PNG hit with ratings downgrade amid political turmoil
MICHAEL FIELD, Contributing writer
AUCKLAND, New Zealand -- Papua New Guinea, which sells itself as the "land of the unexpected," was hit Monday with a credit downgrade right in the middle of protracted political and liquidity crises.
Moody's Investors Service said it had downgraded the PNG government's foreign currency and local currency issuer ratings from B1 to B2, with a stable outlook.
The downgrade, which follows a Moody's review launched in February, comes in the middle of a corruption scandal and a series of high-level political arrests which threaten the leadership of Prime Minister Peter O'Neill.
Late last year PNG attempted to raise $1 billion in international bond markets, but take-up was poor, and this month it moved to borrow $300m from the World Bank.
The downgrade follows a harsh dry season and plunging commodity prices which forced the temporary closure of the government-owned Ok Tedi gold and copper mine in the middle of last year. The mine provided 25% of PNG's export revenue, 5.5% of gross domestic product and around a quarter of government revenue.
Moody's said the key drivers of its downgrade were strains on foreign currency reserves due to balance of payments pressures which are expected to continue over the next two years.
It said there were also unfavorable domestic funding conditions for the government that have increased refinancing risks and eroded debt affordability.
Moody's noted that PNG's gross foreign currency reserves fell sharply to $1.69 billion at the end of last year, down from a peak of $4.26 billion at the same time in 2011.
Even before the ratings downgrade was announced, it was known that a new Exxon Mobil $19 billion liquefied natural gas complex would not produce the cash flow that forecasts had suggested, due to low energy prices.
Moody's note that LNG production drove a large rise in exports but had "failed to stem the deterioration in PNG's external payment."
