NOOSA – Well those big swinging speculators certainly proved me wrong. As the Wall Street Journal headlined, ‘Papua New Guinea breaks bond-market jinx’.
The PNG government - in its fourth attempt since 1999 to sell hard currency debt – plunged into the market in what the Journal called “a test of investor appetite toward the world’s riskier borrowers”.
The bond issue, which some investors said was well-timed, raised about $US500 million (with orders seven times that) on which PNG will pay astronomical interest of 8.375% a year.
The Journal also pointed out that PNG faces numerous challenges, including a shortage of foreign currency and a sharp slowdown in growth.
That astute, numerate and anonymous commentator on PNG affairs, Stret Pasin (@Stret_Pasin), wrote on Twitter that major concerns for PNG in the deal are “the high interest rate, large amount of debt that is not likely to be spent efficiently or effectively and currency risk due to borrowing in US dollars”.
Stret Pasin said a high risk is that the O’Neill-Abel government “is drunk on dinau [debt]”.
“They can't see the road they are driving on, they can't see the dangers that may lie ahead.
“It's OK to take risks with your own money but not with a nation's economy.”
Stret Pasin said issuing US dollar bonds means both the interest and the 10-year bond have to be repaid in US dollars.
“[Previously] borrowing in PNG kina has shielded much of the PNG government debt from currency risk as the kina has fallen [in value].
“In the increasingly likely scenario where the world economy faces another deep financial crisis commodity prices may fall significantly, currencies like the PNG kina could fall a lot more and the repayments of the principal and interest on these US dollar bonds could cripple the budget,” Stret Pasin stated.