Tuesday, December 29, 2009

Papua New Guinea must reform its financial markets



Papua New Guinea needs to have a vibrant financial market to boost its steadily growing economy. In addition, we must also explore the offshore option. Having an offshore stabilization fund as recently mooted by the Treasury may not be a flawed logic as many people may think. There are certain benefits involved.
However, it is important to be vigilant. We must be more aware of the offshore market conditions so we do not rush in without first assessing the market.
The government must do its own due diligence. Its financial advisors must not simply believe everything they are told by the overseas financial institutions until they have done their own investigation.
They must first investigate, analyze and confirm that the source (Banks, finance companies, etc) giving us the offshore option is also applying the same effective strategies themselves, and that the information given is truly genuine, and from reliable financial advice service sources.
There has been a lot of talk in recent years about the benefits of placing funds (whether public, private or individual investors) in offshore funds (companies, trusts and investments). But let’s always be on guard that while some of this information may be correct, a lot of it can also be incorrect.
A common perception prevails that it is expensive, and may not be viable (especially for the average person).
So let us look at some reasons why an offshore funds investing can be an alternative investment choice for PNG.
Firstly, if we structure the offshore company correctly (this is vitally important) we can gain substantial tax benefits.
Second, we can access investments that we may not be able to invest here due to a narrow-base market.
Third, an offshore bank or company also suffers none of the restrictions we may currently have. It can freely invest in these investments that can yield from 25 per cent to several 100 per cent a year.
Presently there may be existing constraints in government regulations regarding foreign prospectuses to anyone here, but can be sent to foreign companies.
What is more, people set up an offshore financial structure (company) to manage investment funds for asset protection, privacy and confidentiality. In as far as international tax planning goes; an offshore funds investment has the advantageous use of foreign jurisdictions and their tax rules for reduction of tax liability.
There is also nothing wrong in keeping the money in our Central Bank, but there may be other inherent technical constraints that may take time to review.
In general, offshore investing is also a good strategy to diversify our country’s investment range. So apart from investing in PNG, it can also be a safe and good investment practice for PNG to have its surplus money in good international funds management jurisdiction.
Here our money is reinvested in several other high-yielding financial instruments to maximize upon good high investment rate of returns many International financial institutions and investment banks offer to its international clients.
On the other hand, while it is not that difficult to set up a Foreign Investment Fund as some people have recently suggested with surplus proceeds from our LNG in PNG, diversifying in an offshore investment opportunity is good investment practice. This way, we are simply not putting all our eggs in the one investment basket.
There are several prudent hedging strategies the government can use. Once done, we can then use creative financing to borrow offshore and loan to smaller Pacific Island countries earning revenue within an onshore financial market.
The power of OPM (Other People’s Money) allows the required flexibility to diversify our financial market and hedge against risks of providing offshore loans to other Pacific states. Such an onshore facility allows us to relend at lower but competitive interests rates.
OPM is a preferred option as it is not good investment strategy to use one’s own money, but the banks to leverage favourable interest rates.
Another good way to have a vibrant and diversified financial market is to create a futures market base in PNG.
We can now set up our own commodities futures and options exchange as opposed to the present passive local bourse (PomSox). Once set up, we then gradually and systematically build up a diversified range of investment opportunities onshore. The futures exchange can annually add a variety of new financial instruments for daily trading activity.
A futures exchange allows public (institutional, banks/finance companies, private and individual small-time) investors to do investment trading onshore than overseas. We can create wealth within our country now by trading futures contracts on common commodities like coffee, cocoa, copra, oil palm, crude oil, sugar, orange juice, pork bellies, currencies, financial indexes, to mention just a few.
The exchange can further dual list other commodities commonly traded on overseas futures (and options) exchanges. This will result in a greatly enhanced trading flexibility, increased volume, lower risk hedging factor and high leverage returns for investors; among others.
The government must also consider lowering onshore banking interest rates to around 2.5 and 3 per cent so the majority of our people are fully involved in growing our economy.
More onshore business opportunities can be realized by our people if the government is prepared now by being more innovative and create a vibrant financial market.
The country is ready for other alternative investment choices for our people. This must now be PNG’s immediate wealth creation strategy within the next five years as part of our government’s national strategic wealth plan for Papua New Guineans.
We can no longer wait and watch only foreigners acquire wealth at our expense.

No comments:

Post a Comment