New Zealand’s debt market gets ready to deliver

The KangaNews New Zealand Debt Capital Market Summit 2024 – which took place in Auckland on 11 September – delivered a report card on local market functionality and ability to deliver capital where it is needed. Participants discussed a raft of challenges including financing infrastructure and transition, and providing investors with diversity and liquidity. An improving economy and growing scale hold promise for the years ahead.

“In August, we published an OCR projection that has a reasonable amount of front-loading of the path back to a more neutral setting. It’s important to emphasise that we are still very much in uncertain times, and there is a wide range of uncertainty around the projection for the OCR. We could move more quickly or more slowly.”

“The issue is that we’re coming out of an unchartered period: it has only been once through the 30-year period of inflation targeting that we have experienced inflation at 6-7 per cent for a year or two. We have a lot of information on how pricing intentions play out when inflation is low, but how will they play out when we come out of this period?”
CHRISTIAN HAWKESBY RESERVE BANK OF NEW ZEALAND

“With interest rate cuts now in train, attention is turning to what the economic recovery looks like. Early signals are that rate cuts could be just as potent as rate hikes were.”

“We are operating in a time when most of our data has been contorted by the seasonal adjustment process. This makes it difficult to interpret. We are also dealing with what I would describe as a normal economic cycle in abnormal times. We need to separate these two things so we can understand that the cycle is normal, rather than dwelling on the abnormal piece.”

“There is a benefit from a larger government presence in the New Zealand dollar market: it creates liquidity across the curve and helps attract investors, especially from offshore. We are closely monitoring tightening spreads as this can affect investment strategies. While demand from certain investor types may be smaller than usual, we hope to continue to get support from our core investors.”

“If the government remains focused on reducing the deficit, it will likely need to make further cuts – because there is a significant gap between the government’s growth forecasts and most other projections. There could be increased pressure on revenue and expenditure, which may also lead to higher debt issuance.”

“The New Zealand export sector, and the agricultural sector in particular, has been remarkably nimble in the last 50 years in the sense of changing what it produces and where it sells to. This is something we should all consider now as we think about how this element of the economy evolves. In particular, even though China may not grow very strongly for a while it may not necessarily be a disaster for our export sector.”

“The domestic investor base is really important. However, its size is likely to be finite. It will grow in line with growth of bank balance sheets and KiwiSaver investment mandates but this may not be sufficient to keep pace with the increasing size of our programme. We are looking to offshore investors for additional growth. About 60 per cent of our bonds is currently held offshore, and our goal is to build really long-term relationships with our investor base.”

“It is clear that a certain tranche size is required to attract offshore investors. For example, some won’t invest in any deal of less than NZ$1 billion. While we don’t face these issues as much domestically, they are significant from a global perspective. Anything we can do to enhance liquidity in the New Zealand market is beneficial.”

“There has been increased participation from fast-money accounts in NZGBs. While there may be concern that filling the demand gap might expose the New Zealand market to volatility from fast-money flows, we believe this is outweighed by the value these types of investors provide in a market with limited liquidity.”

“If we want to be a high-grade market on a global scale, we have got to be open to a diverse range of participants coming into the market on a more regular basis – not just when we’re at the cyclical highs and lows of the rates cycle.”

“If it is done correctly, I think New Zealand bond futures would be extremely worthwhile. They would bring an additional level of transparency to a market where, on occasion, the swaps sector can be a little opaque. Exchange-traded futures could also bring in a different type of investor, which would create market opportunities for everybody. A well-functioning repo market will be extremely important to the success of futures.”

“What bondholders in the US want, in the wake of the enormous US$7 trillion fiscal stimulus during the pandemic and its aftermath, is reassurance that their policymakers will be credible with regard to managing the budget.”

“We have managed New Zealand mandates for nearly 20 years and it is concerning when the credit landscape starts to shrink. Market contraction would be very challenging for our New Zealand clients, and it’s something we want to avoid.”

“As an issuer and from an investor perspective, it is crucial that we maintain a healthy New Zealand debt capital market. We have noticed a decline in issuance recently, which we are monitoring closely. Meanwhile, when we issue in Australia it is not to tap into the same pool of investors as a New Zealand dollar transaction would – we are seeking funding diversification.”

“Fundamentally, for an active manager to generate alpha, it is crucial to have sufficient liquidity to be able to recycle capital. The shrinking New Zealand market and smaller transaction sizes are frustrating. Some of our larger funds opt not to participate in smaller transactions because they result in subscale allocations and less liquid tranches.”

“We want the New Zealand market to grow but we have also always been strong advocates of trans-Tasman investing. We view Australia as a valuable opportunity. There are more issuers, issuance, investors and market makers, offering greater market breadth and depth. For an active manager, this provides additional levers to generate alpha and deliver better returns.”
IAN ROBERTSON MILFORD ASSET MANAGEMENT

“Australian investors wanted to know if our deal would be a one-off transaction or if we were planning to establish a curve. We were clear that we intended to be a regular issuer with a sustained programme. By being transparent about our programme intentions, we give investment funds greater confidence to buy our bonds, knowing they will be tradable.”

