New Zealand Government Securities Overview 2024/25

New Zealand Government Securities#

New Zealand Government Securities are issued on behalf of the New Zealand Crown[1] by New Zealand Debt Management (NZDM), a directorate within the Treasury[2] (Te Tai Ōhanga). These securities provide investors with exposure to a strong fiscal and institutional framework, a diverse and robust economy, a sovereign credit rating in the top twenty globally, and a yield above many peers.

This overview is designed for new or potential investors in New Zealand Government Securities and provides insights into New Zealand’s:[3]

• Institutional Framework and Economic Structure
• Economic and Fiscal Performance
• New Zealand Government Securities Market

The overview also includes background information on participating in the New Zealand Government Securities Market.

Institutional framework and economic structure#

New Zealand is globally recognised for its robust institutional framework. This institutional strength is demonstrated through high rankings across each of the World Bank's Governance indicators, shown below.

Chart 1: Percentile ranking on key governance indicators

Source: World Bank Worldwide Governance Indicators - 2022

Form of Government#

New Zealand is a sovereign state with a democratic parliamentary government based on the Westminster system. Its constitutional history dates back to the signing of the Treaty of Waitangi in 1840, between the indigenous Māori people and the British Crown.

The New Zealand Constitution Act 1852 provided for the establishment of a Parliament with an elected House of Representatives. Universal suffrage was introduced in 1893. New Zealand has the British monarch as titular Head of State. The Sovereign is represented in New Zealand by the Governor-General, appointed by him on the advice of the New Zealand Government.

As in the United Kingdom, constitutional practice in New Zealand is an accumulation of convention, precedent and tradition. As such, there is no single document that can be termed the New Zealand constitution. The Constitution Act 1986 however, updated, clarified, and combined in one piece of legislation, the most important constitutional provisions that had been enacted in various statutes. It provides for a legislative body, an executive and administrative structure and specific protection for the judiciary.

Legislative power is vested in Parliament, a single chambered body titled the House of Representatives. The members are elected for three-year terms through general elections. Eligible residents over 18 years of age may vote in general elections.

The executive Government of New Zealand is carried out by the Executive Council - a formal body made up of the Cabinet and the Governor-General, who acts on the Cabinet's advice. The Cabinet itself consists of the Prime Minister and her/his Ministers, who must be chosen from among elected Members of Parliament. Each Minister supervises and is responsible for particular areas of government administration. Collectively, the Cabinet is responsible for all decisions of the Government.

The judicial system in New Zealand is based on the British model. By convention, and the Constitution Act 1986, the judiciary is independent from the executive.

Electoral system#

As a result of a referendum held in conjunction with the 1993 election, New Zealand changed from a “First-Past-the-Post” system of electing Members of Parliament to a “Mixed Member Proportional” (MMP) system of proportional representation. Under MMP each voter has two votes to cast – a party vote and an electorate vote. A party vote helps decide the share of the 120 seats[4] in Parliament that is allocated to each political party, while the electorate vote determines the local member of Parliament. This change was implemented in the 1996 election.

Economic structure#

New Zealand is a small open economy and operates on free market principles. A large services sector and sizable manufacturing sector complement an efficient export-oriented primary sector (Chart 2).

Chart 2: New Zealand exports by categories - year ended March 2024

Source: Stats NZ

New Zealand's land size is similar to Japan and the UK but with a resident population of only 5.3 million. The climate is temperate, supporting agriculture, forestry and horticulture. It has abundant natural resources and over 80% of electricity generation comes from renewables, including hydroelectric and geothermal power generation.

External trade is of fundamental importance to the New Zealand economy. Primary sector products, commodities, manufactured products and services are all important sources of export income. Tourism and education services remain the largest components of services exports, with New Zealand historically a popular destination for overseas visitors. Additional services exports include transport, financial and business services, and information technology. Raw materials, consumer goods and capital equipment for industry are key components of New Zealand’s imports.

New Zealand has had a freely floating exchange rate of its currency, the New Zealand Dollar (NZD), since March 1985. There are no exchange controls on foreign-exchange transactions undertaken in New Zealand, with the NZD one of the top fifteen traded currencies globally.[5]

Monetary Policy Framework#

The Reserve Bank of New Zealand (RBNZ) was established as a Central Bank in 1934 and is responsible for monetary policy and financial stability policy. The Reserve Bank of New Zealand Act 1989 cemented its independence and introduced inflation targeting.

