Wednesday, October 31, 2012

S&P Boosts Outlook for PNG After Political Stability Returns Following Poll

Jakarta Globe

Papua New Guinea has been given a vote of confidence by ratings service Standard & Poor’s, which on Monday upgraded the country’s long-term sovereign debt credit outlook to stable from negative, citing the Pacific state’s greater political stability following July legislative elections.

The rating agency affirmed Indonesia’s eastern neighbor’s current long-term rating at B+, and its short-term rating at B. PNG’s rating is four steps below investment grade, on par with other countries including Bolivia, Nigeria and Ukraine.

“The elections resolved the stalemate that existed for nearly a year,” S&P credit analyst Yee Farn Phua said in a statement on Monday. Phua was referring to competing claims for the prime minister’s post between Peter O’Neill and previous premier Michael Somare.

The PNG parliament elected O’Neill as prime minister in August 2011 during Somare’s absence due to illness. The Supreme Court then ruled in December that the removal of Somare from office was unlawful. But both O’Neill and parliament rejected the ruling. S&P changed the country’s outlook to negative soon afterward.

Yee said O’Neill’s People’s National Congress Party won the July elections, allowing him to form a cabinet. “Somare’s decision to participate in a coalition with the PNCP should boost political stability,” Yee said.

The rating agency expected the coalition would result in a more efficient legislative process that could smooth changes to mining laws and bring closer an agreement on a proposed liquefied natural gas project.

US oil giant Exxon Mobil is developing a $15.7 billion LNG plant, the country’s biggest-ever resource project. Rio Tinto Group and Newcrest Mining are among miners and explorers with operations in the resource-rich country.

S&P also said that PNG has moderate fiscal deficits, low government debt, a modest net external liability position and strong potential for the minerals and allied sectors to boost economic growth.

Still, vulnerabilities associated with the country’s weak institutional frameworks and shortcomings in governance continue to constrain the ratings, the agency said.

“There is a lack of transparency in the activities of statutory authorities, trust accounts, and other government-controlled entities, which contribute to the government’s off-balance-sheet liabilities,” Yee said. “Further constraining the ratings are infrastructure shortcomings and security risks impeding investment required to diversify the economy, which is highly concentrated in the resources sector.”

S&P said it may lower the country’s ratings should weakening in global economic conditions continue, cutting demand and prices for PNG’s mineral exports. That would worsen country’s external position and government finances, S&P said.

The agency added that PNG’s rating upgrade would likely occur by 2015, when its LNG project starts earning revenue, “given the project completion risks.”

Rival rating agency Moody’s has assigned PNG a B1 rating, also four notches below investment grade, with a stable outlook, while Fitch does not formally assess the country.

Indonesia’s trade with PNG is small despite the two countries sharing the island of Papua between them.

Data from the Indonesian Trade Ministy shows that trade between the two countries fell 39 percent to $154 million in the first seven months of the year compared to the same period in 2011. Indonesia’s total trade during January-July period this year was $113 billion.

S&P rates Indonesia at BB+ long-term, one notch below investment grade.