Govt debt front-loading 'over,' although DMO quietly borrows NZ$700m as foreign investors flock to NZ amid global crises

By Alex Tarrant

The rest of the world just loves New Zealand government debt it seems, and Treasury's Debt Management Office has quietly auctioned off NZ$700 million of it over the last week.

As sovereign debt crises in Europe and the US have captured the world's attention, investors have been turning their attention down-under in search of countries and assets perhaps a little more stable than the traditional havens of the US dollar and the euro. 

Something New Zealand does have going for it right now is (whether you agree with it or not) an official track to budget surplus by 2014/15, a stable government (with polls indicating it may become even more stable after November 26), and low-levels of public debt compared to its peers in the Northern Hemisphere (although the government's willingness to bail out the private sector has raised some eyebrows).

So despite needing to borrow, on average, about NZ$100 million per week over the next few years in order to pay for government's spending committments (and you can see those in our Budget 2011 section here), Treasury has been out in the global markets soaking up demand for NZ government debt while investors are willing to buy it at low interest rates.

On July 29 and August 2, Treasury's Debt Management office auctioned off NZ$700 million in short and long-term debt.

The DMO auctioned off NZ$400 million in three tranches of Treasury Bills (which have maturities less than one year) on August 2, with NZ$601 million in bids for NZ$200 million of debt maturing on November 30. Demand for shorter-term debt had been falling off since the global financial crisis, while demand for longer-term debt has increased.

The DMO had auctioned off NZ$300 million worth of bonds on July 29, in four tranches out to 2023.

Front-loading over?

Having front-loaded its debt programme in the year to June 30 - borrowing more than it needed in case of a blowup in financial markets - the government has been saying the need for this has been diminishing as its borrowing requirements fall. It should also be remembered the DMO every so often has to roll over expiring debt, meaning a possible spike in issuance. Government bond issues with NZ$8.7 billion outstanding are due to mature on November 15 this year, with investors in the market (not the EQC or RBNZ) holding NZ$7.6 billion.

The government borrowed NZ$19.9 billion in the financial year to June 30 to cover what is likely to be a NZ$16 billion deficit before gains and losses for the year, down from earlier expectations of a NZ$16.7 billion deficit.

Budget documents show an expected deficit before gains and losses of NZ$9.7 billion in the current financial year to June 30, 2012, with an annual budget surplus reached in the 2014/15 year, which would allow the government to begin paying down debt wracked up during the economic downturn over the last three years. The NZDMO has said it expects to issue NZ$13.5 billion of government debt during the 2011/12 year. See it's domestic debt programme here.

'We know it puts pressure on the NZ$'

Today in Parliament before Question Time, Finance Minister Bill English said the government had carried out about as much front-loading as it thought appropriate.

"We’ve now dropped down to about NZ$100 million a week, on average, that we’ll be borrowing over the next few years. It was up at about NZ$370 million, we’re down to about a quarter of what we were," English told media before entering the House of Representatives, from which he was subsequently ejected.

"We’re going to see periodic bouts of crisis and confidence problems in the European and US markets for a number of years, but I think we should get used to that,” English said.

Questions over the debt issues over the last week were best directed to the Debt Management Office, but high levels of demand for our debt was an indication that New Zealand was seen as a “reasonably well organised economy with better prospects than most other developed countries. That’s why investment’s flowing this way."

“Now it’s got its disadvantages because it doesn’t help us with the exchange rate. The key to that is to get our debt down. We’ve got a plan to reduce debt, and we’ve got to stick to that plan," English said.