The Reserve Bank of New Zealand Act 2021 (the Act) came into effect on 1 July 2022, replacing the previous RBNZ Act 1989.[6] The renewal of the Act has fundamentally changed how the RBNZ operates and is governed in the aspects below:

• The RBNZ are now overseen by an independently-appointed governing board responsible for all decision‑making (except decisions made by the Monetary Policy Committee). The Reserve Bank Governor is a member of the Board as well as Chief Executive.
• The Treasury now acts as the external monitor and RBNZ reports to the Treasury quarterly on the RBNZ's progress.
• The RBNZ's work must take account of the latest Financial Policy Remit issued by the Minister of Finance.

The focus of monetary policy is to maintain price stability. Monetary policy decisions are made by a committee - the Monetary Policy Committee (MPC). A remit is issued from the Minister of Finance to the MPC which sets out the specific operational objectives. The Charter sets out decision-making processes and transparency requirements for the MPC.

In December 2023, to reflect renewed focus on price stability, the Government passed the Reserve Bank of New Zealand (Economic Objective) Amendment Act 2023 and the remit was amended. The amended remit retains an inflation target of 1% to 3% over the medium-term, with a focus on the 2% mid-point. It removed the accompanying objective to support maximum sustainable employment. Alongside the new remit, the MPC also agreed to changes to the MPC’s Charter with the Minister of Finance.

In March 2020, the RBNZ implemented alternative monetary policy via a Large Scale Asset Purchase (LSAP) programme. The Government provided an indemnity to cover losses the RBNZ may incur, as a result of operating the LSAP programme set as a proportion of specific assets on issue. The assets covered by the indemnity are limited to nominal New Zealand Government Bonds (NZGBs), Inflation-Indexed NZGBs and Local Government Funding Agency (LGFA) bonds.

In July 2022, the RBNZ started selling NZGBs, purchased under the LSAP programme, back to NZDM at a rate of NZ$5 billion per fiscal year. The RBNZ and NZDM signed a memorandum of understanding on the operational details relating to the sales.[7] It is expected that all NZGBs purchased by the RBNZ under the LSAP programme will have matured or been sold back to NZDM by mid-2027.

Fiscal Policy Framework#

The Public Finance Act 1989 requires the New Zealand Government to be transparent in both its short- and long-term fiscal objectives and to maintain prudent debt levels.

The Public Finance Act stipulates the Treasury must publish economic and fiscal forecasts twice a year. These occur at the time of the mid-year Budget (Budget Economic and Fiscal Update – BEFU) and at the end of the calendar year (Half Year Economic and Fiscal Update – HYEFU). The Treasury must also provide a Pre‑election Economic and Fiscal Update (PREFU) prior to general elections, which occur at least every three years.[8] The forecasts extend for four years beyond the current fiscal year ie, “the forecast period”.

Without parliamentary authority, the Government has no authorisation to incur expenses and capital expenditure. An Appropriation Act is the means by which Parliament approves expenses and capital expenditure for the Government for the coming year.

This is supplemented by spending that is authorised under Permanent Legislative Authority which continues in effect until revoked by Parliament. The payment of interest on debt is an example of spending authorised under Permanent Legislative Authority.

Securities law#

The Financial Markets Authority Act 2011 established the Financial Markets Authority (FMA) as New Zealand's market conduct regulator. The FMA is an independent Crown Entity whose main objective is to promote and facilitate the development of fair, efficient and transparent financial markets. The FMA enforces financial markets legislation, including the Financial Markets Conduct (FMC) Act.

The FMC Act regulates the offering and trading of investments and the provision of certain financial services, the operation of securities and derivatives exchanges and trading behaviour on those exchanges. It also provides general prohibitions on misleading and deceptive conduct in financial markets. New Zealand Government Securities are “securities” for the purposes of the FMC Act.

Economic and fiscal performance#

Economic performance#

After a period of strong growth, the New Zealand economy is slowing. Higher interest rates, which were necessary to reduce inflationary pressures, have constrained demand in interest rate sensitive areas of the economy. As a result, annual average real GDP growth is forecast to contract 0.2% in the year to June 2024.

