Tuesday, March 22, 2016

MOODY'S PLACING PNG B1 GOVERNMENT RATINGS ON REVIEW FOR A DOWNGRADE- PANIC STATION


Moody's places PNG's B1 government ratings on review for downgrade Global Credit Research - 25 Feb 2016

Moody's Investors Service ("Moody's") has placed the Government of Papua New Guinea's ("PNG") B1 local currency and foreign currency issuer ratings on review for downgrade.
The review for downgrade is driven by:
1. The impact of the further fall in oil prices on government revenue, fiscal deficits and rising debt; and
2. A likely structural shift to lower economic growth given the increasingly uncertain outlook for commodity-related investments.
RATINGS RATIONALE
RATIONALE FOR THE REVIEW FOR DOWNGRADE
FIRST DRIVER - DETERIORATING FISCAL AND DEBT METRICS
Lower oil prices and weather-related disruption to gold production led to weaker-than-expected revenue in 2015, and we expect pressures on revenue to continue through 2016. Although expenditure cuts in 2016 have been announced in response, the glidepath towards a balanced budget in 2020 is undermined by a further softening of prices for PNG's commodity exports. In particular, we now assume oil prices—which are correlated to prices for liquefied natural gas (LNG)—will average $38 per barrel between 2016 and 2018, while the government assumes a much higher average of around $60 over the same period. As such, we do not expect fiscal deficits to consolidate enough to arrest the rise in government debt, which the government estimates at 34.7% of GDP in 2015, up from a low of 23.6% in 2011.
A turnaround in PNG's fiscal performance will be dependent on further expenditure restraint as funding conditions deteriorate. The expenditure outlook is muddled by elections scheduled for 2017 given the backdrop of poor institutional strength and moderate domestic political risks. Interest rates on government debt have remained at multi-year highs, eroding debt affordability with interest payments projected to double as a share of revenue in 2016 as compared to 2013.
SECOND DRIVER -- WEAKER PROSPECTS FOR ECONOMIC GROWTH
The persistence of low commodity prices places at risk the feasibility of investments that would further monetize the country's ample natural resource endowment. In addition, consequently lower receipts from existing wells and mines will also lower household income growth and the ability of the government to stimulate growth.
Real GDP growth averaged 9.1% between 2010 and 2015, one of the highest rates recorded among B-rated countries. Much of the robust performance was attributed to the development of the PNG LNG Project, which helped to double nominal GDP over a relatively short period of time between 2009 and 2014. Although there are similarly large projects in advanced stages of planning, including an expansion of the PNG LNG Project and the construction of a second LNG installation, their incremental impact on growth is likely to be comparatively smaller.
The government's ability to rebalance the economy to non-extractive sectors will also face challenges. Uncertain weather patterns, such as El NiƱo, could stymie both mining and agricultural production. The lack of suitable infrastructure, low human capital, and persistent law and order issues weigh on the economy's ability to improve productivity and attract investments in tourism and manufacturing.
ELEMENTS OF THE REVIEW FOR DOWNGRADE
During the review period, we will evaluate the government's ability and willingness to respond to the continued pressure on revenue. In addition, we will consider the impact of weaker growth on contingent risks to the government's balance sheet. We also aim to more fully assess the pipeline of investments against the backdrop of the structural shift in commodity prices, which in turn will determine PNG's medium-term prospects for growth. Finally, we will appraise external risks related to the continued pressure on the country's foreign exchange reserves and associated currency depreciation despite the restoration of the current account surplus in the balance of payments. As many of these negative trends have been precipitated by the global shock represented by lower commodity prices, PNG's credit profile will be compared against other commodity-dependent countries with similar ratings.
WHAT COULD MAKE THE RATING GO UP
An upgrade is unlikely given the review for downgrade. However, the prospect of government fiscal deficits and debt levels being contained through policy action, as well as of an improvement in reserve adequacy could support the rating at a B1 level.
WHAT COULD MAKE THE RATING GO DOWN
Triggers for a negative rating action include the conclusion that: (1) the fiscal position will continue to deteriorate, leading to a further rise in government debt; (2) there is a material risk of worsening investor confidence leading to a rapid rise in interest rates and further worsening of debt affordability; and (3) further declines in official international reserves are likely. As these negative trends have been precipitated in part by the global shock represented by lower commodity prices, PNG's credit profile will be compared against other commodity-dependent countries with similar ratings.
COUNTRY CEILINGS
PNG's long-term foreign currency (FC) bond ceiling at Ba3 and its long-term FC deposit ceiling at B2 remained unchanged. The short-term FC ceilings also remain unchanged at Not Prime. These ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country.
The Ba2 local currency (LC) country risk ceiling is also unchanged.
GDP per capita (PPP basis, US$): 2,470 (2014 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 13.3% (2014 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.7% (2014 Actual)
Gen. Gov. Financial Balance/GDP: -8.3% (2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 16.4% (2014 Actual) (also known as External Balance)
External debt/GDP: 110.1% (2014 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 24 February 2016, a rating committee was called to discuss the rating of the Papua New Guinea, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become more susceptible to event risks. Other views raised included: The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The systemic risk in which the issuer operates has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.


Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Christian de Guzman
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077