COVID-19 exit strategy
New Zealand’s pandemic experience has been close to unique and its ability to keep the virus at bay for much of the period has assisted its positive economic position. As the world creeps toward a new normal so expectations are becoming – somewhat – easier to forecast.
MARTIN I am prepared to say we have passed peak uncertainty but it would be a stretch to say conditions are back to a normal level of predictability.
To put this in context, our half-year forecast published in mid-December included information from well before we started to consider the impact of Omicron on the New Zealand economy. The next opportunity to publish revised forecasts will be for the budget, which normally comes in May.
One thing I would point out is that at the half-year update our bond programme, even though we dialled it back, still allowed for quite a big liquidity buffer in the near term, relative to what we have calculated is an appropriate enduring level of around NZ$15 billion (US$10 billion). This gives us scope in the short term to absorb any downside fiscal impacts.
JOHN For us the challenge is to do with supply chain issues and inflation, and the impact they have on projects. In general, larger projects are more likely to have been affected by lockdowns and this will have an impact on the funding requirement. But it seems that it was not as bad in 2021 as it might have been in 2020.
Our funding requirement may end up being a couple of hundred million less than we were expecting, give or take – which is not substantial. The bigger issue is inflation and the impact on project cost. This is bubbling under the surface and seems to be of more concern.
JOHN Some low priority projects may not get done but things are becoming more expensive as well, because of inflation and supply chain issues. We are trying to get a read on that at this stage. Some projects may be shortened, but on the flip side the cost of some projects might go up.
BLIGH Part of the big picture for us relates to Kāinga Ora – Homes and Communities being the delivery arm of government. While we are in the volatile environment of funding markets in a pandemic, we still have an objective to deliver on the public housing plan that was set over the 2018 and 2020 budgets – to deliver a certain number of homes or units by FY24, despite the impact of COVID-19. We are not too far from 2024 already and we now need to deliver the same amount in a shorter time.
This becomes challenging, from the perspective of fiscal delivery of what we need to achieve but also how it shift the dial in our funding requirements. There are still a few conversations that need to occur.
During the pandemic, work just stopped: it was not possible to go into homes to do repairs and maintenance because we were in lockdown and tenants would potentially be compromised. Materials and cost of supply was also an issue. We have some mitigation on this because we have locked-in national supply agreements and try to work on a fixed-price basis.
We are also motivated by delivering the government’s priority of reducing the housing waiting list. This level of need exists and will continue to do so regardless of increasing costs.
With any infrastructure-type entity there are always questions about ability to deliver to forecast, even without a pandemic. This is the dynamic for us and it is something we continue to navigate. The financing demand of Kāinga Ora will always be there, it just becomes a question of timing.
I am prepared to say we have passed peak uncertainty, but it would be a stretch to say conditions are back to a normal level of predictability. To put this in context, our half-year forecast published in mid-December included information from well before we started to consider the impact of omicron on the New Zealand economy.
BUTCHER Yes, I think so. Councils have always underdelivered on their capex plans. It looked like they were getting on top of capex delivery recently but I think now they are likely to slip back again. The sector came through the pandemic over the past two years in good shape with no deterioration in financial position. Council revenue is less cyclical than in other sectors. Property tax revenue continues to increase, which offsets any decline in revenue from other areas such as public transport patronage. Central government has also supported the sector through capital grants.
We think borrowing from councils will be in line with forecasts but an issue could be the cost increases of capex delivery as well as capacity constraints. LGFA bond issuance has also been ahead of council borrowing because we have increased our liquid assets over the past 18 months.
Another factor for the sector and LGFA is how the Three Waters reform plays out over the next couple of years. If the reforms proceed in mid-2024, councils are expecting to lose roughly a third of their assets and a third of their debt. The reforms are still under negotiation and consultation between central and local governments, but this is more of an impact on the sector than COVID-19.
MARTIN It comes up in meetings but mostly from the vantage of human curiosity. For a long time it was clear people we spoke to in other parts of the world had a lot less day-to-day freedom than ourselves, so there was some interest.
I don’t think it has had any serious impact on demand for our bonds. Irrespective of the border opening, investors are pretty comfortable with New Zealand’s fiscal outlook, and the implication it has for the supply of bonds and the creditworthiness of the sovereign.