“One observation from a recent Infrastructure Commission tracker report is that New Zealand spending is on par with other high-income countries but we are not getting the same efficiency and value for money. To a degree, this relates to our size and geography – but it is also a result of institutional settings and policy.”

“The best answer to all the challenges New Zealand faces right now is that we grow our economy faster. Our government is focused on delivering the conditions for a faster-growing, more productive, more prosperous economy. The task is front of mind for us.”

“We want to fundamentally shift the way New Zealand plans, invests in, builds and looks after our infrastructure. Over the next five years, we as the Crown will be investing at least NZ$68 billion in infrastructure, and 2024 is set to be a record year for Crown infrastructure investment. In the budget, we topped up the multiyear capital allowance so essentially we now have NZ$7.5 billion unallocated and available for significant infrastructure projects.”
NICOLA WILLIS NEW ZEALAND GOVERNMENT

“Don’t believe everything you read – and especially the notion that every PPP is a disaster. In fact, the vast majority have been successfully delivered on time and on budget, and have provided great outcomes for end consumers. All these projects have been financed through the bank market.”

“What the industry is crying out for is certainty, and certainty comes from longer-term assurance about what projects are coming down the line, how they will be funded and whether the system of planning and delivery will stick around beyond the life of a government.”

“The water sector has climate change and mitigation issues as well as challenges with pollution and waste management. It also has to consider biodiversity, restoration and community engagement alongside a significant capex programme. If the sector in general borrows from the LGFA, it will be a source of sustainable loans for us.”

“The constraints on infrastructure delivery are fairly obvious. They are the size of the projects and the amount of debt a project typically needs. Also, some investors observe that the unit cost of executing a project in Australia and New Zealand is higher – because of labour cost, skills, supply, geographical distance and other factors.”

“We must think more about transformation over time and also, really importantly, not just about new investment. It is also about replacing and transforming existing investment, especially in Asia Pacific, where we have a tremendous amount of capacity that is not green. It is not just about building new renewables, it is about taking old ways of generating electricity and transforming them into more sustainable investments.”

“New Zealanders have to feel that they have the needed trust and confidence in the financial services sector. One of the aims of the FMC Act is to protect investors, but one of the things that is probably not recognised as much is that there is also a lot about innovation in the act.”

“We are working with stakeholders to consider how to streamline capital market settings to ensure firms have access to capital. We have just had our first private asset roundtable with about 30 industry players, for instance, and I think we are going to have many more of these as we try to work through industry issues. Private assets are only going to increase in value and complexity over the next 10 years.”
DIANA GORDON FINANCIAL MARKETS AUTHORITY

“A year ago, I would have been able to say that the New Zealand sustainable finance market had outperformed year-on-year growth performance over a number of years. Obviously I can’t say this any longer but I am hopeful of a rebound. I am struck by the role of private capital to drive infrastructure investment; perhaps we need something similar to drive the transition in New Zealand.”

“In New Zealand, everyone is talking about the infrastructure deficit, the infrastructure crisis and the infrastructure emergency. Well, how about the infrastructure opportunity? It is through extending into and dealing with the infrastructure challenges that we can produce capital markets of the type we need.”

“Some say New Zealand is comparable to Denmark or one of the smaller Nordic economies. The difficulty is that this ignores the longstanding social democracies that exist in Scandinavia – the kind of compact that exists between government and the public that is built up over, in some cases, hundreds of years.”
WARWICK HUNT BNZ

“The sense I get from the investors we engage with offshore is that the demand is there but supply is not keeping up. We’re hearing from a lot of issuers that it is hard to maintain a constant supply of green or sustainable products in the market, to match the demand that, especially, offshore investors have. Coupled with this is the fact that we’re not really seeing other products growing – such as sustainability linked products.”

“The most important component that I see for 2035 is KiwiSaver. It is currently at about NZ$115 billion and it doesn’t take a lot of aggressive assumptions to get to NZ$300 billion in 10 years’ time. Confidence in KiwiSaver has grown, but it can be eroded if people think their savings are being moved around for political reasons.”

“Looking forward to 2035, if New Zealand does nothing we could end up looking more like Suva than Sydney. We may have no relevance if we continue to do what we are doing today. It is not about just sticking to our knitting – we need some fundamental change. As a capital market, we are heading toward the point of no return.”

“People used to joke about the ASX needing to buy the NZX. We don’t need to joke anymore – it is just happening. The same is starting to happen in capital markets. If we don’t start trying to structurally address things in a meaningful way, we run the risk of becoming an irrelevance.”
MALCOLM JACKSON FIRSTCAPE

“New Zealand financial and nonfinancial corporate supply has been massively disappointing this year and sustainable debt is a very small sector of this small subset. It is not really a surprise that we have had very little issuance. But supply is not yet led by demand. This could potentially change in the years to come, as Gen Z is very engaged in the topic of sustainability. As this generation saves more and becomes bigger investors, supply could come because it is something they want to see and to invest in.”