PNG’s exchange rate and the poor 17 September 2014

2 Responses

  1. Mark R

    Mark R September 19, 2014 at 9:53 am

    Interesting article Paul and bang on the money for its impact on the commodity exporters who were being pumped up to increase production with a falling Kina (and at least for coffee growers rising prices due to Brazil’s drought), even the larger NCM and ABX miners have not been helped with this fiat revaluation.

    I feel bound to clarify one point tho’
    “… by May 2014 a private bank could buy a single USD for K2.44 from the central bank and then immediately sell the USD to an importer for K2.86…”

    The BPNG maintains a Reference Rate BUT does NOT supply currency at the pegged rate. Every two weeks or so they may sell about K60m worth but this is paltry in comparison to the orders. The fact that the BPNG get on intervening at their reference rate is a significant driver as to the bank profitability in 2013 / 2014! They were advised to tender their intervention amount rather than just use their Reference Rate.

    The market has been consistently short of foreign currency since 2013 with the imbalance getting bigger over time. However before the June trading band imposition there was some liquidity but price uncertainty which has been swapped for near price certainty but supply uncertainty. Forwards have become progressively harder to transact and are now virtually impossible as they require the acquisition of the currency to hedge (no futures markets exist for PGK)

    Capex inflows have fallen, the multiplier effect of the Exxon etc capex continues to suck in imports … and the
    govt’s intended infrastructure spend would have cost a LOT more at the pre-Jun 4 rates … and the LNG USD inflows will not start til end 2015. Fortunately the independent central bank’s policy intervention has reduced this budgetary risk.

    1. Paul Flanagan

      Paul Flanagan September 30, 2014 at 3:04 pm

      Hi Mark
      Appreciate the comments. Agree that the central bank limited the chance for arbitrage by constraining the amount of foreign exchange reserves available at the official rate to around K60 million every fortnight- otherwise PNG’s foreign reserves would have dropped much more quickly. The comment about the arbitrage possibility was aimed at highlighting the gap was unsustainable. As you mention, the better option would have been to tender the intervention.
      Your last para mentions the possible budgetary impacts of these changes. I considered including some reference to these in the article – but my sense was that they were unknown and possibly largely offsetting. So as you point out, the cost of the Government’s intended infrastructure spend would have been considerably more at the pre-June 4 rates. Likewise, the appreciation lowers the Kina cost of repaying international loans – including the loan to purchase the Government’s share in Oil Search. On the other side of the coin, tax revenues could fall because exporter incomes are lower and hence mineral tax and company tax collections are lower in Kina terms (many of the larger miners operate their accounts in US dollars). My sense was that there were a range of positive and negative effects on the budget from the change and it was hard to determine the overall impact.
      At the same time, there may be other budgetary risks if the change in policy has discouraged foreign investment (and hence future tax revenues or the price of any asset sales) or increased the size of the sovereign risk (and hence costs) associated with any possible future external borrowings. Once again, appreciate the comments.

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