New Zealand Government Debt Market Outlook January 219
Overview New Zealand Economic Outlook New Zealand Government: Fiscal Outlook Debt Management: Funding Strategy and Announcements 2
Economic Outlook
Summary of forecasts Executive summary table Year ended 3 June 218 219 22 221 222 223 Actual Forecast Forecast Forecast Forecast Forecast Economic Real GDP (production basis, annual average % change) 2.7 2.9 3.1 2.7 2.5 2.3 Real GDP per capita (production basis, annual average % change).7 1.1 1.5 1.4 1.2 1.2 Unemployment rate (annual average, %) 4.5 4.1 4. 4. 4. 4.1 CPI inflation (annual average % change) 1.5 2. 1.8 2. 2. 2. Current account balance (% of GDP) -3.4-3.5-3.6-3.6-3.6-3.7 Fiscal (% of GDP) Core Crown tax revenue 27.9 28.1 28.2 28.5 28.8 28.9 Core Crown expenses 28. 29.5 28.7 28.8 28.4 28.3 T otal Crown Operating balance before gains and losses 1.9.6 1.3 1.5 2.2 2.3 Core Crown residual cash.5-1.7 -.8 -.3.3.8 Net core Crown debt 2. 2.9 2.7 2.1 19. 17.4 Net worth attributable to the Crown 45.1 44.5 44.5 45. 46.3 48. Source: The Treasury, HYEFU 218 4
Growth remains solid Real GDP growth % 5. Forecast 2.5. -2.5 Jun-5 Jun-8 Jun-11 Jun-14 Jun-17 Jun-2 Jun-23 Quarterly Quarterly % change (RHS) Annual average % change Source: The Treasury, HYEFU 218 5
Terms of trade supportive Index (29/1=1) 13 Forecast 12 11 1 9 Jun-5 Jun-8 Jun-11 Jun-14 Jun-17 Jun-2 Jun-23 Quarterly Source: The Treasury, HYEFU 218 6
House prices and net migration Annual average % change 2 15 Number () 8 Forecast 6 1 4 5 2-5 -2-1 -4 Jun-5 Jun-8 Jun-11 Jun-14 Jun-17 Jun-2 Jun-23 Quarterly House prices Net migration (RHS) Source: The Treasury, HYEFU 218 7
Business confidence a risk Net % 6 4 2-2 -4-6 Index 14 13 12 11 1 9 8 7-8 6 Dec-4 Dec-6 Dec-8 Dec-1 Dec-12 Dec-14 Dec-16 Dec-18 General business outlook Own activity outlook Consumer confidence Source: The Treasury, HYEFU 218 8
A positive output gap % of labour force % of potential GDP 8 4 6 Forecast 2 4 2-2 -4 Jun-5 Jun-8 Jun-11 Jun-14 Jun-17 Jun-2 Jun-23 Quarterly Unemployment rate Output gap (RHS) Source: The Treasury, HYEFU 218 9
No urgency to raise OCR Annual % Change % 6 9 5 4 3 2 1 Forecast 8 7 6 5 4 3 2 1 Jun-2 Jun-5 Jun-8 Jun-11 Jun-14 Jun-17 Jun-2 Jun-23 CPI inflation 9-day interest rate (RHS) Source: The Treasury, HYEFU 218 1
Fiscal Outlook
Budget Responsibility Rules Current Government is committed to prudent fiscal strategy with 5 Budget Responsibility Rules: Deliver a sustainable operating surplus across an economic cycle. Reduce the level of net core Crown debt to 2 per cent of GDP within five years of taking office. Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. Take a prudent approach to ensure expenditure is phased, controlled and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio. Ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy. Source: Budget Policy Statement, HYEFU 218 12
Operating surpluses sustained $billions 15 1 Forecast 5-5 -1-15 -2-25 29 211 213 215 217 219 221 223 Year ending 3 June OBEGAL (after inter-segment eliminations) Source: The Treasury, HYEFU 218 13
Capital spending impacts residual cash $billions 15 1 5-5 -1 218 219 22 221 222 223 Year ending 3 June Operating Capital Residual cash Source: The Treasury, HYEFU 218 14
