Budget 2009: NZ Govt bond sales to soar 55% as deficits balloon

New Zealand will increase its bond sales by 55% this year as the shrinking economy erodes tax revenue, forcing the government to fund its operations via debt.

Thursday, May 28th 2009, 3:36PM

by Jonathan Underhill

The New Zealand Debt Management Office will sell up to $8.5 billion of bonds this financial year, up from $5.5 billion the previous year, with a further $11.5 billion forecast next year, and $15 billion in each of the following two years.

The DMO's weekly sales will rise to between $150 million and $200 million per week, up from a $75 million average in previous years.

The government stressed the importance of controlling debt in today's budget, and the Treasury estimates both net and gross debt will peak in the June 2017 year.

"One of the benefits of our low debt levels is it gives us time to make considered decisions" in addressing the global economic downturn, said Finance Minister Bill English to a press conference. "Inevitably, an increase in public debt will have some crowding-out affect on private sector activity."

Government borrowing has increased around the world as policymakers look to raise funds in the face of tightening credit markets and the collapse of financial markets. The U.S. government sold US$35 billion worth of Treasuries today, which pushed up ten-year bond yields.

The New Zealand government said it will keep net debt under 40% of gross domestic product by deferring the second and third tranches of planned tax cuts indefinitely and suspending payments into the New Zealand Superannuation Fund until the operating balance excluding gains and losses returns to surpluses. English said they want to bring net debt to around 30% by "no later than the early 2020s".

The government stated its long-term debt objective in net debt as opposed to gross debt as it believes the indicator is "more accurate and transparent" by taking a wider view of the government's balance sheet and accounting for Debt Management Office assets and central bank settlement cash.

English told the Parliament the "budget will ensure New Zealand retains one of he lowest debt levels, and one of the strongest balance sheets, in the OECD," said Finance Minister Bill English in his address to Parliament.

The country's debt levels became a concern in January when Standard & Poor's put the nation's AA+ foreign currency rating on a negative outlook, giving a one-in-three chance of being downgraded, as the current account deficit ballooned to 8.9% of GDP in the last three months of 2008.

Prime Minister John Key and English have reiterated their confidence that the budget will allay the ratings agency's concerns, and avoid a downgrade to the rating. S&P has already been briefed on the budget by English, and is expected to make an announcement on New Zealand's status today.

The government announced it would issue bonds maturing in May 2021 earlier this year, and, to date, has sold $300 million worth of the securities. It expects this level to grow to around $6 billion, by which time it will become the benchmark bond for the nation.

The Treasury, in its economic and fiscal update, said the majority of the government's borrowing "will be met through the issuance of bonds in the New Zealand domestic market." While issuance in off-shore markets is still an option, any borrowing in foreign currencies would rely on the relative cost compared to a New Zealand dollar-denominated issuance, it said.

Tags: Budget