NZ budget receives tick of approval
New Zealanders learnt last week that they are going to be in deficit for the better part of the next decade and that their government's net debt will peak at 43 per cent of GDP in the 2016-17 fiscal year. With that news, the New Zealand Debt Management Office advised of its borrowing plans for the coming year and those to follow.
The NZDMO intends to issue up to NZ$8.5 billion of bonds over 2009-10, with NZ$150 to NZ$200 million being issued each week; NZ$11.5 billion of bonds in 2010-11; and NZ$15 billion of bonds in each of 2011-12 and 2012-13.
In addition, the office expects to continue to issue NZ$500 million of three- to six-month treasury bills every week and may introduce a twelve-month bill, if there is sufficient market interest.
On Friday, NZ$50 million each of November 2011 and April 2013 bonds were issued at average yields of 3.57 per cent and 4.57 per cent, respectively. A further NZ$100 million of May 2021 bonds were also issued for an average yield of 6.42 per cent. The 2011 and 2021 issues were oversubscribed by a little less than four times and the 2013 bonds were oversubscribed more than two times.
Like everyone else, the NZDMO will have to deal with rising bond yields as it embarks on its increased issuance program. Ten-year yields peaked at 5.89 per cent, up from 4.6 per cent at the start of the year.
However, the NZDMO may face some competition, even if it is indirectly, from a new government or government-backed agency.
Media reports the weekend before last suggested the New Zealand government is close to establishing a bond bank to raise cash for local councils, although this didn't seem to get mentioned in the budget.
The idea is that the bond bank would raise funding for the NZ$33 billion of infrastructure projects that councils need to address over the next decade. The bank would bypass local investors and issue bonds offshore, supported by a New Zealand government guarantee, and presumably at cheaper rates.
This may have some merit, particularly if the bonds are denominated in NZ dollars, which remain in strong demand with international investors, but would add to pressure on government bond yields, overall. On the other hand, issuance in foreign currencies would push the New Zealand dollar basis swap wider and could ultimately become cost prohibitive.
A concern though, is the message that the establishment of such an agency could send to local councils. If they cannot borrow cost effectively now, borrowing through the agency could create moral hazard, especially if a long-term solution is being found for a shorter term problem.
On a positive note, following the release of the budget Moody's stated that, because the country's finances are starting from a relatively strong position, the 'Aaa' rating was not immediately affected by the projected debt path. However, while the outlook for the rating remained stable, a key consideration after the recession ends will be whether the debt trajectory looks likely to be maintained at or below the levels projected in the new budget.
Economic growth is likely to remain low for the next few years after a drop in real GDP of 1 per cent to 2 per cent this year. Pressure on the rating could develop after the recession if government revenues do not increase sufficiently.
S&P was more upbeat from the point of view that it revised the outlook, on the 'AA+/A-1+' foreign currency ratings assigned to New Zealand, to stable from negative on the expectation that the measures announced in the budget will support stabilisation in the government's fiscal position over the medium term. S&P noted that the successful delivery of budget strategy - returning the operating position to surpluses over the cycle and maintaining low debt - is consistent with maintaining the 'AA+' foreign currency rating on New Zealand.