1© The Treasury

OUTLOOK FORTHE NEW ZEALANDGOVERNMENTDEBT MARKET

22

TODAY

• Economic outlook

• New Zealand Government: risk/reward

• Fiscal priorities

• NZDMO’s strategy

• What to watch for…

33

1. ECONOMIC OUTLOOK

4

STRONG ECONOMIC GROWTH

Source: Statistics NZ, Treasury

Production-based GDP

-3

-2

-1

0

1

2

3

4

5

6

7

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Annual average % change

Forecast

5

RECORD HIGH MIGRATION…

Source: Statistics NZ, Treasury

Net inward migration

-20

0

20

40

60

80

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Half Year Update Statistics New Zealand

Annual total (000s)

Forecast Assumption

6

… DRIVING CONSUMER SPENDING…

Source: Statistics NZ, Treasury

Private consumption

-2

-1

0

1

2

3

4

5

6

7

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Annual average % change

Forecast

7

… AND HOUSING CONSTRUCTION

Source: Statistics NZ, Treasury

Residential consents and construction

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

All new dwelling consents (LHS) Residential investment (RHS)

12-month moving sum

Forecast

$millions 2009/10 prices

8

EXPORT OUTLOOK ALSO POSITIVE

Source: Statistics NZ, Treasury

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

0

1000

2000

3000

4000

5000

6000

7000

8000

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Half Year Update services exports Half Year Update TWI (RHS)

$millions

Forecast

Index

800

900

1000

1100

1200

1300

1400

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

ForecastForecast

Quarterly

Index

Quarterly

Index

Services exports and exchange rate Goods terms of trade

9

LABOUR SUPPLY MATCHING DEMAND

Source: Statistics NZ, Treasury

Unemployment and labour force participation rate

64

65

66

67

68

69

70

710.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Unemployment rate Labour force participation rate (RHS, inverted)

%

Forecast

%

10

INFLATION TO RETURN TO MIDDLE OF BAND

Source: Statistics NZ, Treasury

CPI inflation

-4

-2

0

2

4

6

8

Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18 Jun-21

Quarterly

Headline inflation Tradables inflation Non-tradables inflation

Annual % change

Forecast

1111

2. NEW ZEALAND GOVERNMENT: RISK/REWARD

12

SOLID CREDIT RATINGS

Moody’s

Aaa/Aaa (stable)

Standard & Poor’s

AA+/AA (stable)

Fitch

AA+/AA (stable)

“New Zealand’s Aaa rating is based on the

country’s very high economic strength, very high

institutional and fiscal strength and low

susceptibility to event risk.” 22 Dec 2016

“New Zealand has monetary and fiscal flexibility, a

resilient economy, and institutions conducive to

swift and decisive policy actions.” 19 Jan 2017

“New Zealand’s ‘AA’ rating reflects the country’s

strong macroeconomic policy framework and

prudent fiscal management, reinforced by

governance standards and a business

environment that are rated among the best

globally by the World Bank.” 13 Mar 2017

Source: Moody’s Investor Service, Standard and Poor’s, Fitch Ratings – latest credit assessment

1313

STABLE POLITICAL AND

INSTITUTIONAL BACKDROP

Source: World Bank, Bloomberg, Moody’s Investor Service, Standard and Poor’s, Fitch Ratings

70

80

90

100Control of Corruption

Government Effectiveness

Political Stability and Absenceof Violence/Terrorism

Regulatory Quality

Rule of Law

Voice and Accountability

New Zealand Sovereigns rated AA/Aa2 and higher (average)

Worldwide Governance Indicators – World Bank (percentile rank)

1414

Gross Sovereign Debt to GDP

Source: Bloomberg

STRONG BALANCE SHEET

0 50 100 150 200 250

JapanGreece

ItalyPortugalBelgium

SpainCanadaFrance

United KingdomAustria

SloveniaIreland

HungaryUnited States

GermanyFinland

NetherlandsIsrael

IcelandSloval Republic

MexicoAustralia

KoreaPoland

SwedenCzech Republic

DenmarkLatvia

SwitzerlandNew Zealand

TurkeyNorway

LuxembourgChile

Estonia

% GDP

1515

10-year Nominal Bonds

Source: Bloomberg

ATTRACTIVE NOMINAL YIELDS

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017

Yield %

NZ Aus US Germany Japan Switzerland

1616

10-year Inflation-Indexed Bonds

Source: Bloomberg

ATTRACTIVE REAL YIELDS

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

NZ Australia US UK Germany Japan

Real yield Break-even inflation

%

1717Source: Bloomberg

GOVERNMENT BOND YIELD CURVES

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0 5 10 15 20 25

%

Term (years)

Nominal bonds Inflation-indexed bonds (real yield)

1818

3. FISCAL PRIORITIES: DEC 2016

1919

FISCAL PRIORITIES

• Previous fiscal priorities:

– Achieve operating surplus in 2014/15

– Reduce net government debt to below 20% of GDP by 2020

• Current fiscal priorities:

– Maintain rising operating surpluses

– Reduce net government debt to around 20% of GDP in 2020

– Reduce net debt to within a range of 0 per cent to 20% of

GDP in the long term

2020

Source: The Treasury

2014/15 SURPLUS ACHIEVED

-20

-15

-10

-5

0

5

10

2009 2011 2013 2015 2017 2019 2021

NZD billion

Operating Balance (ex gains and losses)

Forecast

"The Government has set out a

clear plan for the next three years, which involves returning tobudget surplus in 2014/15."

