New Zealand Government Debt Market Outlook January 2019 Overview - PowerPoint PPT Presentation

New Zealand Government Debt Market Outlook January 2019

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 2018 2019 2020 2021 2022 2023 Year ended 30 June 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) 0.7 1.1 1.5 1.4 1.2 1.2 Unemployment rate (annual average, %) 4.5 4.1 4.0 4.0 4.0 4.1 CPI inflation (annual average % change) 1.5 2.0 1.8 2.0 2.0 2.0 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 28.0 29.5 28.7 28.8 28.4 28.3 Total Crown Operating balance before gains and losses 1.9 0.6 1.3 1.5 2.2 2.3 Core Crown residual cash 0.5 -1.7 -0.8 -0.3 0.3 0.8 Net core Crown debt 20.0 20.9 20.7 20.1 19.0 17.4 Net worth attributable to the Crown 45.1 44.5 44.5 45.0 46.3 48.0 Source: The Treasury, HYEFU 2018 4

Growth remains solid Real GDP growth % 5.0 Forecast 2.5 0.0 -2.5 Jun-05 Jun-08 Jun-11 Jun-14 Jun-17 Jun-20 Jun-23 Quarterly Quarterly % change (RHS) Annual average % change Source: The Treasury, HYEFU 2018 5

Terms of trade supportive Index (2009/10=1000) 1300 Forecast 1200 1100 1000 900 Jun-05 Jun-08 Jun-11 Jun-14 Jun-17 Jun-20 Jun-23 Quarterly Source: The Treasury, HYEFU 2018 6

House prices and net migration Annual average % change Number (000) 20 80 Forecast 15 60 10 40 5 20 0 0 -5 -20 -10 -40 Jun-05 Jun-08 Jun-11 Jun-14 Jun-17 Jun-20 Jun-23 Quarterly House prices Net migration (RHS) Source: The Treasury, HYEFU 2018 7

Business confidence a risk Net % Index 60 140 130 40 120 20 110 0 100 -20 90 -40 80 -60 70 -80 60 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18 General business outlook Own activity outlook Consumer confidence 8 Source: The Treasury, HYEFU 2018

A positive output gap % of labour force % of potential GDP 8 4 Forecast 6 2 4 0 2 -2 0 -4 Jun-05 Jun-08 Jun-11 Jun-14 Jun-17 Jun-20 Jun-23 Quarterly Unemployment rate Output gap (RHS) Source: The Treasury, HYEFU 2018 9

No urgency to raise OCR Annual % Change % 6 9 8 5 7 Forecast 4 6 5 3 4 2 3 2 1 1 0 0 Jun-02 Jun-05 Jun-08 Jun-11 Jun-14 Jun-17 Jun-20 Jun-23 CPI inflation 90-day interest rate (RHS) Source: The Treasury, HYEFU 2018 10

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 20 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 2018 12

Operating surpluses sustained $billions 15 Forecast 10 5 0 -5 -10 -15 -20 -25 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June OBEGAL (after inter-segment eliminations) Source: The Treasury, HYEFU 2018 13

Capital spending impacts residual cash $billions 15 10 5 0 -5 -10 2018 2019 2020 2021 2022 2023 Year ending 30 June Operating Capital Residual cash Source: The Treasury, HYEFU 2018 14

Net core Crown debt contained % of GDP $billions 80 32 Forecast 70 28 60 24 50 20 40 16 30 12 20 8 10 4 0 0 2009 2011 2013 2015 2017 2019 2021 2023 Year ending 30 June Net core Crown debt % of nominal GDP (RHS) Source: The Treasury, HYEFU 2018 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 2018/19 bond programme. • There are plans to commence a repurchase programme of the 15 April 2020 nominal bond before the 30 June 2019. Repurchase activities will be dependent on portfolio requirements and market conditions. • Forecast NZGBs on issue are consistent with the Government’s commitment to maintain levels of NZGBs on issue at not less than 20 percent of GDP over time. This commitment was taken into consideration when setting the forecast annual bond programme for the 2022/23 year. 17 Source: The Treasury

NZGBs – not less than 20% of GDP NZ$b 25 30% 25% 20 20% 15 15% 10 10% 5 5% 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Annual bond issuance NZGBs as % GDP (rhs) Source: The Treasury 18

IIBs remain important part of funding portfolio NZ$b NZ$b 70 18 Forecast 16 60 14 50 12 40 10 8 30 6 20 4 10 2 0 0 2013 2014 2015 2016 2017 2018 2019 Nominal Bonds Inflation-Indexed Bonds (RH) T-Bills (RH) Source: The Treasury 19

A strategic approach to IIB issuance NZ$b % 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 2012 2013 2014 2015 2016 2017 2018 Inflation-Indexed Bonds Issuance (RH) Inflation Breakeven for IIB 20 Sep 2025 Source: The Treasury 20

Syndication preferred for new bonds NZ$b 5.0 4.5 4.0 3.5 IIB Sep 3.0 2030 IIB Sep NZGB 2.5 2035 Apr 2037 2.0 1.5 IIB Sep NZGB NZGB NZGB NZGB 1.0 2025 Apr Apr Apr Apr NZGB IIB 2020 2027 2033 2029 Apr Sep 0.5 2025 2040 0.0 2012 2013 2014 2015 2016 2017 2018 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

Changing funding needs NZ$b NZ$b 20 90 Forecast 18 80 16 70 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Annual bond issuance - year ended June Total Market Bonds on Issue (RHS) Source: The Treasury 23

Structure of NZGB portfolio NZ$b 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Mar Apr May Apr Apr Sep Apr Apr Sep Apr Sep Apr Sep 19 20 21 23 25 25 27 29 30 33 35 37 40 Source: The Treasury 24

Evolution of portfolio structure Source: The Treasury 25

Maintaining diverse investor base NZ$b % 80 90 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Dec 94 Dec 97 Dec 00 Dec 03 Dec 06 Dec 09 Dec 12 Dec 15 Dec 18 Resident holdings of NZGBs (NZ$b) Non-resident holdings of NZGBs (NZ$b) Non-resident holdings of NZGBs (%) (RH) Source: Bloomberg, RBNZ 26

Increase in proportion of resident holdings Non-resident proportional holdings of NZGS % % 50 75 48 46 70 44 42 65 40 38 60 36 34 55 32 30 50 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Inflation-Indexed Bonds Total (incl. T-Bills) (RH) Nominal Bonds (RH) Source: RBNZ 27

Current snapshot: Holdings of NZGBs Holdings of New Zealand Government Bonds NZ$b December 2018 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2019 2020 2021 2023 2025 2025 2027 2029 2030 2033 2035 2037 2040 NB NB NB NB NB IIB NB NB IIB NB IIB NB IIB Source: RBNZ 28