New Zealand Government Debt Market Outlook February 2018
Overview New Zealand Economic Outlook New Zealand Government: Fiscal Priorities New Zealand Government Bonds: Risk/Reward NZDMO: Strategy and Announcements 2
Economic Outlook
Growth remains robust Real GDP (Production measure) 8 3 2.5 6 2 4 1.5 1 2 0.5 0 0 Forecast -0.5 -2 -1 -4 -1.5 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly Quarterly growth (RHS) Annual average % change Source: The Treasury, HYEFU 2017 4
Net migration moderating Net inflow (000s) Annual average % change 80 4 60 3 40 2 20 1 Forecast 0 0 -20 -1 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 Jun-22 Annual permanent and long-term net migration Working age population growth (RHS) Source: The Treasury, HYEFU 2017 5
Housing construction picks up % of real expenditure GDP 8 7 6 5 Forecast 4 3 2000 2003 2006 2009 2012 2015 2018 2021 Real residential investment Source: The Treasury, HYEFU 2017 6
Private consumption supported Annual average % change 8 Forecast 6 4 2 0 -2 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly Real private consumption Source: The Treasury, HYEFU 2017 7
Terms of trade elevated Index (2009/10=1000) 1400 Forecast 1200 1000 800 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 Jun-22 Quarterly Terms of trade Source: The Treasury, HYEFU 2017 8
Labour market tightens % of working-age population - inv % of labour force 7 61 62 63 6 64 65 5 66 67 4 68 69 3 70 71 2 72 Mar 00 Mar 04 Mar 08 Mar 12 Mar 16 NZ unemployment rate NZ participation rate (rh) Source: Bloomberg 9
Gradual rise in inflation % Annual % change 9 6 Forecast 7 4.5 5 3 3 1.5 1 0 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly 90-day interest rate CPI inflation (RHS) Source: The Treasury, HYEFU 2017 10
Fiscal Priorities
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, December 2017 12
Operating surpluses sustained NZ$b 15 Forecast 10 5 0 -5 -10 -15 -20 -25 2008 2010 2012 2014 2016 2018 2020 2022 Year ending 30 June OBEGAL (Operating Balance Excluding Gains and Losses) Source: The Treasury, HYEFU 2017 13
Capital spending impacts residual cash NZ$b 15 10 5 0 -5 -10 -15 2017 2018 2019 2020 2021 2022 Year ending 30 June Operating Capital Residual cash Source: The Treasury, HYEFU 2017 14
Net core Crown debt contained % of GDP NZ$b 80 35 Forecast 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 2008 2010 2012 2014 2016 2018 2020 2022 Year ending 30 June Net core Crown debt % of nominal GDP (RHS) Source: The Treasury, HYEFU 2017 15
Credibility in achieving forecasts Forecast Net Debt as % of GDP % of GDP 28 27 26 25 24 23 22 21 20 May-14 Dec-14 May-15 Dec-15 May-16 Dec-16 May-17 19 18 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: The Treasury 16
NZGBs maintained above 20% of GDP NZ$b 25 30% 25% 20 20% 15 15% 10 10% 5 5% 0 0% 1995 1996 1997 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 Bond Programme NZGBs as % GDP Source: The Treasury’s NZDMO 17
New Zealand Government Bonds: Risk/Reward
Solid Credit Rating “New Zealand’s credit profile reflects its very high Moody’s economic resilience, very strong institutions and Aaa/Aaa (stable) political effectiveness and a strong fiscal position compared to peers.” July 2017 “New Zealand has monetary and fiscal flexibility, a Standard & Poor’s resilient economy, and institutions conducive to swift AA+/AA (stable) and decisive policy actions. The high level of external liabilities is New Zealand’s main credit weakness” Jan 2018 “New Zealand’s ‘AA’ rating reflects the country’s strong Fitch macroeconomic policy framework and prudent fiscal AA+/AA (stable) management, reinforced by governance standards and a business environment that are rated among the best globally by the World Bank.” Mar 2017 Source: Moody’s Investor Service, Standard & Poor’s, Fitch Ratings 19
