PAPUA New Guinea is facing a serious debt crisis risk.
The threatening crisis results from an extraordinary increase in public debt charges during the term of the O'Neill government.
In 2012, these public debt charges totalled K1.5 billion.
But by 2016, they had exploded out to K13 billion.
Almost all of this astonishing increase came from escalating repayments of domestic debt, which mushroomed by over 1,000% from 2012 to 2016.
Now, every single month, the PNG Treasury, through the central bank, needs to raise nearly K1 billion just to keep debt rolling over.
PNG's debt crisis risk is in this enormous monthly debt rollover burden. If there is a loss of confidence, the crunch point could come very quickly.
Debt crises are rarely about failure to repay an interest bill or because of a high debt to GDP ratio. They occur when a principal payment cannot be made - when debt cannot be rolled over and there is a debt default.
With a looming debt default, governments usually turn to the International Monetary Fund (the cheap option but there are conditions), other international financing (expensive but with fewer conditions) or they start printing money (high inflationary risks and a slippery slope).
The O'Neill government has massively increased the monthly rollover burden and made PNG very vulnerable to a debt crisis.
There are other debt indicators under the O'Neill government which are sounding the alarm:
The rapid increase in the size of official debt - from K8.5 billion in 2012 to K22 billion in 2016 - a 160% increase. Another 160% increase over the next four years will lift official debt to K57 billion by 2020.
Uncertainties about the true size of total public debt as some is being hidden in state-owned enterprises or in the central bank’s balance sheets. Figures of closer to K40 billion have been mentioned but cannot be verified because of government secrecy.
The rapid increase in debt interest costs - from K0.3 billion in 2012 to K1.3 billion in 2016 – that are now the third largest area of expenditure and affecting spending on health and education. The enormity of this has been hidden by the government during the election campaign (see here).
The rapid increase in the size of debt relative to GDP - from 19.8% in 2012 to 35.5% in 2016.
The rapid increase in the interest repayment to revenue ratio - from 3.6% in 2012 to 12.1% in 2016 (see excellent article here).
The prime minister is correct to the extent that PNG's debt to GDP ratio is not high relative to other countries, but this ignores two critical issues which any true leader would take into account:
First, the PNG government is not following its own Fiscal Responsibility Act which limits debt to 30% of GDP. If the government is not following its own laws, those which aim to provide a "fiscal anchor", how can the government be trusted on economic management?
Second, ratings agencies and others do not look at just one figure. The combination of very rapid increases in all debt indicators discussed above is a great cause of concern. Little wonder that Moody's decided to continue with PNG's 2016 credit rating downgrade to B2 - five levels below investment grade.
The graph at the top of this article shows the explosion in domestic debt repayments which is a very worrying development. It reflects a decline in market confidence in the government and also reflects PNG's poor economic management over the last five years on debt, budget, exchange rate and sustainable growth.
For the sake of their children, electors should understand the serious implications of these warning bells of Papua New Guinea’s sky-rocketing debt crisis risks.