Bond investors put little risk premium on election
Spending promises are flying fast and furiously in the final weeks of New Zealand election campaigning, raising questions about the debt funding that may be needed to bankroll it all but investors in the nation's sovereign bonds are taking it in their stride.
The latest 1 News Colmar Brunton poll puts Labour ahead of National for the first time in more than a decade. This week the Labour Party said that based on the Treasury's pre-election fiscal projections it would run smaller operating surpluses over the next five years and take on more debt to pay for extra spending if elected on September 23.
In the first national debate between Labour Party leader Jacinda Ardern and National Party leader Bill English last night, Ms Ardern stuck to her guns. "We do have a slightly slower debt track than the government. We'll get to the goal of 20% of GDP two years after National is predicting," she said. National, for its part, has pledged new spending including on health and education among others but said it will have little impact on existing fiscal forecasts.
New Zealand 10-year government bonds, which have a coupon of 4.5%, are yielding 2.895%, down from 3.32% at the start of the year, according to Reuters data. The spread between New Zealand 10-year government bonds and the 10-year US treasury bond has narrowed sharply to near 89 basis points today from about 300 basis points in late 2008 when the global financial crisis was unfolding.
Ben Alexander, a principal at Sydney-based Ardea Investment Management, said any increase in debt issuances should be seen as a net positive if the additional spending is on investment activities that add to the productive capacity of the New Zealand economy.
However, if the additional spending was allocated to current expenditure on government services, this would do little to boost future gross domestic product growth and "the ratings agencies would be right to call into question the sustainability of such an expenditure programme."
The Debt Management Office has forecast total gross bond issuance to increase by $35 billion between June 2017 and June 2021. There is about $74.4 billion of government debt on issue but the number falls to $66.1 billion by 2021 due to maturities and repurchases. As a%age of gross domestic product, bond issuance was at 27.7% in the year to June and is seen easing to 20.5% by the year to June 2021.
Westpac Banking Corp senior strategist Imre Speizer said any uplift in bond sales "would have to be a big increase to upset the ratings agencies." He noted New Zealand's ratio of government debt to GDP is among the lowest in the world. Any increased issuance would likely steepen the curve, however, with interest rates pushing higher at the long end.
For his part, Matthew Circosta, a sovereign analyst for Moody's Investors Services, was upbeat about the potential for more government spending.
"The government's efforts over many years to preserve strong public finances provides it ample room to pursue an expansionary fiscal policy to buffer the economy from any potential future shocks. If the pace of debt reduction is slower than we forecast, New Zealand's gross government debt will remain much lower than the median for Aaa-rated sovereigns," he said.
Fergus McDonald, Nikko Asset Management 's New Zealand head of bonds and currency, said the market is well placed to absorb any further issuance.
"There is a steady demand for New Zealand government bonds and larger issuance shouldn't have an impact on interest rates so long as the borrowing is seen as for productive purposes that will enhance the New Zealand economy over the medium to long term in areas such as infrastructure/ hospitals/schools etc," he said.
He said any borrowing for consumption or "vote-grabbing initiatives" could lead to higher rates as the central bank will view it as increased fiscal stimulus.
Overall, he agreed New Zealand is in a "fortunate position" compared to many countries around the world in that with low levels of net government debt and surpluses forecast for the years ahead. "This means whoever forms the next government, will have plenty of financial flexibility to implement their agenda," Mr McDonald said.