As inflationary pressures ease, the Treasury expects interest rates to begin falling, driving a recovery in economic activity in late-2024 and 2025. Rising house prices are expected to support growth in residential investment and private consumption, while a recovery in tourism also supports growth. Real growth is expected to pick up to 1.7% in the year to June 2025, then average 2.9% per year thereafter, over the forecast period.

New Zealand generally runs a current account deficit. The current account deficit has widened in recent years, peaking at 8.8% of GDP in the year to December 2022 before narrowing to 6.8% in the March 2024 quarter. The Treasury expects the current account deficit to narrow further towards its long-run average over the forecast period, as much of the drivers of the widening – tourism and export education, transport costs, strong goods imports, and weak goods exports – are expected to reverse. That said, New Zealand’s net international investment liability remains favourable, relative to history, at just under 50% of GDP.

New Zealand has one of the highest labour participation rates in the OECD, at 72% of the working age population. With slowing activity, New Zealand's unemployment rate has increased from a record low of 3.2% in early 2022 to 4.3% in the March 2024 quarter. Treasury expects the unemployment rate to rise above 5% in 2025, before declining to 4.4% by the end of the forecast period.

Annual consumer price inflation, which peaked at 7.3% in June 2022, has moderated to 4.0% in March 2024 quarter. The Treasury expects further moderation ahead, with inflation forecast to fall inside the RBNZ's target band of 1-3% inflation in September 2024. Strong inflationary pressures led the RBNZ to tighten monetary policy, with the Official Cash Rate (OCR) increasing from 0.25% in October 2021 to 5.50% currently. The RBNZ is projecting to begin reducing the OCR in the second half of 2025.

Current fiscal strategy#

The Government's fiscal strategy is formally communicated twice a year, in accordance with the Public Finance Act:

• The Budget Policy Statement is required to be published annually by 31 March, however, is typically published alongside the HYEFU. It sets out policy goals that will guide the Government's upcoming Budget decisions and priorities.
• The Minister of Finance must also present to the House on Budget Day a report on the Government's fiscal strategy. This sets out the Government’s short-term fiscal intentions, long‑term fiscal objectives, revenue strategy, and strategy for managing expenditure, assets and liabilities. The report must include fiscal projections for at least the next 10 years.

The Government's most recent Fiscal Strategy Report was published in May 2024. The Government's operating fiscal target is to return the operating balance (before gains and losses) to surplus in 2027/28, then maintain an average operating surplus in the range of 0% to 2% of GDP over time thereafter. Complementing the operating balance target, is the Government's intention to put net core Crown debt on a downward trajectory towards 40% of GDP then maintain it between 20 and 40% of GDP thereafter.

Chart 3: RBNZ Official Cash Rate

Source: RBNZ

Fiscal performance#

Prior to the onset of COVID-19, the Government had been maintaining an operating balance before gains and losses (OBEGAL) surplus and had reduced net core Crown debt to below 20% of GDP. OBEGAL deficits have since been recorded, initially to cushion the economy from the impact of COVID-19 and, subsequently, due to increased expenses, including for the North Island weather events and cost-of-living support. More recently, softer growth in core Crown tax revenue, reflecting the recent deterioration in income tax revenue from businesses and slower economic activity, has driven the weaker near-term fiscal outlook. OBEGAL is forecast to return to surplus in 2027/28.

Consistent with operating deficit forecasts, net core Crown debt is expected to increase in dollar terms, although decline as a share of GDP from 2025/26. Due to the low level of net core Crown debt immediately prior to the onset of COVID-19, it is forecast to peak at 43.5% of GDP, before declining to 41.8% by the end of the forecast period.

Source: The Treasury, in conjunction with BEFU, 30 May 2024

Government priorities#

Goals

The Government's overarching goals for its term in office are to:

• Build a stronger, more productive economy that lifts real incomes and increases opportunities for New Zealanders.
• Deliver more efficient, effective and responsive public services to all who need and use them - in particular, to restore law and order and improve health outcomes and educational achievement.
• Get the government's books back in order and restore discipline to public spending.

It states that meeting these objectives is the most important contribution the Government can make to the long-term social, economic, environmental and cultural wellbeing of New Zealanders.

In 2020, the Public Finance Act (1989) was amended to require the Treasury to produce a wellbeing report at least once every four years. The first wellbeing report, Te Tai Waiora: Wellbeing in Aotearoa New Zealand 2022, was released in November 2022.

