PRESS RELEASE

24 May 2012
For immediate release

New Zealand Budget Sticking to the Plan

As was expected, there was no change in the New Zealand government’s medium term goal of returning to a surplus by 2014/15. Furthermore, the government has re-affirmed its commitment to ensure net debt remains below its hard ceiling of 35% of GDP. Any new spending has been matched by a combination of saving and revenue initiatives. Risks to the outlook are around global growth and any further seismic activity in the Canterbury region, which could push reconstruction activity back further. The Treasury is assuming RBNZ rates will rise from early 2013, which is in line with our own view.

Facts
- The government projects the budget balances to be -$NZ8.4b (-4.1% of GDP) in 2011/12, -$NZ7.9b (-3.6% of GDP) in 2012/13. The budget is expected to return to surplus by 2014/15 of +$NZ197m (+0.1% of GDP).

- Net crown debt is expected to peak at 28.7% of GDP in 2013/14 and to fall thereafter.

- The government is forecasting GDP to grow by +1.6% in 2011/12, +2.6% in 2012/13, +3.4% in 2013/14.

- CPI inflation is expected to be +1.6% in 2011/12, +2.6% in 2012/13 and +2.5% in 2013/14.

- The unemployment rate is expected to fall to 5.7% by 2012/13 and 5.0% by 2014/15.

Implications
Given the increased concerns about sovereign balance health due to the European debt situation, the New Zealand government has re-affirmed its commitment to returning the budget back into the black by 2014/15, as well as ensuring that net debt does not exceed 35% of GDP. To emphasis this point, the government went further and has amended its long term fiscal objective to ensure that net debt is brought back to a level, no higher than 20% of GDP by 2020.

Following the release of the budget, Standard & Poor’s (S&P), which cut New Zealand’s sovereign rating to AA in September, has announced that the rating would hold as long as the government continues to work towards a surplus.

The 2011/12 budget deficit decreased from the -$NZ12.1b forecast previously to -$NZ8.4b in the current budget because of delays in expenditures related to the costs of the earthquake which will be pushed into the following year (2012/13), raising the expected deficit that year from -$NZ4.4b to -$NZ7.9b. It is expected that earthquake expenses will continue to affect the deficit over the next few years, as costs related to the repair of infrastructure and restoration of the Christchurch CBD are finalised.

As previously flagged, the government plans to sell minority stakes in four state owned energy companies as well as reducing its holding in Air New Zealand. It expects to receive around $NZ5b to $NZ7b from this initiative. The proceeds are expected to be placed in a newly established Future Investment Fund which will re-invest the money into other public assets such as schools and hospitals.

The assets sales as well as $NZ3b of identified savings and some increases in excise taxation will limit the amount of new borrowing the government will have to undertake. Net debt is expected to rise to a peak of 28.7% of GDP before edging lower thereafter. The New Zealand Debt Management Office expects to receive around $NZ51.5b from the issue of government bonds across the five year forecast period with a face value of $NZ49.5b.

The government is forecasting the economy to grow by +1.6% in 2011/12, +2.6% in 2012/13 and +2.5% in 2013/14, with the rebuilding of Christchurch a key driver of overall domestic activity and is anticipated to contribute around 1ppt to annual growth in each year from 2012 to 2016.

The government assumes that the cash rate will start to rise from early 2013 as demand starts to accelerate as the rebuilding picks up from the second half of 2012. This is similar to our own view on RBNZ rates, and quite different to market pricing which currently suggests cuts over the next year.

Bottom Line
The government has reaffirmed its commitment to returning to a budget surplus by 2014/15.

Re-prioritising of spending and asset sales have helped to keep the planned peak in net debt under 35% which is a clear positive for the sovereign outlook. S&P have left the ratings unchanged subsequent to the budget release.

URL to report: https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=Ps1HmGYdzJGa6nHb-r7h2Dn&key=0nx80jmEIr&n=331225.PDF

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