#1烤好 THE TREASURY Kaitohutohu Kaupapa Rawa New Zealand Government Debt Market Outlook March 2018 newzealand.govt.nz#2Overview New Zealand Economic Outlook New Zealand Government: Fiscal Priorities New Zealand Government Bonds: Risk/Reward NZDMO: Strategy and Announcements 2#3Economic Outlook#4Growth remains robust 8 00 Co 6 2 Real GDP (Production measure) 3 2.5 2 1.5 1 0 -2 -4 0.5 0 Forecast -0.5 -1 -1.5 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly Quarterly growth (RHS) -Annual average % change Source: The Treasury, HYEFU 2017 4#5Terms of trade elevated Index (2009/10=1000) 1400 1200 1000 800 Jun-04 Jun-07 Jun-10 Source: The Treasury, HYEFU 2017 Jun-13 Quarterly -Terms of trade Forecast Jun-16 Jun-19 Jun-22 5#6Net migration to moderate Net inflow (000s) 80 Annual average % change 000s per month (s.a.) 000s per month (s.a.) 4 12 12 10 10 60 3 8 8 40 22 2 6. Mu 6 4 4 20 1 2 2 Forecast 0 0 0 -2 -2 4 -4 -20 Jun-04 Jun-07 -1 95 97 99 01 03 05 07 09 11 13 15 17 - Jun-10 Jun-13 Jun-16 -Annual permanent and long-term net migration -Working age population growth (RHS) Jun-19 Jun-22 Net permanent & long-term migration Permanent & long-term arrivals Source: The Treasury, HYEFU 2017 Permanent & long-term departures 6#7Labour market tightening Source: Bloomberg % of labour force 7 6 5 4 3 2 Mar 00 Mar 04 % of working-age population - inv 61 62 63 64 65 66 67 68 69 70 71 72 Mar 12 Mar 16 Mar 08 ―NZ unemployment rate -NZ participation rate (rh) 7#8Gradual rise in inflation 9 % 7 5 3 Annual % change Forecast 6 4.5 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 8#9Inflation divergence Source: Statistics New Zealand Annual % change Annual % change 8 8 6 2 4 2 0 -2 0 -2 -4 -4 95 97 99 01 03 05 07 09 11 13 15 17 Tradable inflation - Non-tradable inflation 9#10Fiscal Priorities#11Budget 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 11#12Operating surpluses sustained NZ$b 15 10 5 0 -5 -10 -15 -20 -25 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: The Treasury, HYEFU 2017 Year ending 30 June ―OBEGAL (Operating Balance Excluding Gains and Losses) 2015 2017 2019 2021 Forecast 12#13Capital spending impacts residual cash NZ$b 15 Forecast 10 5 0 -5 -10 -15 2017 2018 2019 Source: The Treasury, HYEFU 2017 2020 2021 2022 Year ending 30 June Operating Capital -Residual cash 13#14Net core Crown debt contained NZ$b 80 50 Forecast % of GDP 35 70 60 50 40 GN NW 15 25 20 30 30 20 10 10 LO 5 10 0 2008 2010 2012 2014 2016 0 2018 2020 2022 Year ending 30 June Net core Crown debt -% of nominal GDP (RHS) Source: The Treasury, HYEFU 2017 14#15Credibility in achieving forecasts Source: The Treasury Forecast Net Debt as % of GDP % of GDP 28 22222222 27 26 25 24 23 -May-14-Dec-14-May-15-Dec-15-May-16-Dec-16-May-17 21 20 19 18 2013 2014 2015 2016 2017 2018 2019 2020 2021 15#16NZGBs maintained above 20% of GDP Source: The Treasury's NZDMO 0 5 10 1995 15 NZ$b 25 25 20 1996 1997 1998 1999 2000 2001 2002 Bond Programme 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -NZGBS as % GDP 2022 30% 25% 20% 15% 10% 5% do go 0% 16#17New Zealand Government Bonds: Risk/Reward#18Solid Credit Rating Moody's Aaa/Aaa (stable) Standard & Poor's AA+/AA (stable) Fitch AA+/AA (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 "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 "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 Source: Moody's Investor Service, Standard & Poor's, Fitch Ratings 18#19Strong institutions Worldwide Governance