1© The Treasury

OUTLOOK FORTHE NEW ZEALANDGOVERNMENTDEBT MARKET

22

TODAY

• New Zealand Government: risk/reward

• Fiscal priorities

• NZDMO’s strategy

• What to watch for…

33

1. NEW ZEALAND GOVERNMENT: RISK/REWARD

4

SOLID CREDIT RATINGS

Moody’s

Aaa/Aaa (stable)

Standard & Poor’s

AA+/AA (stable)

Fitch

AA+/AA (stable)

“New Zealand’s Aaa rating is supported by the

sovereign’s very high economic resilience, very

strong policy institutions… and a strong fiscal

position compared to peers that provides high

shock absorption capacity.” 27 Mar 2017

“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

55

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)

66

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

77

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

Apr 2011 Apr 2012 Apr 2013 Apr 2014 Apr 2015 Apr 2016 Apr 2017

Yield %

NZ Aus US Germany Japan Switzerland

88

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

%

99Source: Bloomberg

GOVERNMENT BOND YIELD CURVES

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 5 10 15 20 25

%

Term (years)

Nominal bonds Inflation-indexed bonds (real yield)

1010

2. FISCAL PRIORITIES: DEC 2016

1111

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

1212

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

1313

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

14

3. NZDMO’S STRATEGY

1515

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

1616

AVERAGE DURATION EXTENDED

Source: The Treasury

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

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

Years to maturity

1717

PORTFOLIO COMPOSITION REDUCES FISCAL

VARIABILITY, REFINANCING RISK

82%

16%

2%

October 2012

76%

5%

19%

April 2017

Source: The Treasury

1818

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%

1919

Source: The Treasury

APRIL 2013: LIMITED CAPACITY ACROSS

MATURITIES

10.010.7

1.2

11.3 11.5 11.1

8.6

2.01.3

0.7 0.5 0.9

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

2020

Source: The Treasury

APRIL 2017: ISSUANCE CAPACITY ACROSS

MATURITIES

6.562

11.455

7.290

11.059

8.945

2.850

5.700

3.2502.600

5.200

4.2003.800

1.500

0.545

4.710

0.941

3.055

9.150

0.800

6.300

1.800

8.750

2.200

9.400

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

2121

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 issuance

• Manage cash flows around upcoming bond maturities

• Broadly match Australian Commonwealth Government bond maturities

2222

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

2323

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 %

2424

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

2525

4. WHAT TO WATCH FOR…

2626

• 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 (4-6

weeks prior to General 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