PNG has secured a loan worth $US500m (k1.6 billion) from the multinational financial services agency Credit Suisse.

Overall, this is positive news.  The loan is a useful start in dealing with PNG’s cash and foreign exchange shortages.

However, there remain five big unanswered questions.

First, what is the cost?  No information on pricing structure, or hedging of foreign exchange risks have been revealed by the government. As mentioned previously, the interest costs might be similar to or slightly cheaper than what the PNG Government is paying in the domestic market for five year Treasury Inscribed Stock – about 11 per cent per annum.  However, this loan faces exactly the same foreign exchange risks as a sovereign bond.  Based on the experience of the last twelve months, this could add another 14 per cent per annum to the costs, making the effective overall cost more like 25 per cent.  Commissions to the bank are on top of this. This is probably too expensive.  A more rapid move towards a more competitive Kina would lower these costs. Much cheaper finance would have been available by going to international concessional lending agencies – but this would have required more of a commitment from the government to policy reform. The government appears reluctant to do this, and the people of PNG will probably end up paying the price through expensive overseas commercial loans prior to devaluation.

The second question is whether the loan has been secured against another asset. This can be the key difference between a sovereign bond for a government, and a loan to the government. Unconfirmed social media reports suggest the loan interest rate may be 7 per cent – much lower than the expected rate for a sovereign bond (more like 10 to 11 per cent).  This would imply some security has been offered (security means lower risk means cheaper financing – in the same way that home loans secured against a house tend to be cheaper than unsecured personal loans).  What could this additional security have been?  The government’s stake in Oilsearch already looks fully leveraged through the UBS loan and its successors. The key remaining “good asset” in the eyes of the market is probably the government’s share of the PNG LNG project. Has the PNG Government’s share of the PNG LNG project been used as security? Possibly this could be justified in existing circumstance, but it would be another high risk policy option mortgaging the country’s future. Some information on this would help clarify the social media reports – including rebutting them if they are inaccurate. This gets back to the first question – what are the terms of the loan?   Detailed information on the terms of other domestic borrowings and international loans are available to the citizens of PNG (through Treasury and BPNG websites). Why not for the newer commercial loans?  Sovereign governments are generally big enough to tell banks that information on key terms of a loan will be released to the public.

The third question is what are the funds for?  The priority should be on funding the on-going shortages in critical areas such as health and education.  A Supplementary Budget should be introduced to map out how the government is adjusting to lower revenues and the difficulties in securing financing. This would build confidence much more than simple statements saying the economy is going well.  International markets judge countries by their policies and actions, not just the words.

Fourth, there is a question as to whether the loan is legal. For most countries, as this loan financing was fully detailed in the 2016 budget, the loan would be legal.  This is a very different set of circumstances to the loan financing for the Oil Search shares. However, there is a technical issue on whether the loan would breach the government’s debt to GDP obligations – especially since the National Statistics Office in March raised GDP by so much that the debt ratio now appears much lower and below 30 per cent.  As an economist rather than a lawyer, PNG’s debt to GDP ratio is relatively low.  The government could have simply raised the debt ratio to something higher (as it did with the temporary lifting of the threshold from 30 to 35 per cent). The key issue is whether it is generating the revenue to cover interest costs and loan rollover risks (the latter is the major tail-end risk).

Finally, what’s next?  The government still is facing a major financing gap in its budget.  The budget target was $US1 billion for commercial external borrowing in 2016 (an unfortunate requirement given the large budget deficits, exhaustion of domestic financing markets and slow action to get concessional loans). Another $US500 million from the proposed sovereign bond would seem necessary to meet this target.  Failure to get a sovereign bond would represent a harsh judgement from international markets on the government’s current policies, including the handling of corruption allegations and the shooting of university students. The international markets have become more uncertain following Brexit. The direct impacts of Brexit on the PNG economy are limited. However, there are likely indirect impacts from lower global growth and increased uncertainties in global financial markets. Once again, this just points to the importance of improving policies to cope with external circumstances and making PNG a powerhouse in the Asian century.

So overall, this loan appears like good news given current “cash woes”, but there are some important questions that the government should answer to help build confidence and accountability.