The Government's debt management office might struggle to find buyers for its expected large increase in bond tenders to fund ambitious capital expenditure programmes, Westpac chief economist Brendan O'Donovan says.
The funding requirement for the current year is expected to be $5 billion, $1 billion more than outlined in the pre-election fiscal update.
To date, the debt management office had raised $1.9 billion through the tender programmes.
"At best, if we are correct in our assumptions, that leaves an additional $3.1 billion to be issued into the market in the first six months of 2009. That equates to fortnightly tenders of around $240 million."
However, the big hits were likely to come from next year if the updates to the incoming Government were to be believed, he said.
That report implied a borrowing requirement of $6.5 billion in 2010 (up from $6 billion in the pre-election update) and $10.5 billion in 2011 (up from $9.1 billion) rising to $11 billion in 2013 (up from $9.1 billion).
Those figures did not include any adjustment for policy changes, with the most significant being the additional $8.6 billion in capital expenditure.
"Factoring that into the equation suggests we could easily be looking at an annual domestic bond programme of more than $8 billion in 2010 and [more than] 11 billion per year from 2010.
"It seems the debt management office will face some challenging times over the next few years."
Already, the office was facing tough times.
The bond tender on December 11 managed only $60 million of successful bids for a total $150 million of bonds on offer.
Given the strong competition the office was likely to face in offshore markets from other government and government-guaranteed corporate bonds in coming years, Westpac was left wondering where the demand for New Zealand bonds was going to come from, Mr O'Donovan said.
The Government could raise the required funds to meet its funding shortfall through issuing shorter dated Treasury bills, issuing in offshore markets, borrowing from the Reserve Bank or asset sales.
It appeared that asset sales were already under way.
The pre-election update indicated a substantial run down in financial assets held by the debt management office was forecast over the next five years.
Financial assets held by the office were forecast to fall from $17 billion this year to $5.8 billion in 2013, he said.
Further financial asset sales could be made but it was not the ideal time to be selling.
None of the remaining options appeared particularly appealing, but in an environment where investor appetite for New Zealand domestic government bonds appeared limited, there might be little choice, Mr O'Donovan said.
