SOE debts weighing on PNG's sovereign risk profile
Originally published in the The Economist Intelligence Unit
What's happened?
The Mid-Year Economic and Fiscal Outlook for 2023 revealed that the Papua New Guinea (PNG) government had Kina8.3bn (US$2.2bn) in contingent liabilities, equivalent to about 7% of GDP, that are mainly linked to state-owned enterprises (SOEs). Many of PNG's SOEs are unprofitable, generate low returns and are heavily dependent on the government for cash infusions and asset donations. Their debts are becoming a more serious problem for the government, owing to the rise in global interest rates.
Why does it matter?
The PNG government's contingent liabilities weigh on the health of the public finances. Contingent liabilities are not included in official public debt stock, which amounted to Kina58.7bn, or 52.2% of GDP, in 2022. Including them would push the public debt/GDP ratio to above 60%, breaching the debt ceiling set out in the Fiscal Responsibility Act. The government has acted to guarantee for SOE debts.
The dominance of external debt among the contingent liabilities accentuates risks. Of the contingent liabilities currently reported, the majority are from external creditors, and PNG's Treasury Department is yet to establish the identity of the sources for many. This includes, for example, PNG's 19.6% equity in the PNG liquefied natural gas project. The reliance of SOES on external sources of lending leaves the government more exposed to exchange risk that might be assumed. The official public debt stock is roughly evenly balanced between domestic and foreign sources.
The contingent liabilities are more exposed to rising global interest rates. Whereas the PNG government has been able to tap low cost funds from a captive domestic market and concessional funds from official lenders, SOEs have borrowed on commercial terms. Interest payments on these debts will have been rising sharply over the past 12 months in line with higher international rates. This may have contributed to the government requesting additional funds for interest payments in its 2023 supplementary budget, announced in early October.
What next?
The rise in interest rates and greater exchange-rate volatility will reduce the ability of SOEs to repay foreign debt, forcing the PNG government to step in to assist. This will raise PNG's debt servicing costs, although we still believe that an outright sovereign default is unlikely. The broader economic outlook remains positive, given the pipeline for resources projects, although scheduled repayment in 2028 of a US$500m euro bond issued in 2018 represents a medium-term challenge.