Budget Policy Statement, 16 February 2012

2121

OUTLOOK FOR NET DEBT

Source: The Treasury

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10

20

30

40

50

60

70

80

90

100

2009 2011 2013 2015 2017 2019 2021

NZD billion

Net Core Crown Debt % Nominal GDP (RHS)

Forecast

% GDP

2222

Source: The Treasury

STOCK AND FLOWS:

3-4 TIMES PRE-GFC

0

10

20

30

40

50

60

70

80

90

0

2

4

6

8

10

12

14

16

18

20

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

NZD billionNZD billion

Annual bond issuance Total bonds oustanding (RHS)

Forecast

23

4. NZDMO’S STRATEGY

2424

FUNDING STRATEGY

• Balance Sheet Management approach

– Extend duration of the debt portfolio

– Reduce overall fiscal variability

– Reduce refinancing risk

– The role of Inflation-indexed bonds

• Build and maintain liquidity

– Diversify investor base

– Encourage intermediary participation

• Focus on domestic market issuance

2525

AVERAGE DURATION EXTENDED

Source: The Treasury

0

1

2

3

4

5

6

7

8

Mar-2012 Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017

Years to maturity

2626

PORTFOLIO COMPOSITION REDUCES FISCAL

VARIABILITY, REFINANCING RISK

82%

16%

2%

October 2012

76%

5%

19%

March 2017

Source: The Treasury

2727

INFLATION-INDEXED BONDS -

OVERVIEW

Source: The Treasury

Instrument New Zealand Government

Inflation-Indexed Bonds

Total outstanding $14.6 billion

% of total bond portfolio 17.8%

Maturities Sep-25, Sep-30, Sep-35, Sep-40

Currency NZD

Domestic Currency Rating AA+/Aaa/AA+ (all stable)

Linked to Consumers Price Index (CPI),

with no floor in place

Primary Issuance Issued in multiples of $1m via

syndication and tender

Fees and Taxation No fees, AIL or NRWT applies to

coupon payments*

2828

INFLATION-INDEXED BONDS -

STRATEGY

• Role of inflation-indexed bonds in the portfolio

– Extend and maintain duration of the debt portfolio

– Diversify the investor base

– Reduce overall fiscal variability through the cycle

• Issuance strategy

– Focus issuance in longest maturity

– Syndicated launch, blackout period, regular tenders

– Maintain capacity below $6 billion technical limit

2929

INFLATION-INDEXED BONDS –

ISSUING THROUGH THE CYCLE

Source: The Treasury

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2013 2014 2014 2015 2015 2016 2016

Outstanding IIBs 10yr break-even inflation Mid-point of OCR band $M%

3030

Source: The Treasury

MARCH 2013: LIMITED CAPACITY ACROSS

MATURITIES

10.010.7

1.2

11.3 11.511.1

8.6

2.01.3

0.7 0.50.9

3.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2013 2015 2016 2017 2019 2021 2023

Outstanding - Nominal Outstanding - IIB Available capacity

NZD billion

3131

Source: The Treasury

MARCH 2017: ISSUANCE CAPACITY ACROSS

MATURITIES

7.062

11.455

7.290

11.059

8.945

2.850

5.700

3.2502.450

5.200

4.2003.700

1.500

0.545

4.710

0.941

3.055

9.150

0.800

6.300

1.800

8.750

2.300

9.550

4.500

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Dec 17 Mar 19 Apr 20 May 21 Apr 23 Apr 25 Sep 25 Apr 27 Sep 30 Apr 33 Sep 35 Apr 37 Sep 40

Outstanding - Nominal Outstanding - IIB Available capacity

NZD billion

Nom

3232

SUPPORTING PRIMARY AND SECONDARY

MARKET LIQUIDITY

• Quarterly tender schedule announcements include fixed amounts and specific maturities

• New bonds launched via syndication

• Tender issuance into benchmark lines

• Focus on domestic market

• Manage cash flows around upcoming bond maturities

• Broadly match Australian Commonwealth Government bond maturities

3333

ENCOURAGE INTERMEDIARY PARTICIPATION

• Investors need an efficient, reliable secondary market

• Intermediaries make the secondary market

• Efficient, well-functioning market benefits all

participants

• NZDMO’s actions are intended to support efficient,

sustainable functioning of both primary and secondary

markets

• NZDMO supports intermediaries who consistently

support secondary market liquidity

3434

Source: RBNZ

CONSISTENT INCREASE IN OFFSHORE AND

DOMESTIC DEMAND

0

10

20

30

40

50

60

70

80

90

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2001 2003 2005 2007 2009 2011 2013 2015 2017

Estimated overseas holdings Estimated domestic holdings Proportion held for non-residents (RHS)

NZD million %

3535

OFFSHORE DEMAND

– Central bank mandates

– Demand from duration players

– New investors in inflation indexed bonds

DOMESTIC DEMAND

– Prudential requirements drive domestic bank

balance sheet demand

– KiwiSaver

3636

5. WHAT TO WATCH FOR…

3737

• Latest forecasts:

Half Year Economic & Fiscal Update– Updated bond programme for 2016/17

– New Sep 2040 announced (subsequently launched)

– Forecast bond programmes to 2020/21

• Budget set for 25 May 2017

• General election set for 23 Sep 2017

• Ongoing communications:– Economic and Fiscal Updates: Budget (May), Half-Year(Dec) and Pre-Election

– Quarterly bond tender schedule released near the end of March, June, September, December

– Updates related to syndication of new bonds

– Media Statement distribution list for key communications – email info@nzdmo.govt.nz