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Rating Action:

Moody's affirms PNG's B1 rating, changes outlook to negative

18 May 2015

Singapore, May 18, 2015 -- Moody's Investors Service has today affirmed Papua New Guinea's B1 foreign currency (FC) and local currency (LC) issuer ratings and changed the rating outlook to negative from stable.

Key drivers for today's decision are:

• Fiscal deterioration resulting primarily from a step-up in spending since 2012

• A weakened external payments position and increased external vulnerability

In a related action, Papua New Guinea's FC bond ceiling was lowered to Ba3 from Ba2, while its FC deposit ceiling remains unchanged at B2. The short-term FC ceilings also remain unchanged at Not Prime. These ceilings act as a cap on ratings that can be assigned to the FC obligations of entities other than the government that are domiciled in the country.

Papua New Guinea's LC country risk ceilings were lowered to Ba2 from Ba1.

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE RATING OUTLOOK

First driver: Fiscal deterioration

Since 2012, fiscal deficits have widened significantly as the government embarked on an ambitious development program. After running balanced and near-balanced budgets in every year between 2004 and 2011 as a result of high commodity prices and fiscal discipline, the government abruptly reversed course ahead of the expected windfall from the completion of the PNG LNG Project (unrated). Consequently, we estimate that government debt rose to 37.7% of GDP in 2014, breaching the adjusted ceiling of 35% of GDP as prescribed by the Fiscal Responsibility Act.

Government revenue will fall short of the medium-term projections in the 2015 budget due to the impact of lower prices for petroleum, natural gas, and other commodities on royalties, dividends, and the profitability of associated companies. However, the government has not formulated a policy response that would realign expenditures to conform to the planned glide path to a balanced budget by 2017.

Second driver: A weakened external payments position and increased external vulnerability

Papua New Guinea has experienced a halving of its foreign currency reserves over the past two years. As the construction phase of the PNG LNG Project wound down and commodity prices fell, the Papua New Guinean kina depreciated as demand for foreign currency outstripped supply. The central bank, the Bank of Papua New Guinea, has intervened heavily in the foreign exchange market, notably by imposing a trading band around the official rate, exacerbating the loss of hard currency reserves. Nevertheless, the kina has continued to depreciate, leading to a mechanical deterioration in the government's debt ratios. We estimate that the stock of short-term external debt by residual maturity--incorporating both private and public sector debt--now surpasses the level of foreign currency reserves.

RATIONALE FOR THE RATING AFFIRMATION AT B1

Despite lower prices for Papua New Guinea's commodity exports, relatively rapid economic growth is likely to be sustained as the country continues to ramp up production of liquefied natural gas (LNG) following the commencement of export shipments in mid-2014. However, the windfalls for fiscal and external balances are likely to be smaller than originally projected on account of lower oil prices over the medium-term, which in turn are correlated to LNG prices with a lag.

Nevertheless, the successful operationalization of the PNG LNG Project—whose construction phase has driven a doubling of nominal GDP in the past five years—bolsters the prospects for further monetization of Papua New Guinea's rich natural resource base and robust economic growth regardless of commodity price developments.

Although Papua New Guinea's fiscal ratios have deteriorated over the past few years, fiscal deficits continue to be in line with similarly-rated peers. At the same time, the past decade of debt consolidation has left Papua New Guinea with one of the lowest debt burdens among B1-rated countries. In addition, the government's reliance on local sources of financing renders it somewhat insulated from external financial shocks.

WHAT COULD MOVE THE RATING UP/DOWN

Given the negative outlook an upward movement in the rating is highly unlikely. However, containment of government fiscal deficits and debt levels, as well as in improvement in reserve adequacy could stabilize the outlook.

Triggers for a further negative rating action include: (1) a continued fiscal deterioration leading to a further rise in government debt; (2) a loss of investor confidence and a resultant rapid rise in interest rates and a worsening of debt affordability; (3) a further decline in official international reserves.

GDP per capita (PPP basis, US$): 2,399 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 8.4% (2014 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.6% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -7.3% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -22.6% (2013 Actual) (also known as External Balance)

External debt/GDP: 148.5% (2013 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 13 May 2015, a rating committee was called to discuss the rating of "Papua New Guinea, Government of." The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Anne B Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms PNG's B1 rating, changes outlook to negative
No Related Data.
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