New Zealand Government Debt Market Outlook March 2018 Overview - - PowerPoint PPT Presentation

New Zealand Government Debt Market Outlook

March 2018

New Zealand Economic Outlook NZDMO: Strategy and Announcements New Zealand Government: Fiscal Priorities New Zealand Government Bonds: Risk/Reward

Overview

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Economic Outlook

• 1.5
• 1
• 0.5

0.5 1 1.5 2 2.5 3

• 4
• 2

2 4 6 8 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly growth (RHS) Annual average % change Real GDP (Production measure) Forecast Quarterly

Growth remains robust

Source: The Treasury, HYEFU 2017

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800 1000 1200 1400 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 Jun-22 Quarterly Terms of trade Index (2009/10=1000) Forecast

Terms of trade elevated

Source: The Treasury, HYEFU 2017

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Net migration to moderate

Source: The Treasury, HYEFU 2017

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• 1

1 2 3 4

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20 40 60 80 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) Net inflow (000s) Forecast Annual average % change

61 62 63 64 65 66 67 68 69 70 71 72 2 3 4 5 6 7 Mar 00 Mar 04 Mar 08 Mar 12 Mar 16 NZ unemployment rate NZ participation rate (rh)

% of working-age population - inv % of labour force

Labour market tightening

Source: Bloomberg

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1.5 3 4.5 6 1 3 5 7 9 2000 2003 2006 2009 2012 2015 2018 2021 90-day interest rate CPI inflation (RHS) % Forecast Quarterly Annual % change

Gradual rise in inflation

Source: The Treasury, HYEFU 2017

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Inflation divergence

Source: Statistics New Zealand

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Fiscal Priorities

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.

Budget Responsibility Rules

Source: Budget Policy Statement, December 2017

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Source: The Treasury, HYEFU 2017

Operating surpluses sustained

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• 25
• 20
• 15
• 10
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5 10 15 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Year ending 30 June OBEGAL (Operating Balance Excluding Gains and Losses)

NZ$b Forecast

Source: The Treasury, HYEFU 2017

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• 10
• 5

5 10 15 2017 2018 2019 2020 2021 2022 NZ$b Year ending 30 June Operating Capital Residual cash

Capital spending impacts residual cash

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Source: The Treasury, HYEFU 2017

5 10 15 20 25 30 35 10 20 30 40 50 60 70 80 2008 2010 2012 2014 2016 2018 2020 2022 NZ$b Year ending 30 June Net core Crown debt % of nominal GDP (RHS) Forecast % of GDP

Net core Crown debt contained

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18 19 20 21 22 23 24 25 26 27 28 2013 2014 2015 2016 2017 2018 2019 2020 2021 May-14 Dec-14 May-15 Dec-15 May-16 Dec-16 May-17 % of GDP

Forecast Net Debt as % of GDP

Source: The Treasury

Credibility in achieving forecasts

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0% 5% 10% 15% 20% 25% 30% 5 10 15 20 25 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 NZ$b

Source: The Treasury’s NZDMO

NZGBs maintained above 20% of GDP

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New Zealand Government Bonds: Risk/Reward

Moody’s Aaa/Aaa (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.” July 2017

Standard & Poor’s AA+/AA (stable)

“New Zealand has monetary and fiscal flexibility, a resilient economy, and institutions conducive to swift and decisive policy actions. The high level of external liabilities is New Zealand’s main credit weakness” Jan 2018

Fitch AA+/AA (stable)

“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.” Mar 2017

Solid Credit Rating

Source: Moody’s Investor Service, Standard & Poor’s, Fitch Ratings

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Source: World Bank Worldwide Governance Indicators 2016

70 80 90 100

Control of Corruption Government Effectiveness Political Stability and Absence of Violence/Terrorism Regulatory Quality Rule of Law Voice and Accountability

Sovereigns rated AA/Aa2 and higher (average) New Zealand

Strong institutions

Worldwide Governance Indicators – World Bank (percentile rank)

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Source: CIA 2017 Estimate, Bloomberg

50 100 150 200 250 Japan Greece Italy Portugal Belgium Canada Spain France United Kingdom Austria United States Hungary Ireland Germany Finland Israel Netherlands Iceland Australia Poland Hong Kong South Korea Czech Republic Sweden Norway Denmark Switzerland New Zealand Taiwan

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.

Strong balance sheet

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Improvement in NIIP

• 85
• 80
• 75
• 70
• 65
• 60
• 55
• 50

2007 2010 2013 2016 2019 2022

Net international investment position

Australia New Zealand % of GDP Forecast

Source: The Treasury

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Attractive real yields

Source: Bloomberg

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• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 UK Germ JP US AU NZ 10Y Real Yields (IIB Yield) 10Y Inflation Breakevens %

NZDMO: Strategy and Announcements

Source: The Treasury’s NZDMO

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
• ngoing market access to funding, and
• ensuring NZDMO’s actions support secondary market liquidity and well functioning

New Zealand 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.

