Political risk key in PNG’s sovereign debut

IFR 1973 2 March to 8 March 2013
5 min read

IFR Chief Analyst Jonathan Rogers

Jonathan Rogers, IFR Chief Analyst

PAPUA NEW GUINEA bonds anyone? If all goes according to plan, the Pacific Ocean nation will soon make its debut in the international debt markets with a dollar issue led by Barclays, BNP Paribas and JP Morgan.

Whatever the merits of such a deal as an investment proposition, you would have to say hats off to bankers from these three houses for escaping unscathed from the beauty contest for the deal held in Papua’s capital Port Moresby, perhaps the world’s most dangerous city.

Port Moresby was last year ranked by the Economist Intelligence Unit as the second-worst place to live among the world’s 140 capitals. So-called “raskol” gangs control the city and are rather fond of robbing banks while toting M-16 machine guns. Never mind the mandate, you’d be lucky to escape the pitch with your life.

The same is true of those brave blokes from the ratings agencies who came up with a Single B rating for the benighted country, assuming they paid a visit. That puts it on a par with Sri Lanka, but I’m not entirely sure the political risk community would endorse that ratings parity.

The individuals who pronounce on political risk often seem like windbag panjandrums reeling off a stream of bland platitudes, but I’m sure they have a field day when it comes to Papua New Guinea.

JUST OVER A year ago a former colonel called Yaura Sasa led a pre-dawn mutiny and arrested the head of the armed forces, declaring himself Papua’s new military leader. The attempted coup proved unsuccessful, but the political risk input is lost on no-one.

To add to the aura of chaos: the website of the National Parliament of Papua has never been fully functional, and the constitutional court twice overturned the general election results of August 2011, setting off a prolonged period of political infighting. The country at one point had two prime ministers, two cabinets and two chiefs of police.

Meanwhile the country has one of the highest turnover rates among politicians, with often up to 80% losing their seats in general elections and no party ever having won an outright majority.

Contrast this with Sri Lanka, where strongman Mahinda Rajapaksa is digging in his heels, and it seems to me the apples compared with apples implied by the ratings parity of the two countries just doesn’t wash.

I expect any deal from Papua to become quickly illiquid, get locked away and appear in scrappy size on screens

Nevertheless, I expect to see the terms of a debut bond from Papua New Guinea emerging before too long, and the outcome probably won’t be too different from that seen on debut trades from Sri Lanka and Mongolia: a single-digit-yielding deal multiple times covered and gushing praise all round.

I WOULDN’T WANT to wear that risk even on a heavily over-collateralised basis, but many investors will, and there are reasons for that. Leaving aside national income accounts, political risk, corruption and social instability, there are technical factors that favour issuance from emerging-market sovereign issuers.

The asset class is in diminishing supply as previously frequent issuers such as the Philippines and Indonesia issue less and less overseas. This means that sovereign-focused and emerging-market index funds have few opportunities to book big tickets, and are compelled to invest in anything new from the sector.

Meanwhile, a similar dynamic applies to debut issues, with fewer first-timers emerging from Asia than there have been in the past. Debut deals tend to go well because if you’re already long, say on Hutch paper, you will be more inclined to diversify into a new name.

I expect any deal from Papua to become quickly illiquid, get locked away and appear in scrappy size from time to time on broker screens. And I won’t make a call on performance, but it’s worth noting that last year’s attempted coup prompted negative ratings action, something that would have affected a Papua bond if there had been one outstanding at the time.

Investment bankers fall over themselves to bag sovereign mandates and, putting aside the dangers of wandering around Port Moresby with an iPhone in your hand, the mandate for Papua was no exception.

Sovereign work is regarded as the most prestigious an investment bank can do and is often the foundation for winning corporate and FIG business from issuers in the sovereign’s domicile. I doubt we will see a wave of issuance from Papuan corporates or banks any time soon, but the leads will certainly give a sovereign deal from the country pride of place in their pitch books.

They need to remember one thing: sovereigns default. Here’s a short list of examples of defaults that have occurred in the past 10 years: Liberia, Gabon, Nigeria, Paraguay, Indonesia and Ukraine. As we move into the more “exotic” reaches of the Asian sovereign space, you would have to wonder whether that list will be added to in this decade. Only time will tell.

Jonathan Rogers
Jonathan Rogers with border 220