#1THE TREASURY Kaitohutohu Kaupapa Rawa New Zealand Government Debt Market Outlook February 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 6 4 2 0 -2 -4 2000 Real GDP (Production measure) 3 2.5 2 1.5 1 0.5 Forecast -0.5 -1 -1.5 2003 2006 2009 2012 2015 2018 2021 Quarterly Quarterly growth (RHS) - -Annual average % change Source: The Treasury, HYEFU 2017 4#5Net migration moderating Net inflow (000s) 80 60 60 40 20 -20 Jun-04 Jun-07 Source: The Treasury, HYEFU 2017 Jun-10 Jun-13 Annual average % change 4 Jun-16 3 2 1 Forecast 0 -1 Jun-19 Jun-22 -Annual permanent and long-term net migration -Working age population growth (RHS) 5 LO#6Housing construction picks up % of real expenditure GDP 8 7 6 5 4 Forecast 3 2000 2003 2006 2009 2012 2015 2018 2021 Real residential investment Source: The Treasury, HYEFU 2017 6#7Private consumption supported Annual average % change 8 6 4 2 Forecast 0 -2 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly -Real private consumption Source: The Treasury, HYEFU 2017 7#8Terms 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 8#9Labour market tightens Source: Bloomberg % of labour force 7 CO 6 LO 5 + 3 2 Mar 00 Mar 04 % of working-age population - inv 61 ZETO 22222 22 71 66 67 68 69 70 62 63 64 65 72 Mar 12 Mar 16 Mar 08 —NZ unemployment rate -NZ participation rate (rh) 9#10Gradual rise in inflation 9 % 7 5 3 Ma Annual % change 6 Forecast 4.5 1 2000 2003 2006 2009 2012 2015 2018 2021 Quarterly Source: The Treasury, HYEFU 2017 -90-day interest rate CPI inflation (RHS) 1.5 10#11Fiscal Priorities#12Budget 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#13Operating surpluses sustained NZ$b 15 10 5 -5 Forecast -10 -15 -20 -25 2008 2010 2012 2014 2016 2018 2020 Year ending 30 June 2022 Source: The Treasury, HYEFU 2017 -OBEGAL (Operating Balance Excluding Gains and Losses) 13#14Capital spending impacts residual cash NZ$b 15 10 5 0 Forecast -5 -10 -15 2017 2018 2019 2020 2021 2022 Year ending 30 June Operating Capital -Residual cash Source: The Treasury, HYEFU 2017 14#15Net core Crown debt contained NZ$b 80 70 60 50 828232° 40 30 20 10 0 2008 2010 2012 Source: The Treasury, HYEFU 2017 2014 2016 Year ending 30 June % of GDP 35 Forecast 55 30 25 20 15 10 5 0 2018 2020 2022 Net core Crown debt -% of nominal GDP (RHS) 15#16Credibility in achieving forecasts Forecast Net Debt as % of GDP % of GDP 28 27 26 25 24 23 22 21 20 19 -May-14-Dec-14-May-15-Dec-15- -May-16 -Dec-16-May-17 18 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: The Treasury 16#17NZGBs maintained above 20% of GDP 0 Source: The Treasury's NZDMO NZ$b 25 25 20 15 10 5 וווייויו 1995 1996 1997 1998 1999 0007 2001 2001 2002 ZOOZ 30% I 25% 2003 2003 +002 2004 2005 С007 2006 2006 2007 2007 2008 לס 2009 2010 2011 LLOZ OLOZ 2012 לחול 2013 GLOZ 2014 2015 2016 OLOZ LOZ 2017 2018 2019 2020 2021 2022 Bond Programme ―NZGBS as % GDP 20% 15% 10% 5% 0% 17#18wizki New Zealand Government Bonds: Risk/Reward#19Solid 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 19#20Strong 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 -Sovereigns rated AA/Aa2 and higher (average) Source: World Bank Worldwide Governance Indicators 2016 Political Stability and Absence of Violence/Terrorism →New Zealand 20 20#21Strong 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 Source: CIA 2017 Estimate, Bloomberg 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 21 21#22Improvement in NIIP % of GDP % of GDP Net international investment position -50 4 Forecast -2 -4 20 ~ +6∞ -55 -60 -65 -70 Forecast -6 -75 -8 -80 -10 1996 1999 2002 2005 2008 2011 2014 2017 2020 -85 Quarterly 2007 2010 2013 2016 2019 2022 Current account Income balance (inc transfers) Goods balance -Services balance -Australia -New Zealand Source: The Treasury 22 22#23Attractive real yields Source: Bloomberg % 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 23#24NZDMO: Strategy and Announcements#25Funding 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 25#26Source: The Treasury's NZDMO 642 O 2001 Steady issuance profile NZ$b 20 18 16 14 12 10 00 8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Annual bond issuance - year ended June -Total bonds oustanding (RHS) 2016 2017 2018 2019 2020 2021 NZ$b Forecast 80 70 60 • IN WO 10 20 40 30 50 26#27Evolution of portfolio structure (1) From Early-2013 To Current NZ$b 12.0 10.0 8.0 6.0 4.0 2.0 0.0 NZ$b 12.0 10.0 8.0 6.0 4.0 40 2.0 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 0.0 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 Source: The Treasury's NZDMO 27 27#28Evolution of portfolio structure (II) From End-2012 Inflation-Indexed Bonds To End-2017 Inflation-Indexed Bonds Treasury Bills 2% 16% 82% Nominal Bonds Source: The Treasury's NZDMO Treasury Bills 5% 21% 74% Nominal Bonds 28#29Evolution of portfolio structure (III) Years 7.5 7.0 6.5 6.0 5.5 NZGB Portfolio - Average Years to Maturity 5.0 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Source: The Treasury's NZDMO 29#30Supporting 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 30#31Maintaining diverse investor base NZ$m 80000 70000 60000 50000 40000 30000 20000 10000 0 Source: Bloomberg, RBNZ % 90 Apr 94 Apr 97 Apr 00 Apr 03 Apr 06 Apr 09 Apr 12 Apr 15 Resident holdings of NZGBS (NZ$m) Non-resident holdings of NZGBs (NZ$m) -Non-resident holdings of NZGBS (%) (RH) 50 222322° 31#32Recent announcements Forecast Domestic Bond Programme - HYEFU, December 2017 Year ending 30 June (face value) 2018 2019 2020 2021 2022 Total Gross NZGB issuance ($ 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) NZGBs on issue (percent of GDP) 71.4 71.2 67.1 74.1 n/a 25.2% 23.7% 22.5% 20.2% 21.4% n/a Reiterated intention to syndicate NZGB 20 April 2029 before 30 June 2018 72.3 • • 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 32 32#33Coming up • Events Syndication of NZGB 20 April 2029 before 30 June 2018 Commence repurchases of NZGB 15 March 2019 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 33 33#34Disclaimer 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. 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