Treasury office keeps NZ afloat

BY JAMES WEIR

Philip Combes is in charge of keeping the government finances afloat, and he needs to raise about $250 million a week to do it.

Mr Combes, the Treasury's Debt Management Office treasurer, and about 30 other people look after the government borrowing programme, with a target of raising about $10.5 billion this financial year.

"We borrow the money the Crown needs to bridge the gap between revenue and expenditure – $250m a week," Mr Combes said.

The DMO issues long-term bonds for up to 10 years and Treasury bills, usually for three months and six months.

Mr Combes and a skeleton crew of seven worked through the Christmas and New Year break in preparation for the next bond issue on January 7.

The DMO also handles billions in foreign currency trading for government departments such as Defence and Foreign Affairs and the New Zealand Superannuation Fund.

Like many governments, New Zealand's has been borrowing much more since the global financial crisis than in the past.

In the past six months the Government has borrowed almost $7b through bond issues, compared with two years ago when it borrowed just $2b for the full year.

"We have had to increase the bond programme significantly and that's involved more offshore marketing. Most of the bonds are ultimately bought by foreign investors."

Foreign investors are attracted by high interest rates, the potential for currency gains on the New Zealand dollar and a strong AAA credit rating for a country that has come through the global financial crisis better than many.

So far, the DMO is well ahead of target on raising money and has plenty of cash in hand – about $4b – to pay the Government's bills.

Investors bid for the bonds on the basis of interest rates they are willing to pay, with 15 registered banks acting as the middlemen. The lower the interest rate that investors are willing to accept, the better for the government's borrowing costs.

For example, some investors may bid for 10-year bonds at an interest rate of 6 per cent, while others want 6.01 per cent and so on.

When the DMO has enough bids to fill the tender for that week, it cuts off at that level. Those who wanted too high an interest rate could miss out.

"The lowest wins and so on, up in order," Mr Combes said.

The DMO pays the money back when bonds mature but over the life of the bonds, investors can buy and sell the bonds between themselves.

The competition between governments to borrow internationally has been intense since the global financial crisis in late 2008 and Mr Combes and his team have had to take several trips to keep New Zealand in front of investors.

The DMO and Finance Minister Bill English had two world trips last year, including stops in Tokyo, Hong Kong, London and New York.

The office presented New Zealand's case to investors, as part of the wider Asian region which should benefit from stronger economic growth and rising demand for commodities such as dairy products.

"That has gone down very well. Internationally, the perception of New Zealand relative to many other places is a good one."

The attraction for international investment funds is high interest rates for New Zealand bonds – about 6 per cent for 10 years, slightly higher than for Australian bonds. Britain, Germany and United States bonds offer less than 4 per cent.

For Japanese bonds the return is just 1.3 per cent. So the New Zealand interest rates are attractive for Japanese investors, who hold up to 20 per cent of New Zealand's bonds.

About 70 per cent of the bonds are held by foreign investment funds such as pension funds, government investment funds or central banks. The balance is held in New Zealand by big fund managers such as AMP and others.

Foreign investors are also investing in the kiwi through the bonds. "That's where we have had a good run lately, the New Zealand dollar has been pretty strong," Mr Combes said.

In March last year, the kiwi was just under US50c and peaked in the mid-US70c range. It traded around US72c this week.

Investors tend to take a longer-term view on the currency and Mr Combes said he was confident there would not be a big bailout of bonds if the kiwi fell in the next few months.

If the kiwi were to fall, demand for New Zealand bonds may ease, which was one reason the DMO tried to raise more than the total it needed to over the financial year.

"If people started selling our bonds, our response would be to ease back on [new] supply," Mr Combes said.

"Otherwise, you push your yields up", which would mean the Government would end up paying higher interest rates to borrow overseas.

New Zealand's credit rating from Moody's is relatively strong at AAA, one of only about 20 countries with such a strong rating.

Some countries have had their ratings downgraded since the financial crisis – Ireland has lost its AAA rating – so New Zealand's relative position has improved.

The country is also attractive because government debt is much lower than other countries'.

The economy is returning to modest growth after a milder recession than other states.

- © Fairfax NZ News