Will PNG Go Bankrupt?

Commentary by Jay Ban

This week I want to share some insight on what PNG might experience if it goes into bankruptcy. This article comes as the country faces financial hardship as a result of years of miss managed public funds and corruption.

For a quite a few weeks now many public servants in PNG have not been paid and it is also reported that health care services have not received the necessary funding to provide simplest healthcare to its citizens.

The Bank of PNG in its monthly economic report for November, December 2015, and January 2016 illustrated that the government’s cash flow is expected to remain in significant deficit for some time.

What is causing financial hardship in PNG?

Majority of PNG’s income comes from its exports of commodities, loans and aid from mostly Australia, other countries and organisations.

PNG’s financial hardship is being caused mostly by miss management of public funds, loan repayments and drop in commodity prices.

Let’s take a look closely at each one

Mismanagement of public funds

Over the years PNG Politians have been known to continuously mismanage public funds for their own gain without understand the consequences of their actions and the long term negative implications it would have on the country.

Because of the country’s over spending this has resulted in it borrowing more money and seeking more aid over the years.

The problem is if you continue to spend more than you make you will continue to borrow until you have no more reserves left which is where the country is now.

The reserve bank of PNG has no reserves and the country’s income is not sufficient to pay for its debt plus provide for its citizens.

Furthermore every year there is fixed amount of aid that can be given so if PNG is not able to get more aid it will need to borrow more which we discuss in detail in the next section.

Interest on loans

PNG’s national debt has sky rocketed since 2012 according to Trading Economics and data collected by the World Bank.

The country’s debt more than doubled between 2012 and 2013 and continued rising to its current levels. The country has taken more on debt to counter the drop in its income to maintain its spending.

Borrowing more money when future income is not secured is a very risky business for countries like PNG who rely heavily on commodities for its income.

To counter that the country will have to start selling its national assets like Power, Airline, telecom companies etc  and other companies to the highest bidder to raise capital to repay the loans.

In addition the country will then try to borrow more money to repay some of its loans; however failing that it will try to refinance its loans at higher capital costs (which it has done in the last week in Australia with UBS).

If commodity prices do not improve the future outlook of the country is not good.

Commodities Market Drop

Since 2011 there has been a steady decline in the commodities markets around the world and it has significantly affected the drop in price of natural recourses like Gold, Oil, Copper etc. This has caused income problems for PNG and other countries which significantly depend on commodities for its income.

The drop in commodities prices is a result of the biggest consumer of commodities (China) in the world’s economy slowing down since 2010/2011.

Oil has mostly been affected by fracking activities in the US (US being the biggest contributor) and other parts of the world.

The more these prices continue to drop the more it will affect PNS’s income . Over time it will have a cascading effect on other economical factors like the country being able to pay its debt and maintain services within the country.

  

So What will happen to PNG if it goes Bankrupt?

Now that we set the scene on what has happened to PNG and what has caused its financial demise, let’s take a look at history and what has happened to other countries that have been bankrupt.

The most basic systems and institutions that people have come to depend on will simply disappear. Power companies stop operating, the police stopped working, gas stations close, grocery stores run out of food, postal workers stop delivering mail, retirement checks stopped coming, and banks close their doors with bankers fleeing the country, taking people’s life savings with them.

Here are some of the things you can expect that will happen;

• When a country declared bankruptcy its debt is restructured and it only pays very little of it back but the problem with that is the rating agencies in the world issue a warning which stops international companies from operating and investing in the country.

This means all the money that comes into PNG from foreign businesses will stop, resulting in businesses closing down and people losing jobs.

Current overseas companies operating in PNG will close their doors, take their money and leave the country.

• PNG’s currency will basically become worthless meaning buying anything from overseas will be very expensive and some countries will refuse to accept Kina for goods or services. This will result in cost of goods in PNG becoming very expensive.

People might start using other countries currencies like Australian or US dollars similar thing happened in Argentine in 1999, when its currency became worthless.

• Many foreign countries might refuse to buy/ import goods from PNG because they think they might not be of good quality or be damaged by the time it arrives.

• Property prices will drop massively meaning bank’s will want to get back as much money before the currency drop’s so there will be a fire sale by the banks to liquidate all properties that have loans with it.

• PNG Stock markets will stop trading all companies trading on the stock market stocks will either be delisted or holt in trading meaning if you own stocks you won’t be able to get your money back.

• Pension schemes if not invested in other currencies will become worthless as the KINA devaluates.

• People will make a run on the local banks meaning people will want to take out all their savings asap before the banks close their doors this will cause allot of problems for the banks. In some countries banks were closed indefinitely until order was restored in the country.

• When a country cannot pay for its public servants and defence force this will give people an easy reason to loot and cause riots. As a result of these civil protests many infrastructures will be destroyed in the process as a result of up rise in the country.

• Most or all wealthy people will take all their money and leave the country.