“The national government has cheaply sold off more of PNG’s resources with a deal good for international financiers and bad for PNG’s people. The massive under-pricing of the Sovereign Bond is like selling off more of PNG’s resources too cheaply. The resource on this occasion is future tax revenue from hard-working people in PNG through their income taxes and GST payments. And the biggest pain of repaying the $US500 million in 10 years in 2028 is conveniently more than two elections away – so this government will try to run away from its irresponsibility in both the 2022 and 2027 elections” said Ian Ling-Stuckey, PNG’s Shadow Minister for Treasury and Finance.
”The Treasurer Charles Abel is boasting how the Sovereign Bond was massively over-subscribed. However, the 600% level of over-subscription simply says the buyers have got a bargain and the sellers, the people of PNG, have lost out. As a business person, if I put a property on the market and I immediately get more than six buyers at the offer price, I know for sure, I have under-priced the property. I would feel a fool for doing so. I would have essentially ripped myself off. In a very similar way, the people of PNG have just been ripped off with this huge loan called a sovereign bond-and the Treasurer has the audacity to boast about it! Big Maus Long?” said Mr Ling-Stuckey.
“A shameful element of the Treasurer’s press release is that he is caught out yet again, telling another fairytale! Fact, he states that the bond issue in part “will be used to retire high cost short term domestic debt“. There is no short term domestic debt more expensive than this new bond. He is simply lying! Short term debt, using PNG Treasury definitions, means 12 months or less. 182 day debt currently costs the government 4.73%. How is 4.73% “high cost” relative to the 8.375% being paid on this new bond? Even the most expensive short term domestic debt is less than 8.375%. Somebody needs to go back to maths class in school” said Mr Ling-Stuckey.
“The coupon interest rate on 10 years US Government bonds is currently 2.88% – nearly a full 6 per cent lower than the PNG sovereign bond. Both bonds are for 10 years and will be repaid in US dollars (so having the same foreign exchange risk for investors). The difference of 6% for every year for 10 years means the total risk component of this loan is US300 million – or K1 billion (so 6% times 10 years times $USD500 million at 0.30 exchange rate). This extraordinary amount of extra cost has two parts. The first part is the negotiation incompetence of the national government led by its Treasurer. We cannot be sure how much extra he has paid given the 600% over-subscription – let’s say about a third at K350 million. The second component is the risk that investors think PNG won’t repay its loans in 10 years time. One would have hoped that with PNG’s strong repayment record and the strength of our exports and future potential over the next ten years that this risk would be much lower than K650 million. Why is this risk so high? Is it because PNG is regarded as a “junk bond” country by international rating agencies such as Moodys and S&P with ratings going backwards under Abel as Treasurer?” asked the Shadow Treasurer.
In a previous release, I indicated that even a nominal interest rate of 8 per cent would be too expensive, and the Treasurer has failed to deliver even an 8% outcome. On top of the 8.375% figure, there will be fees to pay – probably of around 1% – and a much more unknown foreign exchange risk. Using an independent source covering a long period, the Fitch ratings agency expects the Kina to depreciate against the US dollar by 3 per cent per annum. This is consistent with economic theory that the inflation rate in PNG is about 3% higher than in the US, so a depreciation is required each year just to stay competitive. On top of that, most commentators consider the Kina is currently over-valued at least until 2020. Overall, a more accurate figure for the true interest rate is likely to be over 15%. The true pain!
The Sovereign Bond has proven to be a good deal for foreign financiers. The 600% over-subscription confirms this. Most of the expensive bond will be used to pay off cheaper domestic debt. The likely interest cost will be over 15% after allowing for fees and foreign exchange losses. Better concessional loan sources were available if the right economic policies were in place. The Treasurer has done a bad deal for PNG and badly needs advice. The alternative government has the experience, initiative and credibility to help restructure the government and restructure its policies” said Mr Ling-Stuckey.
Shadow Minister for Treasury & Finance
30 September 2018
Treasurer Abel’s statement boasting about the over-subscription, and the false claim re “high cost short term domestic debt”.
Debt-saddled Mongolia agrees $5.5 bn IMF bailout
AFPFebruary 20, 2017
Heavily dependent on copper exports, Mongolia’s economy grew by 1.0 percent in 2016 (AFP Photo/MARK RALSTON)
Mongolia has reached an agreement with the International Monetary Fund on a $5.5 billion bailout package, officials announced, as the debt-wracked country tries to stabilise its economy.
The landlocked north Asian nation has been hit hard by a more than 50 percent fall over the past five years in the price of copper, its main export.
Billions of dollars’ worth of natural resources lie buried beneath Mongolia’s sprawling steppes, but development has been delayed for years and slowing growth in its biggest customer China has hobbled the economy.
Mongolia’s economy grew 1.0 percent in 2016, while its budget deficit exploded to 3.7 trillion tugrik ($1.5 billion) according to its national statistics office.
The rescue package will include a $440 million loan over the next three years, Koshy Mathai, the IMF’s Asia-Pacific deputy division chief, said in a statement issued Sunday.
The Asian Development Bank, World Bank, Japan and Korea are expected to provide another $3 billion in support, while the People’s Bank of China will extend its 15 billion yuan ($2.2 billion) swap line for another three years.
The bailout package is intended to “restore economic stability and debt sustainability as well as to create the conditions for strong, sustainable, and inclusive growth, while protecting the most vulnerable citizens”, Mathai said.
It will help the cash-strapped country make a $580 million bond payment due in March.
The loan is subject to approval by the IMF’s executive board, which is expected to consider it in March.
“Fiscal consolidation is a key priority, as loose fiscal policy in the past was a major driver of Mongolia’s current economic difficulties and high debt,” Mathai added.
MEDREL-8 PER CENT WOULD BE TOO EXPENSIVE.260918 ils pdf