Financial Crime World

PNG Banking System Shows Resilience Amid Global Challenges

Port Moresby, Papua New Guinea - The banking system in Papua New Guinea has demonstrated remarkable resilience in the face of global economic challenges, with loan growth exceeding 30% per annum over the past few years. Although growth has slowed to around 15% annually, it remains consistent with nominal GDP growth.

Factors Contributing to Stability

According to a report released by the Bank of Papua New Guinea (BPNG), several key factors contribute to the sector’s stability:

  • Non-performing loans (NPLs) remain low compared to regional peers.
  • Capital adequacy ratios (CARs) are high, standing at around 28% as of end-2010.
  • Domestic deposits account for about 80% of liabilities, allowing the banking system to avoid relying on international capital markets.

Challenges and Risks

However, BPNG has expressed concern over the challenge of sterilizing excess liquidity, which is straining its profitability. As a result, the central bank has resisted increasing the stock of central bank bills and kept the policy rate at 7%.

Additionally, the report highlights some risks and challenges:

  • The property market: prices and rents have risen, while supply constraints suggest a small risk of a decline in the near term.
  • Loan concentration in the commercial and financial sector: although stress tests showed that deterioration would need to be extreme for it to have a systemic impact.

Stress Tests

Stress tests conducted by BPNG found that the banking system faces little impact from credit risk shocks in the near term. The tests assumed uniform increases in NPLs and found that even extreme scenarios would require significant defaults before having a systemic effect.

The report also noted that interest rate and exchange rate risks are limited, with:

  • Net interest income recalculated for different maturity buckets showing negligible impact on capital levels from parallel moves in the yield curve.
  • Foreign exchange risks found to be immaterial.

Conclusion

Overall, the report concludes that the PNG banking system is well-positioned to withstand global economic challenges, with high levels of capital and limited exposure to total lending. The sector’s resilience is a testament to its ability to adapt to changing market conditions and maintain stability in the face of uncertainty.