Papua New Guinea Mulls Debut Dollar Bond at ‘Peculiar’ Time

by BLOOMBERG BUSINESS

One of Asia’s poorest nations may be about to test the nerves of dollar bond investors in the region at a fraught time, just as concerns about trade and emerging-market contagion mount.

Papua New Guinea is set to meet investors from Wednesday for a possible note offering in the U.S. currency, according to a person familiar with the matter. Proceeds of $500 million to $1 billion are expected by the end of September from the inaugural sovereign bond, according to a budget strategy paper dated Aug. 29. The southwest Pacific nation has considered dollar debt offerings since at least 1999.

“With EM sentiment still quite fragile, this seems like a rather peculiar time to bring a low-rated debut issue to the market,” said Nicholas Yap, a desk analyst at Nomura International (HK) Ltd. in Hong Kong. “We believe PNG will have to offer investors a sizeable premium to get any deal done.”
A call to Papua New Guinea’s Department of Treasury general line went unanswered and no one was immediately available when the central bank was called.
The bond "will assist in funding the Government’s fiscal needs over the 2018-20 period and facilitate a restructuring of the domestic debt market to lower interest costs and risks and assist in easing the foreign exchange imbalance," according to the budget strategy paper.

Thomas Hugger, chief executive officer at Asia Frontier Capital Ltd., also said that considering the turmoil in Argentina and other emerging markets, Papua New Guinea would likely have to pay up compared to what they would have done last year.

"The market has been expecting their first dollar bond for so many years -- they will have to get the deal done this time despite higher costs given its shortage of foreign currency,” said Hugger.
As of Dec. 31 last year, gross foreign exchange reserves were $1.7 billion, "sufficient for 5.9 months of total and 9.7 months of non-mineral import covers," and were projected to be $2.2 billion at the end of 2018, according to a monetary policy statement on March 31 this year.

The size of the bond offering could also influence its fate. Unless it’s big enough for inclusion in key emerging market bond indexes, investor participation and secondary trading liquidity would likely be limited as with issues from the Maldives and Fiji, according to Nomura’s Yap.
— With assistance by Annie Lee