ANZ says the govt is likely to increase planned debt sales in PREFU to cover NZ$4 bln EQC blowout

The government may increase its planned borrowing programmes for both the current and next financial year in its pre-election economic and fiscal update (PREFU) to cover the NZ$4 billion Earthquake Commission (EQC) cost blowout and slower economic growth, says ANZ.

In their latest monthly credit focus report ANZ's senior interest rate strategist David Croy and senior credit strategist Kerry Duce suggest the New Zealand Debt Management Office (NZDMO), the government's debt manager, may see its 2011/12 bond programme increased to help cover the NZ$4 billion hike to the EQC's estimated liability from the Christchurch earthquakes. Announced in late August, this takes EQC's total estimated liability to NZ$7.1 billion.

Croy and Duce suggest the EQC blowout could also see next year's NZDMO programme increased. After issuing NZ$20 billion worth of bonds in the 2010/11 year, the NZDMO currently intends to issue up to NZ$13.5 billion in the 2011/12 year and NZ$12 billion in the 2012/13 year.

"It is likely that the funding requirement will need to be increased at the PREFU, reflecting EQC cost increases and slower growth," Croy and Duce say.

They note, however, that because the EQC blowout was announced at the end of August, this should already be priced into the market.

During September the NZDMO sold NZ$2.175 billion worth of bonds, its biggest monthly total since April. September saw a record equaling NZ$1 billion tender. Overall bid cover fell to 1.7 times in September, which is the lowest level since ANZ started tracking the data in January 2009.

Nonetheless, Croy and Duce expect a "core of support" for New Zealand government bonds from both domestic and international investors now that the threat of a sovereign credit rating isn't hanging over the market and because the New Zealand dollar has recently dropped in value. Both Standard & Poor's and Fitch Ratings recently downgraded New Zealand's sovereign credit rating to AA from AA+. In the NZDMO's first bond tender after the downgrade, bond yields rose 13 basis points.

The NZDMO's next bond tender, set for tomorrow, is aiming to raise NZ$225 million.

The PREFU will also be watched closely for any downgrade to Treasury's gross domestic product (GDP) forecasts. The last official figure, for the June quarter had GDP up just 0.1% from the March quarter, compared with economists expectations for 0.5% growth. In May's budget Treasury forecast 1.8% growth in the year to March 2012, and 4% growth in the year ending March 2013.

However, since then the European sovereign debt crisis has ratcheted up, the US economy has remained mired in weakness, and the domestic economy has remained stubbornly soft.

The PREFU is due to be released on October 25, ahead of the November 26 election.