NZDMO forecasts larger funding programme following mid-year budget update
- Tuesday, 15 December 2015
A slower-than-expected improvement in New Zealand government finances revealed at the half-year fiscal and economic update (HYFEO) on December 15 leads the New Zealand Debt Management Office to forecast a somewhat larger funding task from next year. But analysts say the government's willingness to run larger deficits rather than seeking to cut spending is a sign of confidence rather than weakness.
The NZDMO's gross issuance task for the 2015/16 fiscal year is NZ$8 billion (US$5.4 billion) – the same as was forecast at the national budget in mid-2015. However, the projected funding requirement for the next three years has been revised to an annual NZ$9 billion (see table below), from NZ$7 billion six months previously. The NZDMO adds a further out year, 2019/20, also with a NZ$9 billion expected gross issuance task.
NZDMO issuance forecast, HYFEO 2015 (NZ$bn)
| 2015/16 | 2016/17 | 2017/18 | 2018/19 | 2019/20 | |
| Gross bond issuance | 8.0 | 9.0 | 9.0 | 9.0 | 9.0 |
| Repayment of market bonds | 1.2 | 0 | 11.3 | 11.5 | 7.4 |
| Net bond issuance | 6.8 | 9.0 | (2.3) | (2.5) | 1.6 |
Source: New Zealand Debt Management Office December 15 2015
An ASB Bank economics report following the HYFEO argues that "the New Zealand government books look healthy" notwithstanding the fact that "the combo of low inflation and less tax revenue mean their improvement is slower than previously forecast".
As a consequence, ASB Bank's economists view the government's decision to meet the shortfall through new bond issuance as "a sign of confidence", commenting that "we expect the market will readily absorb the added stock".
Stephen Toplis, head of research at BNZ in Wellington, agrees that flexibility is the most appropriate response to changing conditions. He writes: "Importantly, the government has displayed a wise degree of flexibility in not blindly pursuing its stated fiscal targets. Instead it has acknowledged the unusual operating environment that it is enmeshed in and has avoided the temptation to achieve a surplus at all costs – namely by tightening fiscal policy."
Toplis points out that the level of forecast government deficit for 2015/16 – 0.2 per cent – is "balance of error stuff" and that the administration remains "determined to grow future surpluses with very high conviction".
An ANZ report highlights the fact that the New Zealand government has committed a further NZ$1 billion to its capital expenditure programme as a sign of its willingness to maintain a consistent strategy despite the revenue undershoot. This supports the view that the government remains committed "to using its balance sheet effectively and getting better value for money".
Michael Gordon, senior economist at Westpac Institutional Bank in Auckland, is somewhat less confident that New Zealand government bond spreads will be unaffected by the larger programme.
"The reduction in the Treasury's revenue forecasts, and the consequent increase in the bond programme, was greater than we expected, which suggests upward pressure on bond yields," Gordon writes. "Market pricing has not moved as yet, which may reflect the fact that the current-year bond programme is unchanged."
The NZDMO's bond-issuance strategy for the balance of 2015/16 includes the introduction of a new 2025 nominal bond via syndication, subject to market conditions, and the expectation of at least NZ$1.1 billion of inflation-linked issuance.