Net core Crown debt contained $billions 8 7 6 5 4 3 2 1 Forecast % of GDP 32 28 24 2 16 12 8 4 29 211 213 215 217 219 221 223 Year ending 3 June Net core Crown debt % of nominal GDP (RHS) Source: The Treasury, HYEFU 218 15
Funding Strategy and Announcements
Announcements at HYEFU Forecasts New Zealand Government Bonds and Treasury Bills Inflation-indexed bond issuance is expected to be around NZ$1 billion of the NZ$8 billion 218/19 bond programme. There are plans to commence a repurchase programme of the 15 April 22 nominal bond before the 3 June 219. Repurchase activities will be dependent on portfolio requirements and market conditions. Source: The Treasury Forecast NZGBs on issue are consistent with the Government s commitment to maintain levels of NZGBs on issue at not less than 2 percent of GDP over time. This commitment was taken into consideration when setting the forecast annual bond programme for the 222/23 year. 17
1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 221 222 223 NZGBs not less than 2% of GDP NZ$b 25 3% 2 15 25% 2% 15% 1 1% 5 5% % Annual bond issuance NZGBs as % GDP (rhs) Source: The Treasury 18
IIBs remain important part of funding portfolio NZ$b 7 6 5 4 3 2 1 Forecast NZ$b 18 16 14 12 1 8 6 4 2 213 214 215 216 217 218 219 Nominal Bonds Inflation-Indexed Bonds (RH) T-Bills (RH) Source: The Treasury 19
A strategic approach to IIB issuance % 3.5 3. 2.5 2. 1.5 1..5 NZ$b 3. 2.5 2. 1.5 1..5. 212 213 214 215 216 217 218 Inflation-Indexed Bonds Issuance (RH) Inflation Breakeven for IIB 2 Sep 225. Source: The Treasury 2
Syndication preferred for new bonds NZ$b 5. 4.5 4. 3.5 3. 2.5 2. IIB Sep 23 IIB Sep 235 NZGB Apr 237 1.5 1..5 IIB Sep 225 NZGB Apr 22 NZGB Apr 227 NZGB Apr 233 NZGB Apr 225 IIB Sep 24 NZGB Apr 229. 212 213 214 215 216 217 218 Syndication volumes (calendar years) Nominal Bonds Inflation-Indexed Bonds Source: The Treasury 21
Funding strategy priorities The debt funding strategy aims to minimise the Crown s borrowing costs over the long-term, while keeping risk at an appropriate level. Implemented in a transparent, even-handed and consistent manner. Source: The Treasury 22
21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 221 222 223 Changing funding needs NZ$b 2 18 16 14 12 1 8 6 4 2 Forecast NZ$b 9 8 7 6 5 4 3 2 1 Annual bond issuance - year ended June Total Market Bonds on Issue (RHS) Source: The Treasury 23
Structure of NZGB portfolio NZ$b 12. 1. 8. 6. 4. 2.. Mar 19 Apr 2 May 21 Apr 23 Apr 25 Sep 25 Apr 27 Apr 29 Sep 3 Apr 33 Sep 35 Apr 37 Sep 4 Source: The Treasury 24
Evolution of portfolio structure Source: The Treasury 25
Maintaining diverse investor base NZ$b 8 7 6 5 4 3 2 1 % 9 8 7 6 5 4 3 2 1 Source: Bloomberg, RBNZ Dec 94 Dec 97 Dec Dec 3 Dec 6 Dec 9 Dec 12 Dec 15 Dec 18 Resident holdings of NZGBs (NZ$b) Non-resident holdings of NZGBs (NZ$b) Non-resident holdings of NZGBs (%) (RH) 26
Increase in proportion of resident holdings Non-resident proportional holdings of NZGS % 5 48 46 44 42 4 38 36 34 32 3 Jul 215 Jan 216 Jul 216 Jan 217 Jul 217 Jan 218 Jul 218 % 75 7 65 6 55 5 Source: RBNZ Inflation-Indexed Bonds Total (incl. T-Bills) (RH) Nominal Bonds (RH) 27
Current snapshot: Holdings of NZGBs NZ$b 12. Holdings of New Zealand Government Bonds December 218 1. 8. 6. 4. 2.. 219 NB 22 NB 221 NB 223 NB 225 NB 225 IIB 227 NB 229 NB 23 IIB 233 NB 235 IIB 237 NB 24 IIB Source: RBNZ 28
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