KFM Weekly Investment Update: Friday, 06 November 2015

Local Market Summary:

• Treasurer Patrick Pruaitch delivered the 2015 Supplementary Budget and the 2016 Nation-al Budget at Parliament this week. The supplementary, revised budget entails significant cuts in expenditure of c.K1.4b, and additional taxes and dividend receipts from various statutory bodies and State Owned Enterprises amounting to c.K1.1b. The Treasurer stated that the recent decline in commodity prices and the ‘knock-on’ effects of the El Nino ne-cessitated reduced expenditure and the sourcing of additional revenues to fill the budget shortfalls. Mr Pruaitch further stated that despite cuts in expenditure, areas of priority such as free primary healthcare and tuition-free education remain unaffected.

• Furthermore, Mr Pruaitch delivered the 2016 National Budget of K14.8b, with revenue is expected to be in the vicinity of K12.7b, representing a deficit of K2.1b. The deficit is expected to be funded through a combination of domestic and foreign debt. He also stated that the Government has opted source foreign debt through the country’s first Sovereign Bond issuance (c. U$1.0b) to alleviate ‘pressure on the domestic debt market’. It is anticipated that the Bond issuance will alter the country’s debt profile and inevitably result in the supply of foreign currency amidst a shortage in the domestic FX market.

• The Government has endorsed a dividend policy for State Owned Enterprises and Statutory bodies during the presentation of the 2016 National Budget. Mr Patrick Pruaitch said that Government organizations should operate with ‘commercial principles’, generating a return on investment for their shareholders; the people of PNG. This is expected to come in the form of dividends (70.0% of Net Income) through to the year 2020.

• The Government expects the Sovereign Wealth Fund (SWF) to begin operations in 2016. It is anticipated that the first inflows into the components of the SWF (Stabilization and Savings Funds) are to commence in Q1 2016, comprised of mineral and petroleum taxes and dividends. Mr Pruaitch stressed the importance of the SWF in stabilizing the economy in times of volatility; smoothing the effects of ‘external shocks’.

• The Savings & Loans Societies Bill 2015 was passed 78-0 in the Parliament. It repeals and replaces the current Savings & Loans Societies Act and provides for a new licensing regime as a class of financial institutions subject to the supervision of the BPNG.

• InterOil has increased its interest in PNG with two licenses which contain Triceratops discovery (PRL 39) and Raptor discovery (PPL 475) following the withdrawal of Pacific Exploration & Production Corp. InterOil CEO Mr Michael Hession announced that they are pleased to own more than 78.0% of these discoveries.

• This week’s BPNG auctions in Treasury Bills were undersubscribed by K129.3m out of the K206.0m on offer indicating reduced appetite for short term Treasury securities. The weighted average yield for both 182 days was 4.5% while 364 days was at 7.5%.

• This week’s auctions in Central Bank Bills were undersubscribed by K113.5m out of K528.5m on offer possibly indicative of the market’s preference for attractive yields offered by longer term securities. The weighted average yields were at 1.3% for 28 days, 2.3% for 63 days and 2.5% for 91 days. KFM expects rates to remain around current levels as supported by subdued outlook for inflation.

• The KSi Index ended the week in positive territory up 0.8% to close at 3,621.2 points sup-ported by an increase in the price of mining stock Newcrest Mining which was up 4.0%, while the KSi Home Index was 0.1% lower, caused by a drop in the share price of City Pharmacy and Oil Search, to end at 9,655.4 points

International Market Summary:

• US stocks ended Thursday’s session modestly lower for a second consecutive day as investors turned cautious ahead of employment report looms. The Dow Jones Industrial Aver-age fell 4.2 points or 0.02% to 17,863.4 points.

• The dollar is slightly stronger and Treasury yields are inching down from recent highs ahead of a crucial update on the US jobs market.

• European Union officials on Thursday put a positive economic spin on the bloc’s refugee crisis. In a forecast, officials predicted that the three million migrants expected over the next three years would provide at least a small lift – a net gain of perhaps a quarter of 1.0% to the European economy by 2017.

• Chinese stocks continued to rally (20% since August) in an otherwise gloomy session ahead of the closely-watched US jobs report.

• Japanese stocks edged up as weaker yen helped keep the benchmark index above 19,000 points. The Nikkei share average advanced 143.1 points or 0.8% to 19,259.5 points.

• Australian share market closed slightly higher as investors await key job figures in the US. S&P/ASX 200 benchmark index rose 22.0 points or 0.4% to 5,215.0 points.

• Oil Search, which rebuffed an A$11.7b takeover offer from Woodside Petroleum last month, just grew more expensive for its suitor, after MSCI said it would add Oil Search to its Australian indices. MSCI said that it would expand its universe to include companies incorporated in PNG and listed on the Australian Securities Exchange.

• PGK/US$ closed for the week 0.9% lower at 0.3395 reflecting the continued shortfall in liquidity while PGK/A$ dropped by 0.8% to close at 0.4755 for the week and the A$/US$ was unchanged for the week 1.3% at 0.7140.

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