Commentary | 08 August 2019

PNG’s China strategy a wake-up call for Canberra policymakers

Originally published in The Australian

Originally published in The Australian

Papua New Guinea’s request for Chinese assistance in refinancing the country’s $11.8 billion public debt has significant strategic ramifications for Australia.

Such a deal would be great for PNG Prime Minister James Marape, who three months ago took the reins of a government that is incredibly strapped for cash. His predecessor Peter O’Neill ran significant budget deficits during the past eight years on the promise of undelivered gas revenues. These budget deficits have become structural, unsustainable and even difficult to finance.

Supplementary budgets have become routine, and many government departments rely on only a fraction of the funds they are promised each year.

Public debt, while relatively low at 32.8 per cent of gross domestic product last year, is expensive. During the past five years interest payments have been the fastest growing area of government spending, now taking up 15 per cent of all government expenditure. Australia’s interest repayments, by comparison, take up 3.5 per cent to 4 per cent of expenditure. Chinese debt makes up about 7 per cent of overall debt, with most being held domestically in expensive short-term Treasury bills and government bonds.

Consolidating PNG’s debt could make it cheaper and simpler to manage. It would inject liquidity into the economy, giving the government more room to borrow again domestically.

If some of the loan were denominated in US dollars it could also help alleviate the considerable foreign-exchange challenges that have suffocated PNG’s private sector for years.

Restructuring debt is a no-brainer for PNG. Debt restructuring is usually a matter for the International Monetary Fund, a route the PNG government has avoided for years. The IMF is unpalatable for two reasons: it is a public admission of a failure of economic management, and the IMF would demand significant structural and public financial reforms in return for its support. These reforms could include cleaning up corrupt state enterprises, severe budget cuts and a slew of other pills that would be tough for PNG politicians to swallow.

A deal would be a significant liability for China. Best estimates put China’s total Belt and Road Initiative spend at anywhere between $60bn and $90bn. An $11.8bn single outlay is a big chunk of that, and without structural reforms there is no guarantee PNG would be in a position to pay China back.

I would not expect China to do this out of the kindness of its heart. China could look for other concessions from PNG that make the risk acceptable.

It could look for mining concessions — PNG is rich in all kinds of valuable minerals. It could also look for more strategic concessions. It is no secret China has been sniffing around the Pacific for the opportunity to set up a permanent military facility.

Even without these concessions a potential deal would be bad news for Australia. It would send a message loud and clear that China is serious and not just opportunistic in building influence in our immediate region.

It would profoundly change the power dynamics in our nearest neighbour and knock us from our perch of being the coveted “partner of choice” in our former colony.

The PNG government may also be playing a deeper game.

PNG knows there is no better way to bring Australia to the party than to make China the guest of honour. Even though China has yet to indicate any interest in helping PNG restructure its debt, the threat alone may encourage Canberra to work with the IMF to come up with a more palatable package. It also will put Australia under more pressure to think creatively about how we might help PNG with its debt challenges independently of the IMF. China gives PNG leverage that it may now be fully using.

Regardless of what China decides to do with this request from the PNG government, it brings to the fore some important issues.

The PNG economy remains incredibly fragile. Government debt needs to be addressed and structural budget challenges alleviated.

Foreign-exchange shortages remain a handbrake on the private sector. The government is pinning its hopes on planned natural resource projects getting started to keep them afloat, but these run risks of delay.

It will take more than the largesse of China to get the PNG economy back on track.