OUTLOOK FOR THE NEW ZEALAND GOVERNMENT DEBT MARKET All photography sourced from: http://www.nzstory.govt.nz 1 The Treasury
OVERVIEW 1 New Zealand Economic Outlook 2 New Zealand Government Bonds: Risk/Reward 3 Fiscal Priorities: Budget May 2017 4 NZDMO: Announcements and StrategyAnnouncemets and strategy ZDMO Announcements and strategy 2
1. ECONOMIC OUTLOOK 3
SOLID GROWTH OUTLOOK (Annual average % change) 7 6 5 4 3 2 1 0-1 -2-3 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Real Production GDP Growth - Budget Update Forecast Source: Statistics NZ, Treasury 4
NET MIGRATION REMAINS STRONG (annual total) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Forecast -10,000-20,000 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Net Migration - Budget Update Source: Statistics NZ, Treasury 5
EXPORT OUTLOOK POSITIVE Services Exports Goods Terms of Trade (Annual average % change) (index) 25 20 15 Forecast 1,400 1,300 1,200 Forecast 10 5 0 1,100 1,000-5 900-10 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly Real Services Exports - Budget Update 800 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21 Quarterly SNA Goods Terms of Trade - Budget Update Source: Statistics NZ, Treasury 6
LABOUR SUPPLY MATCHING DEMAND (% of labour force) 7 (% of working-age population - inv) 62 63 6 64 65 5 66 67 4 68 69 3 70 71 2 Mar 00 Mar 02 Mar 04 Mar 06 Mar 08 Mar 10 Mar 12 Mar 14 Mar 16 NZ unemployment rate NZ participation rate (rh) 72 Source: Statistics NZ, Treasury 7
INFLATION TO RETURN TO TARGET (%) 7.0 6.0 5.0 Forecasts 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 Jun 00 Jun 03 Jun 06 Jun 09 Jun 12 Jun 15 Jun 18 Jun 21 NZ Headline CPI Inflation NZ Non-Tradables CPI Inflation NZ Tradables CPI Inflation Source: Statistics NZ, Treasury 8
NZ NET INTERNATIONAL INVESTMENT POSITION HAS IMPROVED (% of GDP) (% of GDP) -50 0-55 -60-65 -70-75 -80-85 Forecast -1-2 -3-4 -5-6 -7-8 -90 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Quarterly NZ Net International Investment Position (% of GDP) NZ Current Account (% GDP) (rh) -9 Source: Treasury 9
2. NZGBS: RISK/REWARD 10
SOLID CREDIT RATINGS Moody s Aaa/Aaa (stable) Standard & Poor s AA+/AA (stable) Fitch AA+/AA (stable) New Zealand s credit profile reflects its very high economic resilience, very strong institutions and political effectiveness and a strong fiscal position compared to peers. 20 July 2017 New Zealand has monetary and fiscal flexibility, a resilient economy, and institutions conducive to swift and decisive policy actions. 19 Jan 2017 New Zealand s AA rating reflects the country s strong macroeconomic policy framework and prudent fiscal management, reinforced by governance standards and a business environment that are rated among the best globally by the World Bank. 13 Mar 2017 Source: Moody s Investor Service, Standard and Poor s, Fitch Ratings latest credit assessment 11
NZ S STABILITY STANDS OUT Worldwide Governance Indicators World Bank (percentile rank) Control of Corruption 100 Voice and Accountability 90 80 Government Effectiveness 70 Rule of Law Political Stability and Absence of Violence/Terrorism Regulatory Quality New Zealand Sovereigns rated AA/Aa2 and higher (average) Source: World Bank, Bloomberg, Moody s Investor Service, Standard and Poor s, Fitch Ratings 12
STRONG BALANCE SHEET Luxembourg Sweden Norway Turkey Taiwan New Zealand Switzerland Denmark Hong Kong Czech Republic Poland South Korea Australia Slovakia Iceland Netherlands Israel Finland Germany United States Hungary Ireland Slovenia Austria United Kingdom France Canada Spain Belgium Portugal Italy Greece Japan Sovereign Debt as % of GDP 0 50 100 % 150 200 250 GDP Source: Bloomberg 13
