Standards and Poors give positive rating for PNG
CREDIT RATING: B+/Stable/B Country: Papua New Guinea
Rationale
The ratings on Papua New Guinea (PNG) reflect the vulnerabilities associated with the country's weak policy environment and shortcomings in governance. The activities of statutory authorities, trust accounts, and other government-controlled entities lack transparency and contribute to the government's off-balance-sheet liabilities. Infrastructure shortcomings and security risks further constrain the rating by impeding investment required to diversify the economy, which is highly concentrated in the resources sector. The government's moderate fiscal deficits, low government debt, modest net external liability position, and the strong potential of the minerals and allied sectors to boost economic growth support the ratings.
In our view, PNG's political and institutional frameworks remain weak and pose a key challenge as the government manages large windfall gains from liquefied natural gas (LNG) projects. Although the political situation has stabilized since the July parliamentary elections, previous gains in political stability have not led to an appreciably better security environment or improved infrastructure. The quality of public services remains poor, and PNG has made little improvement in literacy and other human-development indicators.
Information risk is a rating constraint. Off-budget transactions appear to be rising, and there are long lags and important gaps in coverage for the national income accounts, the international investment position, and the fiscal accounts. The continued use of off-budget borrowing and expenditure--outside of parliamentary approval and oversight--is symptomatic of the weak transparency and governance.
PNG's general government budget was broadly balanced in the past three years, and we project modest deficits of 2.0%-2.5% of GDP over 2012 and 2013. The authorities plan to return the budget to balance, which will likely involve the deferral of capital spending plans. Although the government has borrowed just under 7% of estimated 2012 GDP off-budget to fund its equity in the LNG project--assuming our base-case scenario for the fiscal and external accounts holds--this is a manageable addition to the general government net debt burden of 3% of GDP.
In our opinion, PNG's economy is likely to continue to benefit from a growing resources sector. Per capita real GDP expanded by a brisk 6.5% in 2011, following growth of 5.2% in 2010. However, we project that the weakening global demand for commodities will rein in this growth to 3.4% in 2012. Thereafter, the completion of the LNG facility in 2015 could lead to a 20% rise in GDP when production commences.
Large current account deficits, related to the LNG investment, are partly financed by foreign direct investment and will likely be temporary.
We expect current account deficits to be 12%-17% of GDP in 2012 and 2013, reflecting goods and services imports related to the construction of the LNG facility and higher income (interest and dividend) payments to nonresidents. We estimate PNG's gross external financing needs at 90% of current account receipts (CAR) plus usable reserves in 2012, and its net external liability position at 14% of CAR. Almost three-fourths of the gross external liabilities are the result of direct investment and other equity inflows, a lesser burden than debt under most circumstances. However, potential volatility in PNG's terms of trade and the material data inconsistencies weigh on our assessment of the external position.
Outlook
The stable outlook balances PNG's improved economic prospects with the difficulties stemming from weak political and institutional settings, as well as infrastructure shortcomings, to raise the nation's low per capita income by developing the mineral sector.
We may lower the ratings if a sustained weakening in global economic conditions reduces demand and prices for PNG's mineral exports, and in turn, worsens the country's external position and government finances. Any material delay in the LNG project under construction would present some short-term risk of a lower rating. This stems from the liabilities associated with the commercial borrowings to fund the government's equity interest and completion guarantees to the creditor and landowners.
Upside potential to the sovereign rating could arise from the beneficial impact of the LNG project on PNG's economic prospects, government finances, and external position. However, any such rating upgrade would likely occur closer to the time when the project starts earning revenue (estimated to be 2015), given the project completion risks.
Related Criteria And Research
-- Government Rating Methodology And Assumptions, June 30, 2011
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
REUTERS
Rationale
The ratings on Papua New Guinea (PNG) reflect the vulnerabilities associated with the country's weak policy environment and shortcomings in governance. The activities of statutory authorities, trust accounts, and other government-controlled entities lack transparency and contribute to the government's off-balance-sheet liabilities. Infrastructure shortcomings and security risks further constrain the rating by impeding investment required to diversify the economy, which is highly concentrated in the resources sector. The government's moderate fiscal deficits, low government debt, modest net external liability position, and the strong potential of the minerals and allied sectors to boost economic growth support the ratings.
In our view, PNG's political and institutional frameworks remain weak and pose a key challenge as the government manages large windfall gains from liquefied natural gas (LNG) projects. Although the political situation has stabilized since the July parliamentary elections, previous gains in political stability have not led to an appreciably better security environment or improved infrastructure. The quality of public services remains poor, and PNG has made little improvement in literacy and other human-development indicators.
Information risk is a rating constraint. Off-budget transactions appear to be rising, and there are long lags and important gaps in coverage for the national income accounts, the international investment position, and the fiscal accounts. The continued use of off-budget borrowing and expenditure--outside of parliamentary approval and oversight--is symptomatic of the weak transparency and governance.
PNG's general government budget was broadly balanced in the past three years, and we project modest deficits of 2.0%-2.5% of GDP over 2012 and 2013. The authorities plan to return the budget to balance, which will likely involve the deferral of capital spending plans. Although the government has borrowed just under 7% of estimated 2012 GDP off-budget to fund its equity in the LNG project--assuming our base-case scenario for the fiscal and external accounts holds--this is a manageable addition to the general government net debt burden of 3% of GDP.
In our opinion, PNG's economy is likely to continue to benefit from a growing resources sector. Per capita real GDP expanded by a brisk 6.5% in 2011, following growth of 5.2% in 2010. However, we project that the weakening global demand for commodities will rein in this growth to 3.4% in 2012. Thereafter, the completion of the LNG facility in 2015 could lead to a 20% rise in GDP when production commences.
Large current account deficits, related to the LNG investment, are partly financed by foreign direct investment and will likely be temporary.
We expect current account deficits to be 12%-17% of GDP in 2012 and 2013, reflecting goods and services imports related to the construction of the LNG facility and higher income (interest and dividend) payments to nonresidents. We estimate PNG's gross external financing needs at 90% of current account receipts (CAR) plus usable reserves in 2012, and its net external liability position at 14% of CAR. Almost three-fourths of the gross external liabilities are the result of direct investment and other equity inflows, a lesser burden than debt under most circumstances. However, potential volatility in PNG's terms of trade and the material data inconsistencies weigh on our assessment of the external position.
Outlook
The stable outlook balances PNG's improved economic prospects with the difficulties stemming from weak political and institutional settings, as well as infrastructure shortcomings, to raise the nation's low per capita income by developing the mineral sector.
We may lower the ratings if a sustained weakening in global economic conditions reduces demand and prices for PNG's mineral exports, and in turn, worsens the country's external position and government finances. Any material delay in the LNG project under construction would present some short-term risk of a lower rating. This stems from the liabilities associated with the commercial borrowings to fund the government's equity interest and completion guarantees to the creditor and landowners.
Upside potential to the sovereign rating could arise from the beneficial impact of the LNG project on PNG's economic prospects, government finances, and external position. However, any such rating upgrade would likely occur closer to the time when the project starts earning revenue (estimated to be 2015), given the project completion risks.
Related Criteria And Research
-- Government Rating Methodology And Assumptions, June 30, 2011
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
REUTERS