Indicators - World Bank (percentile rank) Control of Corruption 100 90 Voice and Accountability Government Effectiveness 80 Rule of Law 70 Regulatory Quality Political Stability and Absence of Violence/Terrorism Sovereigns rated AA/Aa2 and higher (average) →New Zealand Source: World Bank Worldwide Governance Indicators 2016 19#20Strong 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 Source: CIA 2017 Estimate, Bloomberg Spain Canada Belgium Portugal Italy Greece Japan 0 50 100 150 Public Debt as % of GDP* 200 *Public debt compares the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. 250 20#21Improvement in NIIP % of GDP 4 2 0 -2 -4 -6 -8 -10 1996 1999 2002 2005 Current account Goods balance Source: The Treasury % of GDP Net international investment position -50 Forecast -55 -60 -65 سية 2008 2011 2014 2017 2020 Quarterly -Income balance (inc transfers) Services balance -70 -75 -80 -85 Forecast 2013 2016 -New Zealand 2007 2010 -Australia 2019 2022 21 24#22Attractive real yields Source: Bloomberg % 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 UK Germ JP US AU 10Y Real Yields (IIB Yield) -10Y Inflation Breakevens NZ 22 22#23NZDMO: Strategy and Announcements#24Funding 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 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. Source: The Treasury's NZDMO 24#25Source: The Treasury's NZDMO Steady issuance profile NZ$b 20 18 16 14 12 10 8 6 4 20 2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -Total bonds oustanding (RHS) Annual bond issuance - year ended June NZ$b Forecast 80 60 50 10 20 40 30 • = N WON 70 2017 2018 2019 2020 2021 25#26Evolution of portfolio structure (I) NZ$b 12.0 10.0 8.0 6.0 4.0 2.0 0.0 From end-2012 Apr Apr Feb Dec Mar May Apr Apr Sep Apr Apr Sep Apr Sep Apr Sep 13 15 16 17 19 21 23 25 25 27 29 30 33 35 37 40 Outstanding - Nominal Outstanding - IIB Available capacity Source: The Treasury's NZDMO NZ$b 12.0 10.0 8.0 6.0 - 4.0 2.0 0.0 To Current 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 Outstanding - Nominal Outstanding - IIB Available capacity 26#27Evolution of portfolio structure (II) From End-2012 Inflation-Indexed Bonds To End-2017 Inflation-Indexed Bonds Treasury Bills 2% 16% Source: The Treasury's NZDMO Nominal Bonds 82% 21% Treasury Bills 5% 74% Nominal Bonds 27 22#28Evolution of portfolio structure (III) Source: The Treasury's NZDMO Years 7.5 7.0 6.5 6.0 5.5 ил NZGB Portfolio - Average Years to Maturity 5.0 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 28#29Supporting 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 29 29#30Maintaining diverse investor base Source: Bloomberg, RBNZ NZ$m 80000 70000 60000 50000 40000 30000 20000 10000 0 Apr 94 Apr 97 Apr 00 Apr 03 Apr 06 Apr 09 Apr 12 Apr 15 Resident holdings of NZGBS (NZ$m) Non-resident holdings of NZGBs (NZ$m) -Non-resident holdings of NZGBS (%) (RH) ו ז % 90 80 70 60 50 40 30 20 10 0 30#31Recent announcements Forecast Domestic Bond Programme – HYEFU, December 2017 Year ending 30 June (face value) 2018 2019 2020 2021 2022 Total Gross NZGB issuance ($ 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 • 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 Source: The Treasury's NZDMO 31#32Coming 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: [email protected] 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 32#33Disclaimer 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. 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