Yields across a range of maturities remain stable

The amount of debt held by the national government of Papua New Guinea continued to increase in 2016, following consecutive budget deficits posted since 2012. As a result, the government has accessed the domestic and international markets to fund the deficit. However, according to the 2017 national budget, the debt-to-GDP ratio, which was 34.5% in 2016, is expected to ease to 28.8% in 2017 and 2018, declining further thereafter to 27% in 2021.

The authorities, through their financing programme, had set a target to issue PGK900m ($285.3m) worth of government inscribed stock, with maturities of PGK682.3m ($216.3) in 2016. However, the government was not able to achieve this due to a reduction in demand for inscribed stock, as well as a limited investor base and the inability of the market to absorb large amounts of kina-denominated stock.

Despite the reduction in demand, yields across a range of maturities and the issuance of longerdated securities remained largely unchanged over the course of 2016. Rates grew slightly for the second half of the year and into first quarter of 2017, especially for the longer-term maturities. The money supply also increased during the period.

The average yield of five-year inscribed stock is 10.6%; this has remained stable over the last 18 months. The trend is expected to continue into the second half of 2017 after the national elections. Meanwhile, eight- and 11-year inscribed stock have yields of 11.3% and 12.5%, respectively.

Debt Strategy 

At the start of the string of budget deficits in 2012, the government crafted a strategy to lower its cost of debt: the Medium-Term Debt Strategy 2013-17. One of the three strategies outlined is to maintain financial risks at prudent levels. Interest rate risk arises when the Treasury seeks to refinance bonds, there is a risk that debt servicing costs will change due to the new interest rates being higher or lower than the maturing debt.

The refinancing risk, also known as roll-over risk, is the risk that debt is unable to be repaid upon maturity. The second debt strategy seeks to manage refinancing risk by lengthening the maturity profile of the total debt portfolio by maintaining the weighted average term to maturity at about five years for domestic debt and at around 12 years for the foreign currency portfolios.

Interest Rates 

Debts having shorter terms need to be refinanced more often, thus exposing the portfolio to increased levels of interest rate risk. The third debt strategy seeks to manage interest rate risk through review targets for the use of longterm bonds (government inscribed stock) relative to short-term fixed debt (Treasury bills). This is to be accomplished by reducing the level of Treasury bills on issue to below 42% by the end of 2017 and increasing government inscribed stock on issue from PGK7.6bn ($2.4bn) at the end of 2016 to PGK12.5bn ($4bn) in 2021. The scheme is outlined in the 2017 Annual Domestic Debt Issuance Plan, though this has the potential to change following the installation of a new Parliament after the 2017 national elections.

In 2017 gross issuance of government inscribed stock is forecast to be the same as in 2016, totalling PGK900m ($285.3m) with maturities around PGK682.3m ($216.3m). As part of its consolidation plan, the authorities will aim to buy back a small number of government inscribed stock placements throughout the year. Inscribed stock will continue to be a part of domestic debt restructuring even after international financing sources are secured.