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PNG banks operate in high risk environment, says S&P

Ratings agency Standard & Poor’s says Papua New Guinea’s banks operate in a ‘high risk’ environment in spite of LNG revenues and increased infrastructure spending by Govenrment. S&P analysts also suggest PNG needs more policies which promote economic growth beyond the resources sector.

Three banks dominate Papua New Guinea’s banking system—BSP, ANZ and Westpac. According to the latest Standard & Poor’s Banking Industry Country Risk Assessment for PNG, this limits competition and results in a high level of profitability for those banks.

S&P ranks PNG banks on a par with Argentina, Cambodia, Jamaica, Kenya, Mongolia, and Vietnam, which are all categorised as ‘high risk’.

‘Domestic core customer deposits fund almost all the domestic loans, although we believe that the banks would face significant challenges in accessing funding from alternative sources such as offshore capital markets, if needed,’ the assessment’s co-author Andrew Mayes tells Business Advantage PNG.

Economic assessment
S&P analysts note one of the key risks for PNG’s economy is the lower gas price and what that means for gas revenues.

‘That will have an impact on government revenues and also put some pressure on the current account and foreign exchange reserves,’ S&P Sovereign Credit Analyst Craig Michaels told Business Advantage PNG last week.

‘At the moment, we don’t think those impacts will be large enough to have a meaningful impact on the rating or on the economy.

‘The government itself is spending reasonably aggressively at the moment to fill the gap in growth between the construction phase of the (first) LNG project and when it will ramp up into full production this year.

‘And that spending we think is pretty well targetted towards areas that have the potential to support longer-term economic growth, because they are focussed on growth-enablers like infrastructure, health, educational law and order.’

Policies for growth
While the PNG Government gets S&P’s approval of its expenditure priorities (the country receives a ‘stable’ B+ credit rating from the agency), the agency suggests stronger growth-promoting policies may be needed.

‘Yes, there is more stability within the Parliament but, despite that, there hasn’t really been a large enough shift in policy-making to the types of policies that would be supporting growth outside the resources sector,’ says Craig Michaels.

‘Part of that also goes to the uncertain ability of people to enforce contracts which limits people’s willingness to invest. Similarly, the prevalence of crime also deters people from investing. So, those are very important factors that are holding back economic development.

‘If you look at PNG, it has a very low income economy and we think the policy-making environment over the longer-term hasn’t been very conducive to strengthening economic growth outside the resources sector.

‘The resources sector more or less looks after itself but that strong growth that we’ve seen in the last few years hasn’t filtered down to the broader economy.

‘It hasn’t led to broad-based economic growth that has boosted the incomes of the general population,’ said Michaels.

Sovereign Wealth Fund
Michaels says PNG’s planned Sovereign Wealth Fund has the potential to play a fairly important role in boosting economic resilience.

‘It depends really on how much revenue the government receives from the LNG projects and how much is channelled through to the SWF.

‘Over the long term, probably the major potential positive is where those funds are directed towards projects and programs that may boost economic growth potential, like enhancement of infrastructure.

‘This could be more and better quality roads, ports and other transport links that would enable goods and services to move at lower costs.’

Limited sector

As for the banking sector itself:

‘The use of complex products is fairly limited and the significance of banking to the economy is perhaps not as great as we see in other more developed countries,’ says Andrew Mayes.

‘Given this, and when viewed within the context of the current development of PNG’s economy, it’s likely to imply a lower degree of regulatory oversight relative to other more developed countries.’

That said, Australia-based banks, Westpac and ANZ, own 40% of banking assets, Mayes says, so the Australian regulations to which their parent entities adhere to would flow through to the PNG operations.

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