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Annual Report of the Treasury for the Year Ended 30 June 2012

Permanent Legislative Authority Funding for New Zealand Debt Management Office

The Treasury's Debt and Related Financial Asset Management functions are funded through the three PLAs set out below.

Scope of PLA Appropriations

  • Administration of Crown Borrowing PLA - This appropriation is limited to expenses incurred in connection with administering borrowing by the Crown, as authorised by section 61(1) of the Public Finance Act 1989.
  • Administration of Derivative Transactions PLA - This appropriation is limited to expenses incurred in connection with administering derivative transactions of the Crown, as authorised by section 65H(2) of the Public Finance Act 1989.
  • Administration of Investment of Public Money PLA - This appropriation is limited to expenses incurred in connection with administering the investment of public money, as authorised by section 65J(1) of the Public Finance Act 1989.

Significant Work Completed During 2011/12

Borrowing programme

  • NZDMO issued $13.500 billion worth of government bonds, achieving its original programme of same value for 2011/12. A number of large bond tenders were completed through the year, including a record-equalling weekly tender in September 2011, which raised $1 billion. In response to variability in demand, the programme was revised to $15 billion at Budget 2012 to provide operational flexibility to issue additional bonds in the event of an increase in demand. As at 30 June 2012, the face value of bonds outstanding in the market was $55.307 billion.
  • In November 2011, NZDMO repaid its largest ever bond maturity ($8.766 billion). NZDMO has risk and funding policies to ensure that all bond maturities are met in full.

Marketing efforts, interactions with international stakeholders and relationships with credit rating agencies

Throughout the year, NZDMO has been active in promoting bonds and New Zealand more generally. These efforts included: accompanying the Minister of Finance on overseas investor missions; developing and strengthening investor relations; and engaging with sovereign peers. This work included:

  • Head of NZDMO, along with other Treasury staff, accompanied the Minister of Finance on a trip to the US to attend the IMF/World Bank Annual Meetings in Washington.
  • Head of NZDMO and NZDMO staff have participated and presented at a number of investor and sovereign peers conferences and forums, including the Euromoney Australian and New Zealand Debt Capital Markets Forum, Fourth Annual Australasian Fixed Income Conference, the ANZ/Kanga News Capital Markets Forum and the Australian Central Financing Authorities Annual Conference.
  • NZDMO has hosted a number of visiting delegations from developing debt management offices and investors, including sovereign wealth funds, Asian central banks and Japanese institutions, and briefed them on the economy and debt issuance strategy.

The Treasury and NZDMO maintained regular contact with the three rating agencies (Moody's, S&P and Fitch) during the year to assist them in their assessments of New Zealand's creditworthiness. This work included:

  • briefing them on the developments in the New Zealand economy; and organising meetings with officials from relevant agencies including the Treasury, RBNZ, Minister of Finance, Opposition Finance Spokesperson and private sector economists and commentators, and
  • on 30 September 2011, both Fitch and S&P announced that they had downgraded New Zealand's long-term foreign-currency rating from AA+ to AA and the domestic rating from AAA to AA+. Both agencies had had New Zealand on negative outlook. NZDMO had concluded several weeks earlier that a downgrade was a possible outcome of this year's rating reviews and had alerted the Minister to this. The Treasury provided the Minister's office material requested in order to prepare for the eventuality of a downgrade.

Derivatives programme

  • Risk associated with the changing market value of NZDMO's debt and asset portfolios was successfully managed within NZDMO's average monthly Value at Risk (VaR) target.
  • NZDMO has undertaken work to study the implications of the G20 mandate for over-the-counter derivatives to be centrally cleared, set to be implemented by the end of 2012.

Investment programme

  • As at 30 June 2012, NZDMO managed marketable securities valued at $4.758 billion, deposits valued at $132 million and a cash balance of $8.477 billion. These assets are used to fund Crown operations, to provide short-term liquidity if required and to help repay debt maturities as they fall due.
  • Assets are invested primarily in AAA- and AA-rated securities. The high quality of the asset portfolio, in conjunction with NZDMO's asset-liability matching policy, means that the portfolio value had very low volatility, as reflected in an average monthly VaR during 2011/12 of less than $1 million.
Performance Measures: Permanent Legislative Authority Funding for New Zealand Debt Management Office
Performance Dimensions for 2011/12 Target Performance for 2011/12
Cost of new core Crown borrowing is less than the long-term average cost of the New Zealand Government. Cost of new borrowing is less than 6%

Achieved

Average cost of new borrowing was 3.34%

Tender efficiency: Average domestic bond tender cover ratio. Average tender cover ratio is greater than 2

Achieved

Average cover ratio was 2.4 times

Tender efficiency: Average range of successful bids in domestic bond tenders. Average range of successful bids is less than 5 basis points

Achieved

Average range was 2.44 basis points

Funding risk: The nearest bond maturity will be at least 50% funded from NZDMO's holdings of cash and short-term liquid assets within six months of maturity, and fully funded within three months. Funding target met Achieved
Compliance with risk management policies and parameters for portfolio management and debt issuance. No more than four breaches

Achieved

Two credit policy breaches

Losses incurred from the credit-related sale of securities or from default by a counter-party. No losses

Achieved

No losses

Number of settlement errors, and financial value of losses arising from settlement errors. No more than 12 errors; losses do not exceed $10,000

Achieved

Two errors; no losses

Permanent Legislative Authority Funding for New Zealand Debt Management Office
2011
Actual
$000
Appropriations 2012
Actual
$000
2012
Main Estimates
$000
2012
Supp. Estimates
$000

Administration of Crown Borrowing PLA:

4,931 Expenses 3,746 5,276 4,374

Funded by:

4,814 Revenue Crown 3,685 5,178 4,276
117 Other revenue 61 98 98

Administration of Derivative Transactions PLA:

1,077 Expenses 904 1,008 951

Funded by:

1,055 Revenue Crown 889 986 929
22 Other revenue 15 22 22

Administration of Investment of Public Money PLA:

671 Expenses 564 820 609

Funded by:

657 Revenue Crown 555 816 605
14 Other revenue 9 4 4

Administration of Crown Borrowing PLA is $628,000 under the Supplementary Estimates budget. This is owing to delayed implementation of inflation indexed bonds and project scoping work.

Note

Figures in the Investment Programme section are derived from NZDMO's management reporting, which is calculated on a different basis from external Crown financial statement reporting. For management reporting, NZDMO values its portfolios by the commonly-used methodology of calculating net present values from all future cash flows using zero-coupon discount curves which are generated at least daily from market data. NZDMO uses current spot foreign exchange (FX) rates to translate foreign-currency net present values to New Zealand dollars.

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