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01 May 2018

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My understanding is that as of the end of 2016 PNG's total debt was around K22 billion or 35.5% of GDP, with associated debt servicing charges of around K13 billion per annum or over K1 billion per month.

It does not require a PhD in economics to know that this is a very perilous situation for PNG.

The merest hint of a global downturn will see a very rapid collapse in the availability of credit, leaving PNG potentially unable to roll over its debt except at a truly usurious interest rate.

This, in turn, will set off a spiral of economic disaster as more and more recurrent funds have to be diverted into debt servicing thus reducing the funds available to pay for things like education, health services, roads, etc.

Right now, with the rate of return on US Treasury bonds approaching 3% per annum, you have to wonder why anyone would think that lending more money to PNG would be a good idea.

The implication is that the US$500 million Eurobond being sought, even if available, is going to require paying much more than 3% per annum.

The prospective lenders are going to build a serious risk premium into the rate based upon both the PNG government's poor economic record and the wider global risks which are now very obvious to anyone who bothers to pay attention to these things.

My belief is that the age of very easy credit is destined to come to a rather abrupt halt in the not too distant future.

At some point, someone is going to realise that the global debt mountain, which now totals over 300% of global GDP, cannot be deleveraged without real and sustained economic and financial pain.

Quite why this has not happened already is beyond me but, unless the fundamental laws of economics as we know them are somehow wrong, it has to happen eventually.

God help PNG and the rest of us when reality finally dawns.

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