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
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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
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
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