NZ: A stronger fiscal war-chest – ANZ

David Croy, Senior Rates Strategist at ANZ, suggests that all in all today’s HYEFU was fairly upbeat and will be taken well by the market, as one would expect given the underlying strength of the economy.

Key Quotes

“It showed stronger growth forecasts, slightly higher surpluses, lower net debt, and acknowledged the impact of the Kaikoura earthquake. But the new 2040 inflation-linked bond (“linker”) planned for next year might surprise some.”

“The Treasury now sees GDP growth of 3.6% and 3.5% respectively over 2017 and 2018 (up from 2.9% and 3.2% forecast in the May Budget). Tweaks to GDP forecasts further out were minor, with 2019 growth revised up from 2.8% to 2.9% and 2020 revised down 0.1% to 2.4%.”

“The Treasury’s analysis assumes that the net cost to the Crown of the Kaikoura earthquake will be $1bn (out of a total cost estimate of $2-3bn, with the remainder covered by insurances and existing Budget allocations).”

“Importantly, nominal GDP is assumed to be a cumulative $23.7bn higher than assumed in the Budget, courtesy of stronger nominal GDP year-to-date (i.e. a better starting point), stronger real GDP forecasts, and expected higher prices – CPI inflation is forecast to reach 2.0% in 2018 and hold steady thereafter. Collectively, these factors support the collective $1.1bn improvement in OBEGAL over the forecast period (compared to the Budget), despite absorbing a net $1bn hit from the Kaikoura earthquakes.”

“For markets, the “surprise” will be in the detail of the bond programme. Although most (including us) assumed the hit from the Kaikoura quake would lead to an upgrade in current year issuance (duly lifted from $7bn to $8bn), the surprise is that the slack will be taken up by planned syndication of a 20 September 2040 linker to be launched via syndication in calendar H1 2017. There was no change to the 2017/18 and 2018/19 bond programmes, but a $1bn reduction (from $7bn to $6bn) in 2019/20.”

“The fiscal impulse is expected to turn expansionary in 2016/17 and 2017/18, largely thanks to capital spending increases. The fiscal stance was contractionary to the tune of 0.4% of GDP over the 2015/16 year, but it becomes positive to the tune of 0.9% and 0.1% of GDP respectively over 2016/17 and 2017/18 respectively. Beyond that there is “payback”, neutralising the overall fiscal impulse over the next 5 years.”

“Risks to the outlook are assumed to be greater than in the Budget, and the HYEFU contains two scenarios. The first assumes slower trading partner growth (especially in China). In this scenario, growth, tax revenue and OBEGAL are all assumed to be lower. The second explores the inflationary impact capacity constraints may have on the economy – potentially leading to faster nominal growth, higher tax revenue and better surpluses.”