In its credit analysis report for PNG, Moody's said the long-term outlook is not as positive as the near-term, given the nation unexpectedly hit peak oil production this year.

Oil Search is strategically looking to bolster its ageing oil fields revenue with its role in the ExxonMobil-led consortium to develop the PNG LNG project currently awaiting government approval.

Moody's Sovereign Risk Unit vice president Steven Hess said the project could greatly improve the prospects for economic development and PNG's government bond rating.

"More specifically, the $10 billion project, if developed, could begin exports by 2014, thereby contributing to higher gross domestic product growth and government revenues, as well as assuring stronger balance of payment and external financial positions," Hess said.

For the short term, Hess said the prospects for PNG look very good despite some expected slowdown in global growth.

"Prices for its major commodities are likely to remain high, while low interest rates are encouraging an acceleration in credit to the private sector, and a rise is likely in government spending."

The report noted the government debt to GDP ratio had fallen to 35% at the end of last year compared to around 70% in 2001 and 2002.

"As a result, the country's government debt ratios now compare favorably with those of other countries at the B1 rating level," Hess said.

Hess outlined three major factors behind PNG's bond rating.

"First, in terms of support for the rating, there is PNG's large natural resource base, which has in recent years underpinned a strong balance of payments performance.

"Additional supportive factors are the country's relatively low level of external debt and the improving state of government finances.

"On the other hand, the B1 rating remains constrained by the country's low level of development, governance problems, and the volatility evident in export earnings."

The report found other restraints on economic growth included poor roads, utilities

services, inefficient telecommunications, law and order problems, weak governance and issues with land tenure.

"The current government has admittedly made only limited progress on these fronts - despite its successful fiscal and monetary policies - but we believe that the commodities boom may allow it to invest more in responding to these problems," Hess said.