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10 20 30 40 50 60 70 80 2 4 6 8 10 12 14 16 18 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 NZ$b NZ$b Annual bond issuance - year ended June Total bonds oustanding (RHS)

Forecast

Source: The Treasury’s NZDMO

Steady issuance profile

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From end-2012 To Current

0.0 2.0 4.0 6.0 8.0 10.0 12.0 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 NZ$b

No m

Source: The Treasury’s NZDMO

Evolution of portfolio structure (I)

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0.0 2.0 4.0 6.0 8.0 10.0 12.0 Apr 13 Apr 15 Feb 16 Dec 17 Mar 19 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

NZ$b

Evolution of portfolio structure (II)

From End-2012 To End-2017

Inflation-Indexed Bonds

74% 5% 21% 82% 16% 2%

Nominal Bonds Treasury Bills Inflation-Indexed Bonds Nominal Bonds Treasury Bills

Source: The Treasury’s NZDMO

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5.0 5.5 6.0 6.5 7.0 7.5 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Years NZGB Portfolio - Average Years to Maturity

Source: The Treasury’s NZDMO

Evolution of portfolio structure (III)

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• 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

Supporting liquidity

Source: The Treasury’s NZDMO

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10 20 30 40 50 60 70 80 90 10000 20000 30000 40000 50000 60000 70000 80000 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) %

NZ$m

Maintaining diverse investor base

Source: Bloomberg, RBNZ

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Forecast Domestic Bond Programme – HYEFU, December 2017

• Reiterated intention to syndicate NZGB 20 April 2029 before 30 June 2018
• Up to NZ$5b of NZGB 15 March 2019 to be repurchased prior to 30 June 2018
• Maintain levels of NZGBs on issue at not less than 20% of GDP over time

Year ending 30 June (face value) 2018 2019 2020 2021 2022 Total Gross NZGB issuance ($ billion) 7.0 7.0 7.0 7.0 7.0 35.0 NZGB maturities and repurchases ($ billion) 9.1 7.9 7.3 11.1 0.0 35.3 Net NZGB issuance ($ billion)

• 2.1
• 0.9
• 0.3
• 4.1

7.0

• 0.3

NZGBs on issue ($ billion) 72.3 71.4 71.2 67.1 74.1 n/a NZGBs on issue (percent of GDP) 25.2% 23.7% 22.5% 20.2% 21.4% n/a

Recent announcements

Source: The Treasury’s NZDMO

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Coming up

Events

• Economic and Fiscal Updates: Budget (May), Half-Year (Dec)
• Quarterly bond tender schedule release: End-Mar, -Jun, -Sep, -Dec
• Biannual release of New Zealand Government Securities Overview

Communications

• Subscribe for email updates from the NZDMO: info@nzdmo.govt.nz
• For further information see: https://www.nzdmo.govt.nz or https://www.treasury.govt.nz
• Contacts: Sarah Vrede, Head of New Zealand Debt Management Office

Kim Martin, Principal Strategist

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Disclaimer

• This presentation has been prepared by The Treasury’s New Zealand Debt Management Office (“NZDMO”) on behalf of the

New Zealand Government and is for general information purposes only. By listening to the presentation, or reading the presentation materials, you acknowledge and agree to the contents of this disclaimer.

• To the maximum extent permitted by law, neither NZDMO nor the New Zealand Government makes any representation,

recommendation or warranty, express or implied as to the accuracy, completeness or currency of any of the information in this presentation and accept no responsibility or liability therefore. Data are indicative and approximate only, and all information is subject to change. This presentation is intended as a snapshot view of New Zealand only, and NZDMO and the New Zealand Government have no obligation, and do not undertake or accept any responsibility or obligation, to update, expand or correct anything in this presentation or inform you of any matter arising or coming to their notice, after the date of this presentation, which may affect any matter referred to in this presentation.

• This presentation contains forward-looking statements including information regarding NZDMO’s future bond issuances and

the New Zealand Government’s forecast fiscal and economic performance based on current information, estimates and

• forecasts. Those statements are subject to risks, uncertainties, and assumptions which are hard to predict or anticipate, and

therefore actual outcomes and performance may differ materially from the statements. Any opinions expressed in this presentation reflect the judgement of NZDMO as the date hereof, and do not bind NZDMO nor the New Zealand Government.

• This presentation is not a product disclosure statement, disclosure document or other offer document under New Zealand law
• r any other law. This presentation is not, and does not constitute financial advice. All reasonable care has been taken in

relation to the preparation and collation of this presentation. Except for statutory liability which may not be excluded, no person, including NZDMO or any person mentioned in this presentation accepts responsibility for any loss or damage howsoever occurring resulting from the use or reliance on this presentation by any person. Past performance is not indicative

• f future performance and no guarantee or future rights are implied or given.
• Nothing in this presentation is an offer to sell, or solicitation of an offer to purchase, any securities. This presentation must not

be relied upon by any person for making any investment decision and will not form part of any investment contract. The information provided in this presentation is not investment advice and does not take into account the investment objectives, financial situation or particular needs (including financial and taxation issues) of any particular investor. Any person considering in investing in New Zealand Government securities must refer to any relevant offer documents and disclosures provided expressly in connection with those securities and should take their own independent financial and legal advice on their proposed investment. New Zealand Government securities have not been and will not be registered under the United States Securities Act of 1933 (U.S Securities Act) or the securities laws of any state or other jurisdiction of the United States. New Zealand Government securities may not be offered or sold, directly or indirectly, in the United States or to, or for the account

• r benefit of, any person in the United States except in transactions exempt from, or not subject to, the registration

requirements of the U.S. Securities Act and any other applicable U.S. state securities laws.

• This presentation may not be copied, distributed, disclosed or used without NZDMO’s express written consent.