“PNG’s Treasurer is now travelling around the world on a first class ticket with well-paid financiers trying to sell PNG’s Sovereign Bond to international financial markets. There are far cheaper and more objective means to test the market for PNG sovereign bond appetite instead of the Treasurer proving he has fallen in love with travelling in first class while sleeping on the job!” said the Hon. Ian Ling-Stuckey, Shadow Minister for Treasury and Finance.

“The Alternative Government has three key concerns with the Sovereign Bond. First, it is only being considered because of financial mismanagement by the government – too much debt, a failure to take available concessional loans, and the decline in business confidence driving up interest rates on domestic stock. Second, there are better and cheaper alternatives available. Third, it seems that the Treasurer is happy to share details on the PNG economy that he is not willing to share to the PNG Parliament and its people. Until we get some real information on this proposed Sovereign Bond, we are not in the position of endorsing it. Any massive increase in expensive debt with large foreign exchange risks should come to the PNG Parliament.” said the Shadow Treasurer.

“Let me deal with each of the Alternative Government’s three concerns in some more detail. First, the stated reasons for needing this expensive Sovereign Bond are misleading. The national government claims,  “One of the initiatives of the government through our 25-point plan” (what happened to the fake “100 Day Plan?)  “is to begin a process of debt restructuring to reduce short-term domestic debt with longer term, cheaper concessional foreign debt”. However, if one looks at the latest Bank of PNG statistics, we see that the current short-term interest rates on government debt range from 4.73% for 182 day bills to 8.05% for 364 day Treasury Bills. Foreign commentators on the likely interest and fee charges on any Sovereign Bond say it will be over 10%. Latest markets indicate that other Asian countries with much better credit ratings than PNG hit interest only costs of 9.5% in July 2018 (excluding fees), although they have decreased slightly since then. Indeed, these Asian bond costs have increased from 6% at the start of the year to now be over 8.5%. On a Sovereign Bond issue of possibly over K3 billion, this interest change already represents a loss of K75 million every year (2.5% of K3 billion). So how are Sovereign Bond costs at over 10% going to be less than short-term domestic market costs which are 4.5 % to 8%?” asked Mr Ling-Stuckey.

“The government has also claimed that too much of PNG’s debt is from domestic sources. The facts, using BPNG figures, are that domestic debt was 73.6% of total public debt in mid-2012 and it is now 73.0% in 2018 – so the share has gone down over the last six years. So why, after nearly six years, is this suddenly a national emergency that requires expensive trips travelling around the world to secure expensive financing?

[The detailed figures are at the end of the June quarter 2012, domestic debt – so Treasury Bills and Inscribed Stock- was K6,095m out Total Public Debt of K8,281m – so 73.6%; at the end of the March quarter 2018 – the latest available data, domestic debt was K17,134m out Total Public Debt of 23,481m – so 73.0%]

“The real reasons for the current problems are three-fold.  First, there has been irresponsible fiscal policy that have increased public debt levels three-fold. There might finally be attempts to bring this under control, but the Alternative Government just doesn’t believe the current figures in Treasurer Abel’s Budget or 2019 Budget Strategy – too many fake numbers, inconsistencies and potential games. Second, the  government has lost the confidence of the domestic market. This is reflected in the quadrupling of domestic debt interest rates from under 2% in April 2013 to 8.05% in the latest 364 Treasury Bill auction of 5 September. This loss of confidence on the domestic debt is conservatively estimated to be costing the budget over K500 million per year (so 6 percentage point increase on outstanding Treasury Bills of K9.3bn is K556m per annum). Third, the government has totally dropped the ball in terms of its use of concessional loans from the World Bank and Asian Development Bank. These have been going down as a share of public debt under the government.  Instead, the government has turned to much more expensive commercial debt such as the Credit Suisse loan. They are also turning more to Chinese concessional loans – most of which are not as concessional. These are the real reasons for the current financial problems – all problems created by this government which the alternative government can help them fix!” stated the Shadow Treasurer.

“Overall, the Alternative Government considers there is a better way forward rather than chasing an expensive Sovereign Bond deal. There is a need to get our house in better order – the shambolic 2019 Budget Strategy indicates we have a long-way to go. We need an independent audit of the budget to confirm the real figures and situation. We need a thorough Public Expenditure Review to get a better handle on where the money is actually flowing. Then we need to get into serious discussions with friendly international borrowers to secure cheap finance, including accessing the cheap finance available to us by drawing down on our IMF standby arrangements. Mongolia, another resource-dependent country but with a population of only half the size of PNG, was able to secure some $US6 billion in cheap, friendly financial assistance last year. This is what is really required to turn the economy around, but it will entail taking some hard medicine. So why is this more comprehensive and cheaper alternative not being followed? Because the government is afraid of correcting its economic mismanagement. And the people of PNG will be the losers”.

“The third concern about this first class junket is that the Treasurer has not undertaken to release all of the detailed information he is giving to foreign investors to the people of PNG. Going out to financial markets requires detailed background papers to be provided on the state of the economy. This should include items such as the real level of public debt once State-Owned Enterprises are included, the real level of expenditure arrears, the real level of unpaid GST refunds, the real level of dividends expected from the National Fisheries Agency in 2018 rather than the unbelievable K800m expected in the budget. If its good enough to share with foreign financiers, could you also please share with the Parliament and PNG people?” asked the Shadow Treasurer.

“This information should also include details on the fees and charges associated with preparing the bid and the on-going fee and charges costs. The concern is that these could be very large. For example, we note that the 2018 Budget “reclassified” some “interest costs” away into “Goods and Services” costs reflecting they were fees rather than interest. This was K63.2m when there was only a relatively small Credit Suisse loan. This is a lot of fees and charges. I hope that this whole exercise is not just about first class airfares and big fees to foreign financiers. The people of PNG deserve better” said Mr Ian Ling-Stuckey.

Hon.Ian Ling-Stuckey,CMG.MP
Shadow Minister for Treasury & Finance

 6 September 2018

 

 

Source BPNG Treasury Bill Results (updated weekly) –  https://www.bankpng.gov.pg/financial-markets/domestic-money-and-bond-market-operations-and-development/treasury-bills/bills-weekly-auction-results/

 

Source: BPNG Fortnightly Statistics Table 2.2 Bank of Papua New Guinea Interest Rates (%)

https://www.bankpng.gov.pg/wp-content/uploads/2014/06/Stats-Update-14-Nov-14.pdf

The above two images shows how interest costs have increased:

  • on 364 day Treasury Bills from 1.96% in April 2013 to 7.30% by Sep 2014 to 8.05% currently –so more than quadrupling
  • on 182 day Treasury Bills from 1.79% in April 2013 to 4.51% by Sep 2014 to 4.73% currently

Note that there has been little change in the share of public debt funded by the domestic market. The big change over the last six years has been the swap of expensive commercial debt and away from cheap concessional debt.

Interest rate costs (excluding fees) on other sovereign bonds from countries with better credit ratings than PNG hit 9.5% in July – costs are very likely to be over 10% for any borrowing by PNG with its lower credit ratings and once fees are included.

Source: Bloomberg: https://www.bloomberg.com/news/articles/2018-09-04/papua-new-guinea-considers-debut-dollar-bond-at-peculiar-time

Note the footnote highlighting K63.2 million in fees associated with public debt.

 

MEDREL -PNG’s SOVEREIGN BOND.060918 ils pdf

http://www.opposition.gov.pg/medrel-pngs-sovereign-bond-060918-ils-pdf/