The ratings agency Moody’s has affirmed Papua New Guinea’s B2 rating, but downgraded it from ‘stable’ to ‘negative’, citing higher government liquidity risks, increased gross borrowing requirements and limited funding sources. It points to a growing reliance on short-term debt.
According to Moody’s, over ‘the next few years’ the PNG government’s gross borrowing requirements will ‘remain large’ at about 16-17 per cent of GDP, Business Advantage PNG reports.
‘The confluence of rising government debt, albeit from low levels, a large share of shorter-dated and high interest rate domestic maturities, and increasing reliance on external commercial debt will continue to weaken debt affordability and weigh on overall fiscal strength,’ the report says.
‘Until recently, PNG’s large superannuation funds and banks contributed to a reliable source of financing.’
‘In turn, persistent liquidity constraints raise refinancing risks.’
The Moody’s report observes that, until recently, PNG’s large superannuation funds and banks contributed to a reliable source of financing.
The government’s ‘sizeable fiscal deficits’ since 2013, however, have strained the domestic financial system’s ability to absorb government borrowing.
‘Prospects for further domestic financing are constrained as some banks are reaching internal limits for holding government securities.
‘The tightening conditions are making it harder for Moody’s to raise long-term debt.’
‘Deteriorating government liquidity is manifesting in higher local interest rates, which feeds into weaker debt affordability.’
The report predicts that interest payments will absorb 15.1 per cent of government revenues in 2018. ‘[This is] higher than many similarly-rated sovereigns, and up sharply from recent years.’
The tightening conditions are making it harder for the government to raise long-term debt, according to Moody’s.
‘To the extent that domestic investors are still willing and able to purchase government securities, demand is shifting to shorter maturities, which raises refinancing risks.
‘Treasury bills with maturities of less than one year account for around 39 per cent of all government debt in 2017, up from 32.4 per cent in 2012 and 15.6 per cent in 2007.
‘The Bank of Papua New Guinea is absorbing a greater share of government bonds to help offset weakening domestic investor appetite.’