DEFU And BPS Key Points
Data Flash (New Zealand)
December Economic and Fiscal Update (DEFU) and Budget Policy Statement (BPS)
* This year's bond tender programme has been increased by $800 million to $3.65 billion as the Government looks to cover a cash flow shortfall resulting from lower than anticipated growth and increased capital spending requirements.
* The Treasury believes the economy will expand 3.7% in 2001/02 and 2.6% in 2002/03. This follows estimated growth of 2.2% in 2000/01. Total growth over the forecast period is similar to that projected in the June Budget. However, a weaker short term prognosis has been offset by stronger out years.
* The change in growth profile is reflected in the fiscal track. Treasury now anticipates fiscal surpluses of $765 million for the year ended June 2001, $2.2 billion in 2002 and $2.8 billion in 2003 (0.7%, 1.9% and 2.3% of GDP respectively). This compares with Budget forecasts of $1.0 billion, $2.0 billion and $2.7 billion respectively.
* The Treasury forecasts inflation to rise a peak of 3.8% yoy in June 2001 and to then steadily fall over the next two years, although not at the rate projected by the RBNZ (inflation is expected to remain at 2.8% yoy in March 2002 and 2.1% yoy in March 2003).
* The current account deficit is forecast to fall to 3.8% of GDP by March 2002 and 3.3% of GDP by March 2003.
* The Treasury's forecasts are predicated on the view that the Reserve Bank hikes interest rates 75 basis points through calendar 2001 to a peak of 7.5% (90 day bill rate) in March 2002.
* The Government remains committed to maintaining operating surpluses over the course of the economic cycle and to maintaining gross debt of 30% of GDP consistent with net debt below 20% of GDP.
* The Government has raised its capital expenditure provisioning for the next three years to $3.2 billion from $2.4 billion.
* The Treasury's economic forecasts appear credible and not substantially different to our own view of the world. 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 in its 2001 Budget and $615 million the year after. We consider there is significant topside expenditure risk so expect the eventual surpluses to be lower than forecast.
* Notwithstanding our concerns, if the Government is able to stick relatively closely to its fiscal projections then it is difficult to claim that this left leaning Government is suffering from fiscal profligacy.
* Note that the expenditure increases quoted above are higher than those in the published DEFU. The Finance Minister, Dr Michael Cullen, provided these new numbers in the analysts' lock-up. He also said that since the DEFU went to print it now appears that short term growth may be stronger than forecast - confidence levels appear to be rebounding sharply - and the CPI peak somewhat lower (the latter due to a reduction in state house rentals - see our note on this issue dated 13 December).
* Dr Cullen noted that the key risk to the Government's forecasts was the potential for the international economy to slow more than anticipated. We share this concern, although our central forecast remains based on a US soft-landing scenario.
* The Treasury has joined the community of commentators convinced that New Zealand's economic outlook is relatively strong. Its view of the world provides further supporting evidence that interest rates will need to rise in the first quarter of 2001, and beyond, a view that the markets are having a great deal of difficulty in reconciling with the changing stance of many of the world's other central banks.
* There was no market reaction to today's announcement. The increased bond tender programme did come as a surprise - we had expected increased T-bill issuance - and it is fair to say that increased demands on capital going forward may mean that tender programmes in the out years will be higher than currently anticipated. But there was nothing to change people's fundamental views on inflation, growth or risk so asset prices reacted accordingly.
Darren Gibbs, Senior Economist, New Zealand, (64) 9 351-1376 Stephen Toplis, Equities Strategist, New Zealand, (64) 4 474-7559
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