Given my interest in PNG’s economic situation, this is the first of several posts on economic issues at the Australia PNG Business Forum being held in Cairns. Overall, it is a well attended conference which helps underline the importance of business ties between the two countries.

Debt to GDP ratio.

KEY POINTS

• Latest IMF estimate is PNG’s official debt to GDP ratio  is 56%.
• This ratio is not high in comparison to other countries.
• However, the ratio does not include all growing State Owned Enterprise Debt – there is declining transparency on SOEs.
• PNG’s GDP estimates were increased by over one-third by the NSO earlier this year – these new numbers need to be verified.
• The key issue for a debt crisis is not the level of debt, but whether repayments can be made and existing debt rolled over.

One small controversy at the conference is whether PNG is meeting its Fiscal Responsibility Act targets, specifically whether debt to GDP is being kept below 30% (which was temporarily increased to 35% for 2013 to 2015).

The answer is “probably not” but this is the wrong issue to focus on in PNG.

Part of the problem is that there are great uncertainties about the size of the PNG economy (or GDP). As covered here, there was a mistake in calculating GDP in the 2016 budget by about 10% (a pretty big error for a budget document). Using the IMF measure of GDP (which is close but slightly below mine), as well as a more inclusive definition of government debt, the IMF says the ratio was 56% in 2015.

However, in a project done by the National Statistics Office and released after the budget, suddenly the  PNG economy is over one-third bigger.  Wow – that was a rapid growth rate! The new NSO numbers, for example, increased the estimated size of the finance and real estate sector by over 400%. This all happened in 2006. Indeed, the NSO estimates imply growth rates have been slower since 2006 than current estimates by about 10%. This is because the GDP estimate for 2006 was increased by an extraordinary 48% (all within 2006) and a more modest but still extraordinary increase of 35% in 2013. More detailed analysis by sector, and from 2006 through to 2013 will be provided in a later post.

My view is that I’d want a second opinion on these before building them into official forecasts – the IMF should do this as part of their Article IV mission later this year.

But this is the wrong number to focus on in PNG. The PNG Government is holding an increasing amount of debt “off-budget” so that it does not appear in this ratio. In reality, the government acts as a guarantor (sometimes defacto) for a large amount of debt that is being transferred to State Owned Enterprises. The most obvious one of these is the UBS loan. The IMF actually included it in its last report and said PNG’s official government debt to GDP ratio was 56% (“Overall, the IMF notes that “there has been a significant increase in overall public debt, which amounts to about 56 percent of GDP once arrears to a superannuation fund and other liabilities are taken into account (p.14 of 2015 IMF Article IV)”. We actually do not know the true size of debt that ultimately would be a charge on PNG taxpayers in case of default. Transparency on these SOE operations has declined in recent years.

And of course, ultimately the issue is not so much the size of debt but whether you can keep affording the interest costs and meeting rollover requirements. The debt servicing cost of even official debt has increased from K460m in 2012 to K1,075m in 2015– a K615m increase that is more than the cost of the tuition free education policy. And there are uncertainties about rolling over the UBS loan for the Oil Search purchase at a reasonable interest rate. A debt crisis is not usually about the level of debt – it is about whether the next repayment can be met. And the effects on the ground suggest the PNG government is in a cash crisis with a growing risk of rollover failure.