PNG economy may recover when second LNG project begins, but debt will rise

Ratings agency, S&P Global Ratings expects the Papua New Guinea to recover when the second LNG project commences next year, but has maintained a Negative outlook for the economy.

In its latest review of the South Pacific’s largest economy, S&P Global Ratings (S&P) expects the economy to contract this year, with rising debt and interest payments along with a deteriorating public health situation, adding pressure to economic performance and accounts.

It has maintained PNG’s rating at ‘B-/B’, removed it from CreditWatch Negative, but says the outlook is negative.

There is a one-in-three chance the economy will be downgraded over the next 12 months, due to PNG’s weak fiscal position and rapidly increasing debt levels.

“We could revise the outlook to stable if the effect of the current pandemic is less damaging to public finances than we expect,” the report says.

To do that requires fiscal reforms and boosting tax revenues.

S&P has removed PNG from its CreditWatch after the government refinanced its Solwara undersea mining project debt, rather than restructuring that debt. (The Canadian company, Nautilus Minerals, behind the project was declared bankrupt in November, 2019).

Impact of COVID

COVID-19 has provided challenges to the economy, through less revenue and more spending, which has increased government net debt.

S&P estimates debt is now 44.6% of GDP in 2021. That estimate includes state-owned enterprise debt, which S&P has not been able to quantify.

“We forecast it to reach around 49.9% in 2024 due to delays to the government’s fiscal consolidation efforts because of fallout from COVID-19.”

Meanwhile, the deficit is expected to average 4.4% of GDP between 2021 and 2024.

“The government continues to increase its reliance on external borrowing, with its debt strategy targeting a 50:50 split between domestic and external financing.”

COVID-19 will continue to weigh on GDP by weakening private investment and domestic consumption in the country, suppressing GDP growth while the pandemic rages globally.

The closures of gold mines Progera and Ok Tedi in 2020 led to negative economic growth for the year. Travel restrictions for fly-in fly-out workers from Australia led to lower production and productivity.

Lower interest rates

While some debt has been refinanced at lower interest rates, we anticipate interest payments to rise as debt stock increases rapidly, offsetting the benefits of lower interest rates, to about 22% of general government revenues by 2024, the report says.

Protracted negotiations in new resource projects are weighing on the country’s economic growth outlook.

While several new LNG projects will boost economic growth, ongoing negotiation delays are pushing this benefit further out.

“A recent collapse in energy prices could delay investment decisions for several years, weighing on PNG’s economy.”