Climate change

The New Zealand Government recognises climate change is an urgent issue and is committed to leading climate change action. The Government legislated domestic climate targets through the Climate Change Response (Zero-Carbon) Amendment Act in 2019, with the aim of reaching net zero long-life greenhouse gas emissions by 2050 and a 24-47% reduction in gross biogenic methane emissions by 2050, compared to 2017 levels.

New Zealand is also a signatory of the Paris Agreement and the UN Sustainable Development Goals (SDG). Guided by the Paris Agreement, New Zealand is committed to reducing emissions and contributing to global efforts to limit the increase in global average temperature to 1.5˚C above pre-industrial levels. In October 2021, to show its commitment, the Government set a Nationally Determined Contribution (NDC) of reducing net emissions by 50% below gross 2005 levels for the period 2021-2030.

Alongside climate mitigation, New Zealand recognises the importance of adapting to the effects of climate change and is taking action to set the foundation for a more climate-resilient economy. The Finance and Expenditure Committee is undertaking an inquiry into climate adaptation, with the final report due by 5 September 2024. The purpose of the inquiry is to recommend high-level objectives and principles for the design of a climate change adaptation model for New Zealand, to support the development of policy and legislation to address climate adaptation. This includes investment and cost-sharing.

The Government also seeks to build a more productive, sustainable and inclusive economy. In November 2021, New Zealand signed the International Just Transition Declaration.

Further information on the Government's climate change programme can be found on the Ministry of the Environment website.

Credit ratings#

New Zealand's credit rating is within the top twenty sovereign ratings globally. S&P Global Ratings and Moody's Investors Service currently assign the highest long-term local currency rating for New Zealand, at AAA and Aaa respectively. S&P Global Ratings upgraded New Zealand’s long-term credit ratings in February 2021, the first sovereign to be upgraded since the onset of COVID-19, while Moody’s Investors Service have maintained the rating since October 2002. Similarly, Fitch Ratings rates New Zealand highly, with a long-term domestic currency credit rating of AA+.

Source: Moody's Investors Service, S&P Global Ratings, Fitch Ratings

New Zealand Government Securities market#

New Zealand Debt Management (NZDM) is a directorate within the New Zealand Treasury. Its primary responsibility is the efficient management of the Crown's debt and associated financial assets within an appropriate risk management framework.

The maintenance of a well-functioning New Zealand Government Securities (NZGS) market is central to this remit.

The New Zealand Crown has always paid, when due, the full amount of principal, interest and amortisation requirements upon its external and internal debt, including guaranteed debt.

New Zealand Government Securities#

NZDM manages the issuance of NZGS, which include: nominal bonds, inflation-indexed bonds (IIBs), Treasury Bills (T-Bills) and Euro-Commercial Paper (ECP) in the wholesale market. The inaugural Green Bond was issued in November 2022. From a debt management portfolio construction perspective, Green Bonds are treated similarly to conventional nominal bonds. Green Bonds form an enduring part of the New Zealand Government Bond (NZGB) programme.

At 30 June 2024, there were NZ$173 billion NZGBs outstanding. In addition, there were NZ$6 billion of T-Bills and US$8 billion of ECP on issue. NZGBs outstanding are projected to be NZ$221 billion at the end of the forecast period.

When the RBNZ ceased its LSAP programme in July 2021, the RBNZ held NZ$52 billion of NZGBs (including IIBs) that were purchased under the programme. The RBNZ started selling back NZGBs purchased under the LSAP programme to NZDM in July 2022, and expect to have no NZGBs held under the programme by mid-2027.

At 30 June 2024, there were fifteen nominal bond and four IIB maturities on issue, as shown in Chart 5. Individual nominal bond lines are capped at a maximum of NZ$25 billion face value, while IIB maturities are capped at NZ$10 billion. Coupons on nominal bonds are paid on a semi-annual basis, in arrears. For IIBs, coupons are paid quarterly, in arrears.

For more information see the New Zealand Government Securities Funding Strategy webpage.

Chart 4: NZGB annual issuance and total outstandings

Source: The Treasury

Chart 5: Outstanding NZGBs and capacity for issuance - at 30 June 2024

Source: The Treasury

Primary issuance#

Primary issuance of NZGBs and T-Bills is undertaken by NZDM through competitive tenders and/or syndications, while ECP is issued via reverse enquiry.

