CREDIT ratings agency Moody’s has downgraded Papua New Guinea’s foreign currency and local currency issuer ratings from B1 to B2.

Making the decision in late April after starting a review in February, Moody’s said heightened balance of payments pressures had put strains on PNG foreign currency reserves that would continue for two years.

PNG’s gross foreign currency reserves fell to US$1.69 billion at the end of 2015, down from the US$4.26 billion recorded at the end of 2011, Moody’s said – adding that this was a continuation of the balance of payments pressures the nation was facing.

“Liquefied natural gas (LNG) production drove the large rise in exports and the restoration of the current account surplus since 2014,” Moody’s said.

“However, this has failed to stem the deterioration in PNG’s external payments position as cross-border debt servicing and other demands for foreign currency as represented by the large financial account outflows have overwhelmed the supply of hard currency available to the central bank, the Bank of Papua New Guinea (BankPNG).”

Any increase in gold and copper production will mitigate this payment pressure, with reserve adequacy having weakened, Moody’s added.

“Moreover, the challenging environment for external liquidity has fed back to the real economy through weaker sentiment, which is already suffering from the decline in global prices for PNG’s commodity exports,” the group said.

Declining fiscal revenue and constrained domestic financing conditions have also weakened the government’s liquidity position, Moody’s said, adding that it estimated revenue as a share of gross domestic product fell to 17.1 per cent in 2015, the lowest level in at least a decade.

Despite the downgrade, Moody’s has rated the PNG economy as stable, basing the view on robust medium term economic growth prospects, including an expansion of PNG LNG, the Wafi-Golpu gold mine and the Papua LNG project, despite lower commodity prices.

“While we do not expect material progress on the implementation of these projects until late 2017, the resulting upturn and stabilisation in growth will, in our view, alleviate external and fiscal pressures from escalating,” Moody’s said.

The ratings agency added that it expected government efforts to maintain low government debt levels as compared with similarly rated peers, while funding conditions and external liquidity will remain tight.