NZ: Kiwi fiscal books shine again – TDS

In view of the research team at TDS, New Zealand’s newly minted Finance Minister Steven Joyce has delivered a credible string of fiscal surpluses via realistic revenue assumptions and conservative spending plans.

Key Quotes

“The NZGB issuance program is little changed; a new nominal April 2029 to be issued later this year.”

“Tax cuts and a bigger infrastructure package barely lowered fiscal surpluses across the forward estimates. With such a confluence of positive fundamentals NZGBs remain attractive, although shrinking liquidity may become an issue over the medium-term.”

“This budget may be uncontroversial and conservative, but a string of fiscal surpluses through ongoing spending restraint earns a credit outlook upgrade to AA/positive from both S&P and Fitch in our view.”

“Highlights

• The 2016/17 fiscal surplus is much higher than the December estimate of +$NZ473m, now $NZ1.6b, or +0.6% of GDP. The higher terms of trade and therefore higher nominal GDP growth was a contributor to the better bottom line.
• Healthy fiscal surpluses are expected to resume thereafter, through to +$NZ7.1b (or +2.2% of GDP) by mid-2021. Net debt peaked years ago, and is expected to be 19.3% of GDP by mid-2021.
• While debt levels are higher than Australia per se, the lack of appetite for reform in Australia has seen the debt ratio gap narrow substantially as New Zealand's debt levels fall and Australia’s continue to be revised up.
• There are the usual caveats that GDP growth may not be as strong as that assumed by Treasury. We see the $NZ11b infrastructure build including tourism and film helping New Zealand broaden its sources of growth, relying less on consumption and the vagaries of the commodity price cycle.”

“Economic projections: growth a tad optimistic

Treasury forecasts above-trend GDP growth of 3.5% and 3.8% in June years 2018 and 2019 respectively, before ‘easing’ to 2.9% by mid-2020. TD is closer to 3% by mid- 2019. The inflation outlook looks low, not expecting a return to mid-target 2% until mid-2019. 90d bank bills are assumed to yield a steady 2% throughout 2018 before jumping to 2.7% by mid-2019. We see upside to this scenario, but it won’t materialise until the RBNZ brings forward its OCR hikes.”

“For the markets: the ‘big picture’ remains unchanged, with the National Party’s commitment to lowering debt remaining unchanged even in pre-election mode. Low NZGB issuance and a strong domestic economy remains a favourable combination for holding NZGBs, even without a credit outlook upgrade, and strong fiscal books puts a solid floor under the NZD.”

“For the RBNZ: this as-expected budget is neutral for monetary policy as many of the sweeteners are either fully funded or not slated to be delivered until well after the election. We see Governor Wheeler remaining in wait and see mode until his retirement in September.”