Sovereign bond under-pricing a negotiation disaster: Opposition

The Opposition claims that the National Government has cheaply sold off more of PNG’s resources with a deal good for international financiers but bad for PNG’s people.

“The massive under-pricing of the sovereign bond is like selling off more of PNG’s resources too cheaply,” said Ian Ling-Stuckey, PNG’s Shadow Minister for Treasury and Finance.

“The resource on this occasion is future tax revenue from hard-working people in PNG through their income taxes and GST payments. And the biggest pain of repaying the $US500 million in 10 years in 2028 is conveniently more than two elections away – so this government will try to run away from its irresponsibility in both the 2022 and 2027 elections.

“Treasurer Charles Abel is boasting how the sovereign bond was massively over-subscribed. However, the 600 percent level of over-subscription simply says the buyers have got a bargain and the sellers, the people of PNG, have lost out.

“As a business person, if I put a property on the market and I immediately get more than six buyers at the offer price, I know for sure, I have under-priced the property. I would feel a fool for doing so. I would have essentially ripped myself off.

“In a very similar way, the people of PNG have just been ripped off with this huge loan called a sovereign bond, and the Treasurer has the audacity to boast about it!” said Ling-Stuckey in a statement.

The shadow minister highlighted that Abel said the bond issue in part “will be used to retire high cost short term domestic debt”.

“There is no short term domestic debt more expensive than this new bond,” refuted Ling-Stuckey.

“Short term debt, using PNG Treasury definitions, means 12 months or less. 182 day debt currently costs the government 4.73 percent. How is 4.73 percent ‘high cost’ relative to the 8.375 percent being paid on this new bond? Even the most expensive short term domestic debt is less than 8.375 percent.

“Somebody needs to go back to maths class in school,” said Ling-Stuckey.

 “The coupon interest rate on 10 years US Government bonds is currently 2.88 percent - nearly a full 6 percent lower than the PNG sovereign bond.

“Both bonds are for 10 years and will be repaid in US dollars (so having the same foreign exchange risk for investors). The difference of 6 percent for every year for 10 years means the total risk component of this loan is US300 million – or K1 billion (so 6 percent times 10 years times $USD500 million at 0.30 exchange rate).

“This extraordinary amount of extra cost has two parts. The first part is the negotiation incompetence of the national government led by its Treasurer. We cannot be sure how much extra he has paid given the 600 percent over-subscription – let’s say about a third at K350 million.

“The second component is the risk that investors think PNG won’t repay its loans in 10 years’ time. One would have hoped that with PNG’s strong repayment record and the strength of our exports and future potential over the next ten years that this risk would be much lower than K650 million. 

“Why is this risk so high? Is it because PNG is regarded as a ‘junk bond’ country by international rating agencies such as Moodys and S&P with ratings going backwards under Abel as Treasurer?” asked the Shadow Treasurer.

“In a previous release, I indicated that even a nominal interest rate of 8 percent would be too expensive, and the Treasurer has failed to deliver even an 8 percent outcome.

“On top of the 8.375 percent figure, there will be fees to pay – probably of around 1 percent - and a much more unknown foreign exchange risk.

“Using an independent source covering a long period, the Fitch ratings agency expects the Kina to depreciate against the US dollar by 3 percent per annum. This is consistent with economic theory that the inflation rate in PNG is about 3 percent higher than in the US, so a depreciation is required each year just to stay competitive.

“On top of that, most commentators consider the Kina is currently over-valued at least until 2020. Overall, a more accurate figure for the true interest rate is likely to be over 15 percent. The true pain!

“The Sovereign Bond has proven to be a good deal for foreign financiers. The 600 percent over-subscription confirms this. Most of the expensive bond will be used to pay off cheaper domestic debt. The likely interest cost will be over 15 percent after allowing for fees and foreign exchange losses.

“Better concessional loan sources were available if the right economic policies were in place.

“The Treasurer has done a bad deal for PNG and badly needs advice. The alternative government has the experience, initiative and credibility to help restructure the government and restructure its policies,” said Ling-Stuckey.

Press release