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PNG—Sovereign bond issue bodes well; but FX shortages remain

Papua New Guinea issued its maiden foreign currency sovereign bond in late September. The country raised US$500m at 8.375% per annum repayable in 10 years. The issuance was close to 7x oversubscribed—implying investors were willing to lend up to US$3.5b. Strong investor appetite for PNG contrasts against current weakness in emerging market capital flows more broadly. The funds, in addition to US$600m from the World Bank and ADB, over the next three years, will help the government fund its budget dExport Finance Australiaits and improve the shortage of foreign currency, which has stymied imports and weighed heavily on the non-mining economy.

The current FX shortage is estimated at around US$700m, down from US$1b. But this does not account for latent demand—businesses and households that have stopped seeking FX because of past failures. One way to estimate latent demand is to look at the historical level of goods imports relative to the size of the economy. On this metric, imports averaged 25% of GDP between 1990 and 2009.[1] This is equivalent to US$6.7b in 2018 vs the current 2018 projection of US$5.2b, the difference implying latent demand of US$1.4b. As such, despite new commercial and concessional funding, only the start of PNG’s next major resource project is likely to restore balance to the FX market. Though investment flows onshore are often subject to multi-year delays due to lengthy development periods for major projects.

 

[1] This excludes imports between 2010 and 2014 because of the large capital goods required to build the PNG LNG project, which would upwardly bias the import numbers.