By CHRISTOPHER YANDAWAI
THE country’s economic outlook has been rated to ‘negative’ from ‘stable’ reflecting the weakening in fiscal strength and debt position that the country is current placed at.
This is according to Moody’s Investors Service, often referred to as Moody’s, which provides global financial research on bonds issued by commercial and government entities thus their economic outlook ratings.
Yesterday evening, the well-known international company released a statement announcing the economic outlook of Papua New Guinea being changed to negative from stable.
“Moody’s Investors Service (“Moody’s”) has today changed the outlook on the Government of Papua New Guinea’s (PNG) ratings to negative from stable, and concurrently, the B2 long-term issuer and senior unsecured ratings have been affirmed,” the statement reads.
The decision to change the outlook to negative from stable was said to have been reflected from the weakening in PNG’s fiscal strength and debt position and elevated borrowing requirements raise liquidity risks, although the government’s strategy to increase reliance on concessional external financing.
Moreover, the company states that the extent of the fiscal pressures, combined with an uncertain near-term macroeconomic outlook as the economy emerges from a large contraction, will continue to challenge the government’s economic and fiscal reform plans and further raise implementation risk.
The statement revealed that the affirmation of the B2 rating incorporates Moody’s assessment that while PNG’s domestic government liquidity and external liquidity risks remain credit constraints, these are somewhat balanced against credit strengths stemming from prospects for higher GDP growth potential over the medium term as investment in PNG’s natural resource wealth is realized, although a degree of execution risk in progressing large resource projects to fruition remains.
“The rating is also underpinned by credit challenges related to weaknesses in government effectiveness and moderate political risks.”
Moody’s said PNG’s local and foreign-currency country ceilings remain unchanged at Ba2 and B1, respectively while the wider than-average three-notch gap between the local currency ceiling and the sovereign rating reflects low predictability and reliability of government institutions, as well as domestic political risks.
While the government does not possess a major footprint in the economy, the company stated that the government’s ownership in large resource ventures is in most cases a minority share, where its revenue base is heavily reliant on the resources sector.
“The two-notch gap between the foreign currency ceiling and the local currency ceiling takes into account relatively high external indebtedness, weak macro policy effectiveness, and capital account restrictions, as there continues to be a backlog of FX orders due to the country’s FX regulations, which have periodically delayed offshore payments.
These ceilings typically act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.”
The rating rationale of Moody’s was the PNG’s deteriorating fiscal position and a rising government debt burden, as revenue shortfalls, expenditure overruns and the clearance of government arrears led to a widening of the deficit over 2018 to 2019.
The company also points out some factors that could lead to an upgrade or downgrade of the ratings.
To change the rating down, the company said “a materially weaker outlook for fiscal consolidation and stabilization of the government’s debt burden and affordability would result in negative pressure on the rating”.
“Moreover, Moody’s would also likely downgrade the rating should weaker implementation of the government’s reform agenda contribute to higher liquidity pressures than currently assumed.”
Moody’s stated that negative pressure on the rating would also materialize should there be a significantly bleaker outlook for execution on large investments in PNG’s natural resource wealth, which would threaten PNG’s growth potential and external position.
“This could come in the context of diminished commercial viability of projects, potentially owed to domestic or external factors, that leads to significant delays or outright abandonment.”
Furthermore, Moody’s said it would also consider downgrading the rating upon a likely sustained decline in the stock of foreign exchange reserves, and/or worsening foreign exchange shortages.
“Such diminished external liquidity buffers would heighten risks to PNG’s external debt servicing capacity and significantly restrict monetary and fiscal institutions’ policy flexibility to effectively respond to potential shocks or implement credit profile enhancing reforms.”
And to change the rating down, Moody’s said “upward pressure on the rating would likely emanate from a durable and material reduction in refinancing risks, consistent with a significantly greater fiscal adjustment, reduction in gross borrowing requirements and strengthened access to external sources of finance than Moody’s currently expects”.
Moody’s stated that it would also consider upgrading the rating should a sustained increase in non-debt-creating external inflows lead to a sustained accumulation in foreign exchange reserves.
“Such an improved position in external liquidity buffers would enhance PNG’s external debt servicing capacity, aid economic activity in the non-resource sector, and provide monetary and fiscal authorities with improved policy flexibility.”
Over the longer term, should implementation of key resource sector investments generate positive economic spill overs in the non-resource economy, Moody’s said the positive impact on growth potential would contribute to upward rating pressure.
Meanwhile, former Prime Minister and Member for Ialibu-Pangia, Peter O’Neill, who was so sceptical on this rating raised a concern in today’s parliament sitting while directing series of questions in respect to downfall in PNG’s economy to Treasurer Ian Ling-Stuckey.
Mr O’Neill asked the Treasurer whether he was aware of the Moody’s report and what his plans are to rectify the negative economic rating.
Mr Stuckey said he was aware the report was released yesterday evening but could not comment as he hasn’t gone through the report yet.
But he assured the former Prime Minister that he will explain it in detail when he presents his ministerial economic status report in the coming days of parliament sittings.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631 .
