Managing financial risks in Papua New Guinea : an optimal external debt portfolio

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Managing financial risks in Papua New Guinea : an optimal external debt portfolio, Volume 1

Author:	Coleman, Jonathan R.; Ying Qian;	Collection Title:	Policy, Research, and External Affairs working papers ; no. WPS 739. International trade
Country:	Papua New Guinea;	Date Stored:	1991/08/01
Document Date:	1991/08/31	Document Type:	Policy Research Working Paper
Language:	English	Major Sector:	Public Administration, Law, and Justice
Region:	East Asia and Pacific	Report Number:	WPS739
Sub Sectors:	Other Public Sector Management	SubTopics:	Environmental Economics & Policies; Economic Theory & Research; Settlement of Investment Disputes; Strategic Debt Management; Public Sector Economics
Volume No:	1

Summary: This report shows that Papua New Guinea's assets and liabilities may be poorly balanced for debt servicing. Thus, it could benefit substantially from active risk management, especially through better selection of the financial instruments in its debt portfolio. The authors present a model and estimate of an optiomal debt portfolio that allows for the use of commodity-linked bonds and conventional debt denominated in different currencies. They judge the hedging effectiveness of this portfolio by how much the variance of expected real import is reduced. The results indicate that commodity-linked bonds could play an important role in the country's risk management strategy. They also show that the country's external debt structure is not well balanced to hedge the foreign exchange risk from the existing composition of non-U.S. dollar-denominated liabilities. The debt portfolio contains an excess of Japanese yen - and Deutschemark - denominated liabilities, while liabilities denominated in British pounds are substantially underrepresented.


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