Result: Efficient and Effective Management of Financial Operations - Debt and Financial Asset Management
What are we seeking to achieve?
NZDMO is responsible for funding the Government's borrowing requirements, and associated activities that include managing the Government's overall net cash flows and some of its interest-bearing assets. Our goal is to manage debt and assets in a way that minimises costs while keeping risk at an appropriate level.
The overall result we are seeking is effective and efficient debt and financial asset management. Our primary objective is to minimise the long-run cost of government borrowing. Lower interest costs improve the budget position, and help to maintain New Zealand's international credit rating. This contributes to a stable and sustainable macroeconomic environment.
For more information on NZDMO, visit: http://www.nzdmo.govt.nz
What will we do to achieve this?
Following the global financial crisis and associated recession, there has been a large increase in the size of the Crown's forecast debt programme. There is a risk that borrowing costs may increase in the coming year. The large increase in global sovereign-debt issuance could lead to reduced international investor demand; or a perceived increase in New Zealand's sovereign risk could raise our borrowing costs. To keep borrowing costs as low as possible, in 2010/11 we will focus on the two areas described below.
Cost-effective funding
- Successfully conducting regular domestic bond tenders in an efficient manner, and supporting liquidity in the domestic bond market. This includes work on the possible introduction of inflation-indexed bonds, and secondary market trading activity by NZDMO.
- Choosing debt instruments that minimise the cost of new borrowing while achieving an appropriate risk profile. We continue to maintain funding options across a range of instruments, and a range of domestic and foreign currency markets.
- Managing funding risk by building up assets in advance of bond maturity dates, thus smoothing the Crown’s borrowing requirements.
- Increasing our marketing effort in order to retain existing investors and encourage new investors. Maintaining relationships with credit-rating agencies will continue to be a high priority.
Maximum value added within an appropriate risk management framework
- Ensuring that our investment and derivatives portfolios, and capital market services provided to Crown clients, continue to generate value and manage risk for the Crown.
How will we demonstrate success in achieving this?
The key measure of NZDMO success is the New Zealand Government's cost of borrowing. However, there are many factors influencing borrowing costs that are outside NZDMO's control. The performance indicators set out below focus on the specific actions that NZDMO can take to reduce the Government's cost of borrowing.
| Impact measures for 3 to 5 years | Milestones for 2010/11 |
|---|---|
Overall impact |
|
| Average cost of new borrowing is lower than the long-run average. | Borrowing cost: Cost of new core Crown borrowing is less than 6%. |
Cost-effective funding |
|
| Improved demand and liquidity in the domestic bond market results in more efficient issuance. | Tender efficiency: Average domestic bond tender cover ratio is greater than two. |
| Tender efficiency measure: Average range of successful bids in domestic bond tenders is lower than five basis points. | |
| Minimise funding risk generated by maturing bonds (potentially up to $8 billion). | Funding risk: The nearest bond maturity will be fully funded from NZDMO's holdings of cash and short-term liquid assets within three months of maturity. |
Maximum value added within an appropriate risk management framework |
|
| Investing and derivatives activity generates value for the Crown. | Value added: Value added in the investment and derivatives portfolio is $40 to $60 million. |
| Risk measures of the investment and derivatives portfolio are maintained within target limits. | Investment and derivatives risk: Risk, as measured by monthly value at risk, of the investment and derivatives portfolio averages less than $1.4 million. |
