Third quarter market review

The Kina Funds Management recently released its quarterly investment market review for the third quarter of 2019. Below are excerpts from the report:

Kina Funds Management investment outlook

Domestic equities: Banking/Financial sector stocks have performed well through the year, and this is likely to continue through 2020. We also anticipate a boost to mineral/mining sector stocks in the fourth quarter as the Government is likely to give the all-clear to two major resource projects.

Domestic fixed income: Pressure on the Government’s fiscal position will accelerate borrowing in the fourth quarter. However, we anticipate that this will be done primarily through Treasury Bill issuances in the domestic market.

International Equities: Stock markets have surged following positive developments between US and China as a temporary truce has been reached. Leading stock market indicators have reached their highest levels after these developments and the trend is likely to continue as Washington and Beijing work towards a resolution. Weakening economic indicators in the US, however, point to a potential reversal as consumption remains weak.

International Fixed Incomes: Bond prices have decreased as investor sentiment has turned. With stock markets improving, investment capital has left protective investments such as gold and government debt. Interest rates on 10-year government bonds are expected to increase over the fourth quarter.

Market Update

Domestic Economy: The appointment of Ian Ling-Stuckey as Treasurer this past quarter has somewhat improved the transparency of the country’s fiscal position. A rigorous analysis of the national accounts by Treasury staff – which was later independently confirmed by the IMF– has revealed a K4.636 billion blowout in the 2019 Budget deficit. This was attributed to contingent liabilities and loan guarantees being called, overspending on emoluments and other areas of fiscal mismanagement. The Treasurer has since tabled the Supplementary Budget announcing K1.482 billion in cuts to be reappropriated, and an immediate financing requirement of K1.557 billion.

The cut represents about 2 per cent of PNG’s GDP and is a substantial hit on the economy. K1.082 billion will be cut from capital spending: K286 million from Services Improvement Programme, and K795 million from the Public Investment Programme. K400 million will be cut from recurrent spending. After what was described as a “Mexican standoff” between the State and Total SA, there have been some positive developments in the negotiations of Papua LNG this past quarter. The Government gave the all-clear to developers Total SA on Sept 2 after extracting key concessions in the project agreement. This was highlighted by the Minister for Petroleum Kerenga Kua in a press release. The gains to the State were with regards to the national content plan, third-party access to pipelines, pipeline ownership and the potential for use of LNG tankers in which a participating interest is owned by the State. Parliament has since passed enabling amendments– Papua LNG Amendments Bill– on Oct 17, paving the way for the project to progress.
Kua indicated in late September that the State would now focus on the P’nyang expansion of the PNG LNG and that it would seek a “far better” deal from the project. We understand that, although they are two separate projects, there are linkages in the economics of both Papua LNG and the addition of PNG LNG’s third train through P’nyang Given the deteriorating fiscal position and the flow on muzzling effect on the economy, it is imperative that these major projects are commissioned as soon as practicable. Large investments such as the Papua LNG will provide very needed economic stimulus. A speedy agreement of the terms of the P’nyang project is therefore important to allow both of these to happen.
Global Economy: The US-China tensions continued with positive indications being made toward the end the quarter. Trade negotiations in July ended on a sour note when Washington announced an additional US$300 billion tariff on Chinese imports to take effect on Sept 1. China retaliated with US$75 billion tariffs of their own in August just days before trade talks were set to resume. Meanwhile, central banks around the world continue expansionary monetary policy through the use of various instruments. The retreating bond prices have coincided with advancing stock markets with the easing of the US-China trade tensions. An attack on Saudi oil refineries in September has threatened the global supply of oil. The Khurais and Abqaiq oil refineries supply about 5.7 million barrels of crude and 56.6 million cubic meters of gas per day. Energy prices jumped up in the days following the attack but retreated soon after once supply levels normalised.

PNG Kina

PNG Foreign Exchange: The Bank of Papua New Guinea (BPNG) slightly devalued the PNG Kina by 0.17 per cent over the third quarter. Through the course of the year, the kina devalued by US$0.003.BPNG has also reinstated foreign exchange (FX) rationing as the US$500 million boost to the country’s FX reserves from the Sovereign Bond was fully utilised. Treasury has reported higher taxation revenue from import duties and company taxes over the first half of the year. This comes as companies are able to greater satisfy their import requirements, as well as being able to declare and repatriate profits overseas. According to the September Monetary Policy Statement, BPNG has foreign reserves amounting to US$2.046 (K7.069) billion as at June 30. This is sufficient for 5.3 months total import cover and 11.3 months non-mineral import cover.The tightening of FX controls continues to dampen an already-slowing domestic economy.
BPNG also anticipates the receipt of the proceeds of foreign loans to aid the country’s FX position, however the draw-down of these loans are yet to occur. BPNG continues to urge Government to secure more foreign currency inflows from mining projects through provisions in the Project Development Agreements that allow for a portion of mining revenue to be kept on shore to assist with the economy’s FX requirements.

International Currency Developments: The PNG Kina finished weaker against the US dollar over the course of the third quarter. The US economy remains strong in comparison to other advanced economies during the global slow-down. The US is among a handful of advanced economies that have interest rates and yields on government bonds above zero percent. The US Federal Reserve has cut interest rates twice in the third quarter–first, by 25 basis points to 2.25 per cent in July; and second, by another 25 basis points to 2.00 per cent in September. The PNG Kina finished stronger against the Australian dollar over the quarter, largely due to the Australian dollar weakening against the US dollar.
The Reserve Bank of Australia (RBA) cut interest rates to 1 per cent in September—the lowest official interest rate for Australia in history at the time of the cut. After the close of the quarter, the RBA cut rates even lower to 0.75 percent on Oct 1. This has led to the Australian dollar’s slump to a ten-year low against the US dollar at the beginning of October. RBA Governor Philip Lowe stated slow income growth and low inflation as the main considerations that triggered the historic cuts. This has given rise to new concerns that RBA cuts are not translated to the economy by commercial banks through lending and mortgage rates.
The Reserve Bank of New Zealand (RBNZ) slashed interest rates by half a percent on Aug 7, which precipitated a fall in the value of the NZ dollar. Governor Adrian Orr of the RBNZ has stated at the time of the cuts that employment and inflation would likely ease relative to their targets in the absence of monetary stimulus. The NZ dollar continues weaker against the US dollar at the close of the third quarter.