Strong institutions Worldwide Governance Indicators – World Bank (percentile rank) Control of Corruption 100 90 Voice and Accountability Government Effectiveness 80 70 Political Stability and Rule of Law Absence of Violence/Terrorism Regulatory Quality Sovereigns rated AA/Aa2 and higher (average) New Zealand Source: World Bank Worldwide Governance Indicators 2016 20
Strong balance sheet Taiwan New Zealand Switzerland Denmark Norway Sweden Czech Republic South Korea Hong Kong Poland Australia Iceland Netherlands Israel Finland Germany Ireland Hungary United States Austria United Kingdom France Spain Canada Belgium Portugal Italy Greece Japan 0 50 100 150 200 250 Public Debt as % of GDP* * Public debt compares the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. 21 Source: CIA 2017 Estimate, Bloomberg
Improvement in NIIP Net international investment position % of GDP -50 -55 -60 -65 -70 Forecast -75 -80 -85 2007 2010 2013 2016 2019 2022 Australia New Zealand Source: The Treasury 22
Attractive real yields % 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 UK Germ JP US AU NZ 10Y Real Yields (IIB Yield) 10Y Inflation Breakevens Source: Bloomberg 23
NZDMO: Strategy and Announcements
Funding strategy priorities • NZDMO’s debt funding strategy aims to minimise the Crown’s borrowing costs over the long-term, with due consideration to risk. This requires: balancing a debt portfolio structure appropriate for the Crown’s balance sheet requirements with investor demand building and maintaining depth, diversity and confidence of the investor base to ensure ongoing market access to funding, and ensuring NZDMO’s actions support secondary market liquidity and well functioning NZ capital markets to minimise borrowing costs through time. • In implementing the debt funding strategy, NZDMO aims to execute funding programmes in a transparent, even-handed and consistent manner. Source: The Treasury’s NZDMO 25
Steady issuance profile NZ$b NZ$b 20 Forecast 80 18 70 16 60 14 50 12 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 Annual bond issuance - year ended June Total bonds oustanding (RHS) Source: The Treasury’s NZDMO 26
Evolution of portfolio structure (I) From Early-2013 To Current NZ$b NZ$b 12.0 12.0 10.0 10.0 8.0 8.0 6.0 6.0 4.0 4.0 2.0 2.0 0.0 0.0 Apr Apr Feb Dec Mar May Apr Apr Sep Apr Apr Sep Apr Sep Apr Sep Mar Apr May Apr Apr Sep Apr Apr Sep Apr Sep Apr Sep 13 15 16 17 19 21 23 25 25 27 29 30 33 35 37 40 19 20 21 23 25 25 27 29 30 33 35 37 40 Outstanding - Nominal Outstanding - IIB Available capacity Outstanding - Nominal Outstanding - IIB Available capacity No m Source: The Treasury’s NZDMO 27
Evolution of portfolio structure (II) From End-2012 To End-2017 Inflation-Indexed Bonds Inflation-Indexed Bonds 2% Treasury Bills 21% 16% 5% Treasury Bills 74% 82% Nominal Bonds Nominal Bonds Source: The Treasury’s NZDMO 28
Evolution of portfolio structure (III) Years 7.5 7.0 6.5 6.0 NZGB Portfolio - Average Years to Maturity 5.5 5.0 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Source: The Treasury’s NZDMO 29
Supporting liquidity • Stable levels of recent, current and forecast funding programmes • Levels of outstanding bonds at 3-4 times pre GFC levels • Government commitment to minimum level of NZGBs on issue • Quarterly tender schedule announcements: fixed amounts and specific maturities • Capacity to tender two nominal maturities per month • New bonds launched via syndication for immediate volume • Use of benchmark lines • Focus on domestic market issuance and core products • Management of cash flows around upcoming bond maturities • Broadly match Australian Commonwealth Government bond maturities Source: The Treasury’s NZDMO 30
Maintaining diverse investor base NZ$m % 80000 90 80 70000 70 60000 60 50000 50 40000 40 30000 30 20000 20 10000 10 0 0 Apr 94 Apr 97 Apr 00 Apr 03 Apr 06 Apr 09 Apr 12 Apr 15 Resident holdings of NZGBs (NZ$m) Non-resident holdings of NZGBs (NZ$m) Non-resident holdings of NZGBs (%) (RH) Source: Bloomberg, RBNZ 31
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