ahead into 2021 is promising,” he said. “For instance, Japan has committed to a K1 billion low-interest loan to help finance PNG’s budget deficit. Further, the Government has provided assurances regarding multi-billion Kina resource projects like the Wafi-Golpu, Papua LNG, Pasca offshore, and the re-opening of the Porgera mine. A successful conclusion of negotiations will provide foreign exchange relief.”
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PNG Business News - June 15, 2021
PNG Vanilla Company Partners Expo2020 Team
Dr. Nancy Irwin (left) with the Deputy Commissioner General for Expo2020 and Head of the PNG Expo2020 Secretariat, Mrs. Jacinta Warakai-Manua began the partnership to tell the PNG Vanilla story in Dubai, by exchanging ideas in Port Moresby last week. A vanilla production and export company is partnering with the PNG Expo2020 Team to promote their products in the Dubai World Exposition that starts in October this year. KAMAPIM, a company working with landowners in the Madang and Morobe Provinces produces top quality vanilla beans and is already exporting to the EU market. The Managing Director of the company Dr. Nancy Irwin, met with the PNG Commissioner General to Expo2020 Ambassador Joshua Kalinoe and his Deputy Mrs. Jacinta Warakai-Manua in Port Moresby last week to firm up the arrangements. Dr. Irwin said Kamapim (pidgin for develop and to improve) concentrates its efforts in producing the best quality bean for the international market through quality assurance production methods. “PNG farmers can grow anything, they have instinctive ability to grow well any crops. When I first started the project, the quality of the beans were poor, full of fungus due to lack of processing knowledge. We saw huge potential of the organically grown beans and started working with landowners through a cooperative production and marketing structure to improve quality” “The company provide extension services to farmers and buy the beans directly, ensuring farmers are paid a fair price for their efforts”, she said. Dr Irwin said the beans are tested internationally and are consistently classed as the top-quality A grade level. “While PNG has a good perception of growing environment friendly organic vanilla beans, the challenge is for the relevant Government authorities to work with farmers to improve quality. I believe the cooperative production methods applied by our company, Kamapim, could be used nationally as one of the models to improve quality for the export market as well as to maximize revenue gain for farmers”, Dr. Irwin said. She said the company is looking forward to partnering with the PNG Expo2020 Team to tell the PNG story and to connect with niche importers in Dubai and the Arab world in general. Dr. Irwin said the company would promote its products in specially branded PNG Expo2020 containers to create visibility for the country as well as to preserve quality at the company’s cost.
PNG Business News - June 15, 2021
PNGEITI Praises Open Dialogue to Reopen Porgera Mine
The PNG Extractive Industries Transparency Initiative (PNGEITI) has praised the open stakeholder dialogue culminating in reaching consensus to re-open the Pogera Mine in Enga. Parties in April this year sanctioned a “Framework Agreement for the New Pogera Project” which spells out the roadmap to reopen the mine. Mark Bristow, CEO and President of Barrick Gold last week explained key elements of “Framework Agreement for the New Pogera Project” at a public forum at the Piam Oval in Pogera witnessed by PNG Prime Minister James Marape, landowners and other leaders. In the new agreement, PNG stakeholders will together own a 51 % equity stake in the mine while Barrick Niguini Limited (BNL), a joint venture company in which Barrick and Zijin Mining Group each own 50% will hold 49 %. BNL will remain the mine operator. At the end of the first ten year period, the PNG stakeholders will have the option to purchase BNL’s 49 % PNGEITI Head of Secretariat Lucas Alkan remarked that the open discussion throughout the negotiation process on the part of the mine operating lead, Government and landowners has culminated in this agreement signed happily by all parties. “We at the PNGEITI congratulate the Government and the project lead Barrick Gold and other stakeholders for reaching a consensus decision to reopen the mine. “Pogera has been an economic powerhouse for many years and people in the country have been waiting for the outcome. “We commend the Prime Minister, the President and CEO of Barrick Gold Mr. Mark Bristow for the leadership in ensuring that the negotiations were done in the transparent and open manner. “PNG Extractive Industries Transparency highly encourages such openness in the negotiating process for resources benefits and importantly the responsibilities that each stakeholder must take on to ensure smooth flow of proceeds. “We look forward to working with the Government and the project operator in the areas of transparency and accountability to help derive best value for all stakeholders. PNGEITI commitment to reporting on developments in the mining and petroleum space is becoming stronger with new reporting dimensions taking shape as we making progress in promoting transparency and accountability in the PNG mining and petroleum industry” Mr. Alkan said.
PNG Business News - June 14, 2021
BPNG Goes For Review
Treasurer Ian Ling-Stuckey has revealed the terms of reference for a review of the Bank of PNG, as well as the members of the review panel. Former Chief Secretary Robert Igara will lead the study, which was planned in the Supplementary Budget for 2020. Former central bank governor Sir Wilson Kamit and Australian professor Dr Stephen Howes are the two members. “These very eminent people, all of whom have detailed experience of the PNG financial system and reform, will be working to a term of reference approved recently by the NEC,” Ling-Stuckey said. “It is the first review of the central bank and the Central Banking Act 2002 since Sir Mekere Morauta’s financial system reforms when he was prime minister from 1999 to 2002. “Much has changed since then, and the effects of the coronavirus pandemic, along with substantial technological advances, have made the need for a review even more urgent. “The aim is to modernise the bank and the legislation in line with international developments, and make it more responsive to prevailing circumstances while preserving its independence.” The study is scheduled to be finished in time for Parliament's November session. “An independent advisory group was also established by the late Sir Mekere when looking at the changes that led to the Central Banking Act 2000,” he said. “Igara, currently the University of Papua New Guinea chancellor, was chief secretary at the time, and Sir Wilson was the governor of the Central Bank. “Prof Howes, head of the Development Policy Centre at the Australian National University, has long been involved in PNG research and advice and consultation, particularly in relation to national development.” Reference: The National (8 June 2021). “BPNG going for review”.