$800m borrowing rise surprise

By BRIAN FALLOW

An $800 million increase in its borrowing programme in the first half of next year was as close as the Government came to surprising the financial markets in yesterday's December Economic and Fiscal Update.

Much of that increased bond issuance will replace maturing debt that public hospitals have raised on their own behalf with, hopefully cheaper, crown debt.

But it also reflects a drop of $350 million in the Government's operating cashflow (compared with what it expected in the June Budget) in line with weaker than expected economic growth.

ANZ Bank treasury economist David Drage said the bond market had taken the increased borrowing in its stride.

"That reflects the general strength of the market here and in the US," he said.

AMP Henderson Global Investors' head of fixed interest, Chris Wozniak, said the bond market did not regard supply as a major factor, compared with the economic cycle and the direction of global yields.

"We have gone through a cycle where international investors have reduced their exposure to New Zealand assets and we are now at the beginning of a cycle where they will tend to increase their exposure, particularly to interest-rate assets."

As expected, the Treasury has revised down its forecast of economic growth for the March year (to 2.2 per cent from 3.7 per cent in the June Budget), but lifted its forecast for the two coming years. Over the three years, the cumulative expansion is about the same, averaging just under 3 per cent a year.

Parallel, but modest, revisions have been made to the fiscal track, with $250 million shaved off this year's surplus, and $200 million added to next year's.

"The Treasury's forecast appears credible and not substantially different from our own view of the world," Deutsche Bank economists said in a commentary.

"Therefore, at face value, the fiscal outlook also looks believable. However, success in achieving the surpluses predicted will rely heavily on the Government keeping a tight constraint on expenditure. It has allowed itself only $640 million of extra spending [new initiatives] in its 2001 Budget and $615 million the year after."

Mr Drage said the acid was on the Government to live within those limits, because the credit rating agencies had the risk of a blowout in spending as a concern.

The Treasury's central forecast assumes that the international economy will slow moderately.

Finance Minister Michael Cullen said that if the United States had a hard landing, New Zealand's growth would be somewhat below the central forecast. But the Federal Reserve's room to manoeuvre was no longer constrained by an imminent presidential election and it was able to respond aggressively to signs of a sharp slowdown.

The Treasury's alternative scenario of weaker world growth and more subdued domestic demand has the economy growing 2.9 per cent in the 2001-2002 year. Mr Drage said that almost certainly underestimate the extent to which slower world growth could undermine the local recovery.