Bigger borrowings expected by Government

By BRIAN FALLOW ecnomics editor

The Government expects it will have to borrow $1.8 billion more over the next three years than it reckoned on in the May Budget.

While the $1 billion bailout of Air New Zealand accounts for most of that, the increase in the borrowing requirement also reflects lower operating surpluses in the current and coming fiscal years because of the world economic slowdown.

The Government is bringing forward, by a couple of years, over $400 million of capital spending on hospitals, schools, prisons, transport infrastructure and military equipment.

The net effect is to boost the bond tender programme for the current June year to $4.1 billion (from $3.5 billion in the Budget), increase the current programme to $5 billion (from $4.5 billion) and increase the next financial year's debt raising from $4.9 billion to $5.6 billion.

It will be issuing much of the additional debt at a time when sentiment in world bond markets is likely to be negative, because of the expected recovery in the economic and interest rate cycles. It was also when the market will have to digest the sell-off of most of the Government Superannuation Fund's Government bond holdings.

The Bank of New Zealand's head of market economics, Stephen Toplis, said that on its own the increase in the supply of bonds need not push up interest rates. But it did mean the Government would be more vulnerable if the market turned against it for other reasons.

The market had been expecting a significant increase in the bond tender programme and shrugged off yesterday's announcement. The three-year Government stock futures contract settled up three points at 9397 (equivalent to a 6.03 per cent yield) and the 10-year contract settled up one point at 9319 (6.81 per cent).

Citibank economist Annette Beacher does not expect the increased supply of Government debt to push up interest rates.

She is forecasting the spread between New Zealand and US bond yields to narrow to 140 basis points during next year and the transtasman spread to shrink to 60 points.

Finance Minister Michael Cullen said that the Government's borrowing requirement over the next five years would be $10.6 billion.

Of this, $4.1 billion was earmarked for asset acquisition (Air New Zealand, Auckland rail, schools, hospitals and prisons), $3.9 billion for student loans, $1.8 billion to refinance hospital board and Housing Corporation debt and $1 billion for net capital injections to state-owned enterprises and crown entities (including $83 million for Kiwibank).

In the December Economic and Fiscal Update, released yesterday, the Treasury as expected revised down its forecast of economic growth for the year to March 2003. It is now expecting growth of 1.9 per cent, down from 3.3 per cent in the Budget.

But it has revised up its forecast for the current March year, to 3.1 per cent (from 2.6 per cent in May) and for the March 2004 year to 3.7 per cent (from 3 per cent).

The Treasury expects export demand and prices to continue to weaken over the short term and for this drop in export income to flow through the domestic economy.

It says uncertainty and the expectation of lower income growth may see firms defer investment projects until global growth picks up, from the middle of next year.

Households are also excepted to adopt a wait-and-see attitude, keeping consumption subdued throughout next year.

The labour market is expected to weaken, with the unemployment rate rising to 5.7 per cent by March 2003 (it is 5.2 per cent now). Wage inflation is forecast to remain around 3.7 per cent over the next couple of years.

The impact on the Government's bottom line is to reduce the operating balance this fiscal year from $1.4 billion to $1 billion, and next year's from $2.4 billion to $1.8 billion.

Dr Cullen said two-thirds of this year's drop was explained by the downward revaluations of ACC and the Government Superannuation Fund, which had been driven by lower interest rates.