Govt’s sovereign bond option ‘risky’

The Opposition Government has labeled the Government’s sovereign bond option as risky and short-term.

The Shadow Minister for Treasury and Finance, Ian Ling-Stuckey, said the Treasurer is not admitting that a sovereign bond is now the wrong path for fixing the foreign exchange crisis crippling PNG’s economic growth.

Ling-Stuckey was responding to the Deputy PM and Treasurer, Charles Abel’s trip after leading the international roadshow to market PNG’s first ever sovereign bond.

“The Treasurer has returned from his expensive overseas junket promoting his risky, short-term, soft option for dealing with the Government’s foreign exchange crisis and debt crisis,” the Shadow Minister and Kavieng MP said in a statement.

“The Alternative Government has better and less risky options because a sovereign bond is just a fancy word for debt, more national government debt and more dinau!

“A massive risk for Abel’s proposed sovereign bond is a large devaluation being forced on PNG because of world events. Global uncertainties have been highlighted by the recent crises facing Argentina and Turkey. There are growing concerns about the health of the global system 10 years after the Global Financial Crisis.

“If there was another global crisis, it is likely that once again we would see a collapse in commodity prices. For countries with most of their exports dependent on commodities, such as PNG, there will be massive pressure to devalue.

“In addition, most economic experts consider that our currency is also not at the right price – something we should have a national conversation about. This risk of massive devaluation does not appear to have been considered by the Treasurer and again, I caution Mr Abel for taking on the wrong types of debt.

“If our currency was forced to devalue by 25 percent say, a figure close to those being suggested by the ANZ, UPNG and ANU, then the bond could immediately cost PNG people an extra K1.1 billion (so a US1 billion bond at an exchange rate of USD 0.30 would provide K3.33bn but at USD 0.225 would provide K4.44bn).

“Over an extra K1 billion being stripped out of our health and education budgets is an unacceptable level of risk. Indeed, these uncertainties mean international analysts have described PNG’s offering as ‘peculiar’,” said the Shadow Treasurer.

“Going out to international markets is very risky. PNG’s international economic standing is that independent credit ratings agencies consider PNG government debt is five levels below ‘junk bond’ status.

“The International credit downgrades by S&P and Moody’s under Abel’s time as Treasurer despite a surge in oil prices means international markets do not trust the Treasurer.”

Ling-Stuckey said the sovereign bonds may be cheaper than commercial loans such as the recent massive Credit Suisse $US500m loan.

“However, they are much, much more expensive than the concessional loans available from the World Bank and other friendly institutional sources. The PNC government has dropped the ball when it comes to accessing these much cheaper loans. Their share of our public debt has declined dramatically over the years.

“As the government considers the interest cost proposals coming in for the sovereign bond, they need to consider the extra fee costs and foreign exchange risks. The government talks about substituting out of short-term debt for these 5 to 10 year bonds. So let’s set a benchmark.

“6 month short-term Kina debt through Treasury Bills is currently 4.73 percent - the rate from the Bill issuance at 12 September which was massively over-subscribed by domestic markets.

“If international markets can deliver a significantly lower interest rate (after including expensive fees) and allowing for massive foreign exchange risks, then possibly it would be a deal worth supporting. If not, Treasurer, please do not burden our children with a risky deal.

“The Treasurer should have spent more time in Washington talking to the IMF and World Bank frankly about actions the national government would take to start correcting their economic mismanagement. Getting these structural changes to re-build growth is really the key for fixing our multiple economic crises and of course, the PNC government may consider adopting a bipartisan approach with the NA led alternative government so we can help them fix up the mess,” said Ling-Stuckey.

(Shadow Minister for Treasury and Finance, Ian Ling-Stuckey)

Press release