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ANZ Suggests A PNG Government Bond Issue To Finance Deficit Spending

The Papua New Guinea economy faces a conundrum: how to finance deficit spending as cheaply as possible. ANZ analysts suggest a global bond issue as a solution. At the same time, ANZ CEO Mike Smith urges a national discussion about how to capitalise on the Asian Century.

‘I hold a bullish view about PNG’s future,’ declared Mike Smith, addressing the Port Moresby Chamber of Commerce and Industry last week.

‘Since my last visit around 18 months ago, PNG has achieved some significant milestones, including the first shipment of LNG in May this year. This is an extraordinary achievement, which has brought benefits to PNG and its people.’

He referred to last year’s ANZ report, Bold Thinking: Imagining PNG in the Asian Century, which showed the growth in exports between the Pacific and Asia had quadrupled in the decade to 2012, while imports from Asia into the region have risen by more than 10 times over the same period.

‘Across the Asia Pacific region, we’re already seeing strong trade flows, which have risen from US$1.7 billion in 2000 to almost US$10 billion in 2013,’ Smith said.

‘PNG can benefit from a more active conversation about how to make the most of the opportunity presented by the Asian Century.’

Bond issue

Meanwhile, ANZ economists report government expenditure is outpacing revenue receipts ‘by a considerable margin’ and the answer could be the country’s first bond issue.

In ANZ’s latest Pacific Quarterly Review, they argue that, while the level of deficit spending is appropriate, deficit spending ‘is likely to become more constrained as revenue appears likely to miss targets and domestic financing is becoming prohibitively expensive’.

The fiscal balance is now expected to be -6.9% of GDP (K3bn), up from an initial target of 5.9% (K2.6 billion). And if K600 million in state asset sales do not eventuate, the fiscal deficit would rise to 8.3% of GDP.

‘If additional sources of financing are not tapped, expensive domestic financing and uncertain revenue receipts put the fiscal boost at risk this year, and possibly next. This would delay much needed infrastructure development to later in the decade,’ says the Review.

The reports authors say the time to consider a global bond issue is drawing close.

As well as being a cheaper source of funding, a bond issue will provide exporters greater incentives to return to the foreign exchange market.

The report says countries with the same credit rating as PNG (B1, Moody’s) have bond yields trading at 5–6%, while the local market yields at 12–13%.

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