The BEFU and HYEFU announcements contain forecasts for annual bond issuance, bond maturities and repurchases, and the level of short-term borrowings on issue at fiscal year end. The most recent update, at the time of publication, is shown in Table 3.

Ahead of each month, a regular NZGB issuance schedule is announced. The announcement occurs at 8am (NZT) on the day prior to the last tender of the preceding month. The schedule announces the aggregate volume to be issued on stated tender dates, as well as a range of issuance per curve segment. On the first business day of the week of the tender, NZDM will announce the specific bond lines, and volume per line to be offered at the tender. NZDM survey market demand on a weekly basis and interested parties can express their demand via RTCs. Market demand is considered alongside NZDM’s own portfolio preferences when determining tenders.

IIB tenders may be offered at each nominal bond tender. However, as issuance volumes and tenors are informed by market demand, IIB tenders will only occur when demand is expressed in our regular market survey. IIB tender details, such as the IIB maturity date(s) and volumes, are published alongside nominal bond tender announcements.

NZGB tenders are typically held on Thursdays. Only Primary Dealers (PD) may take part in tenders, however, investors may offer their bids through a PD. Bids must be submitted between 2.00pm and 2.30pm (NZT) on the day of tender. The minimum denomination is NZ$1 million (principal) and in multiples of NZ$1 million thereafter. Further details are available on the NZDM website.

Historically, one to two syndications were undertaken each fiscal year and were confined to launching new bonds. However, since the pandemic, up to 5 syndications have taken place per year and tap syndications of existing bond lines have also been utilised.

Historically, syndication volumes were around NZ$1.5 to 2.0 billion but, since the pandemic, volumes have ranged from NZ$2.25 billion to NZ$7.0 billion. Volumes of future syndications will depend on annual NZGB borrowing programmes, the specific bond line being issued, and investor demand.

T-Bills are also issued via tenders which occur weekly on Tuesdays, when bids need to be submitted between 2.00pm and 2.30pm (NZT). Typically 3 month, 6 month and 12 month maturities are offered. The volume and maturities on offer may vary and are announced the day prior to tender.

ECP issuance to end investors is distributed by the banks named in the ECP issuance program, with pricing levels set daily by NZDM.

Source: The Treasury, in conjunction with BEFU, 30 May 2024

*The forecasts show current expectations of how short-term cash liquidity needs will be met at fiscal year-end. However, the actual issuance of short-term borrowings, may vary from forecast, based on actual short-term cash needs and an assessment of relative costs. We anticipate that a minimum of NZ$3 billion of T-Bills and US$3 billion of ECP on issue will be maintained. The balance will be a mix of ECP and T-Bills, based on relative cost and market dynamics.

Secondary market#

The secondary market is supported by banks, both local and offshore, including those that participate in the NZGB primary market. The secondary market is supported further by an interbank repurchase market, along with the RBNZ offering an overnight bond lending facility as a lender of last resort.

NZGB yields have historically traded above our global market peers. Chart 6 shows generic 10-year NZGBs yields relative to sovereign peers with similar credit ratings. Since 2001, generic 10-year NZGBs have traded between -70bps and 320bps over their US equivalents. Over the same period, NZGBs have traded between -40bps and 110bps over Australian equivalents.

Chart 6: NZGB yield relative to peers with similar credit ratings*

Source: Bloomberg

*Of those sovereigns rated AA or higher by S&P, Liechtenstein, Luxembourg and United Arab Emirates are not included in the chart.

Considerations for non-residents#

For non-resident investors, NZGBs are effectively free from withholding tax. While NZGBs are subject to an Approved Issuer Levy like other New Zealand bond issues, the Crown will pay this tax on behalf of non-resident investors.

As at 31 May 2024, 62% of NZGBs were held by non-resident investors. Over the past 15 years this percentage has ranged between just under 50% and 80%. Participants in the market are diverse by type and by regional location. Nominal NZGBs and IIBs are currently constituents of a number of global benchmark bond indices.

NZGS are issued only in NZD, with the exception of our foreign currency ECP programme. European Medium Term Note documentation is also in place to enable longer-dated issuance in foreign currencies, although we have not issued under this programme since 2004.