POSITIVE SPREAD TO PEERS (%) 4 3 2 1 0-1 NZ-US 10Y Bond Yields NZ-AU 10Y Bond Yields NZ 10Y Bond Yields (RH) (%) 9 8 7 6 5 4 3-2 2 Jan 1997 Jan 2001 Jan 2005 Jan 2009 Jan 2013 Jan 2017 Source: Bloomberg, * Generic bond spreads 14
ATTRACTIVE REAL YIELDS (%) 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 UK Germ JP US AU NZ* 10Y Real Yields (IIB Yield) 10Y Inflation Breakevens * NZ data refers to the 2025 maturity Source: Bloomberg 15
GRADUAL IMPROVEMENT IN LIQUIDITY (NZ$m) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Non-Repo (3mth average of weekly turnover) Source: RBNZ 16
WEAKENED LINK WITH CURRENCY (%) 90 80 70 60 50 40 30 20 10 0 Mar 95 Mar 98 Mar 01 Mar 04 Mar 07 Mar 10 Mar 13 Mar 16 Source: Bloomberg Non-resident holdings of NZGBs (%) NZ TWI (RH) 90 80 70 60 50 40 30 20 10 0 17
3. FISCAL PRIORITIES: BUDGET - MAY 2017 18
FISCAL PRIORITIES MET & EXTENDED NZD billion 10 5 Forecast NZD billion 70 60 Forecast 40% 35% 0-5 -10-15 "The Government has set out a clear plan for the next three years, which involves returning to budget surplus in 2014/15." Budget Policy Statement, 16 February 2012 50 40 30 20 10 30% 25% 20% 15% 10% 5% -20 2009 2011 2013 2015 2017 2019 2021 Operating Balance (ex gains and losses) 0 2009 2011 2013 2015 2017 2019 2021 Net Core Crown Debt % Nominal GDP (RHS) 0% 19
STEADY BOND ISSUANCE Year End 30 June (face value) 2017 2018 2019 2020 2021 Total Gross NZGB 8.0 7.0 7.0 7.0 6.0 35.0 issuance (NZ$b) NZGB maturities and 4.8 11.5 6.5 7.3 11.1 41.1 repurchases (NZ$b) Net NZGB issuance 3.1-4.5 0.5-0.3-5.1 (NZ$b) NZGBs on issue 75.4 70.9 71.5 71.2 66.1 (NZ$b) Source: NZDMO - In conjunction with BEFU, 25 May 2017 20
OUTTURNS BEATING EXPECTATIONS % of GDP 28 Forecast Net Debt as % of GDP 27 26 25 24 23 22 21 20 19 18 May-14 Dec-14 May-15 Dec-15 May-16 Dec-16 May-17 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: Treasury 21
GOVERNMENT COMMITMENT TO MAINTAIN NZGB ABOVE 20% OF GDP OVER TIME Forecast Illustrative % GDP 35% 30% 25% 20% 15% 10% 5% 2000 2003 2006 2009 2012 2015 2018 2021 2024 Total NZGBs (% GDP, RHS) Minimum NZGBs (% GDP, RHS) Net Core Crown Debt (%GDP, RHS) Total NZGBs - no minimum (% GDP, RHS) 0% Source: Treasury 22
ANNUAL ISSUANCE STABILISED NZD billion 25.0 20.0 NZD billion 80 Forecast 70 60 15.0 50 40 10.0 30 5.0 20 10 0.0 2000 2003 2006 2009 2012 2015 2018 2021 0 Annual bond issuance Total bonds oustanding (RHS) Source: Treasury 23
2. NZDMO ANNOUNCEMENTS AND STRATEGY 24
FUNDING STRATEGY PRIORITIES Balance Sheet Management approach Reduce overall fiscal variability Reduce refinancing risk Commitment to inflation-indexed bonds Build and maintain liquidity Diversify investor base Encourage intermediary participation Focus on domestic issuance Execute in a Transparent, Even-handed and Consistent manner 25
PORTFOLIO COMPOSITION REDUCES FISCAL VARIABILITY, REFINANCING RISK October 2012 July 2017 16% 2% 19% 5% 82% 76% Source: The Treasury 26
INTENTION TO SYNDICATE NZGB 2029 (NZD b) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Dec 17 Mar 19 Apr 20 May 21 Apr 23 Apr 25 Sep 25 Apr 27 Apr 29 Sep 30 Apr 33 Sep 35 Apr 37 Sep 40 Outstanding - Nominal Outstanding - IIB Available capacity No m Source: The Treasury 27
CONSISTENT INCREASE IN OFFSHORE AND DOMESTIC DEMAND NZD million % 80,000 90 70,000 60,000 50,000 40,000 30,000 20,000 10,000 80 70 60 50 40 30 20 10 0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 Non-resident holdings of NZGBs Resident holdings of NZGBs Proportion held for non-residents (rh) Source: RBNZ 28
CONTINUE REPURCHASE PROGRAM 100 Non-Resident Holdings (%) 90 80 70 60 50 40 30 20 10 0 Jul 2015 Jan 2016 Jul 2016 Jan 2017 December 2017 (GB1217) March 2019 (GB0319) April 2020 (GB0420) May 2021 (GB0521) April 2023 (GB0423) April 2025 (GB0425) Source: RBNZ April 2027 (GB0427) April 2033 (GB0433) April 2037 (GB0437) 29
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