Govt fully aware its borrowing programme is creating demand for NZ$, potentially pushing currency up, English says

The Government is defending its decision to borrow more than it requires for the current year, and is "fully aware" that selling government bonds to overseas investors could be one factor pushing up the New Zealand dollar.

The NZ dollar hit a post-float high of 82.6 US cents last week, raising questions of whether the Reserve Bank could intervene in currency markets to push the currency down.

Prime Minister John Key has said he thinks the main reason for the high NZ dollar against the US dollar is due to an inherent weakness in the greenback, as the US Federal Reserve prints money in its efforts to stimulate the US economy.

However, instead of investing those dollars in the US economy, investors are looking to countries such as New Zealand and Australia which offer higher rates of return than in the US, where interest rates are close to 0%.

Some commentators, as well as ACT Party leader Don Brash this morning, have pointed to the New Zealand Government’s borrowing programme, where roughly 60% of bonds are sold to overseas investors, as one factor creating demand for the currency and therefore pushing up the New Zealand dollar.

The Council of Trade Unions this morning also attacked the government for borrowing more than it required for the current year, whilst saying it needed to cut schemes like KiwiSaver and Working for Families in order to get its books and borrowing requirements under control. CTU economist Bill Rosenberg said the government was misleading and scaring people by saying it had to borrow NZ$380 million a week, when in fact some of this was being held to fund next year's deficit.

The Government is running a NZ$16.7 billion deficit before gains and losses for the current year to June 30, requiring an average NZ$320 million in borrowings a week, while running a borrowing programme of up to NZ$20 billion for the year, meaning an overall average borrowing requirement of NZ$380 million a week. English has repeatedly said the extra borrowings in the current year are to front-load next year’s requirements to cover an expected deficit of NZ$9.7 billion.

The extra borrowings this year were being made at favourable interest rates while demand for New Zealand government debt was strong, and had been brought forward in the face of an escalating European debt crisis, which could potentially shut down New Zealand’s funding lines, English has said.

Influence on the NZ$

Speaking on National Radio this morning, English said the Government’s borrowing programme was “potentially one influence among a number” pushing up the New Zealand dollar.

“We’re very aware of that – it’s one of the reasons why in the budget we’ve moved to cut government borrowing quite considerably,” English said.

“In fact, compared to other countries, we’ve got one of the faster rates of deficit reduction over the next four or five years compared to almost any developed country, and that is one of the reasons we’ve done it,” he said.

“We’re fully aware of the impact it could be having on the exchange rate. That is creating a strong headwind for exporters, and we need to reduce that head wind if we possibly can.”

Asked whether the Government had made a mistake by borrowing so much now, English replied he did not think so.

“When you look at the financial markets we’re borrowing in, they’re struggling with the potential insolvency of Greece and Ireland, there are now doubts about Spain and Portugal. The people who lend to them are the same people who lend to us, and I think the less active we are in the debt markets over the next 12 months to two years, the better for New Zealand,” English said.

'We're not playing games'

Meanwhile, Prime Minister John Key said the NZ Debt Management Office had a number of different requirements that triggered the need for government borrowing.

“For instance, where we have a maturity of a previously issued bond, then that will require a certain amount of refinancing,” Key said to media in Parliament Tuesday morning.

“Then there’s new debt that’s created because of the deficit. So if we go and have a look at it, there’s been a number of numbers. The Minister of Finance, the week of the budget actually said some weeks we’ve borrowed a billion dollars,” Key said.

“But on average, if you go and look at it, the deficit this year was NZ$16.7 billion – that has a new borrowing requirement of NZ$320 million a week. It dramatically reduces next year – it halves – and in the year after it’s gone.”

There were no games being played for the government in terms of how much it needed to borrow, Key said. The government had been talking about borrowing on average NZ$300 million a week for the current financial year, which had risen lately to NZ$380 million as borrowing was brought forward due to low interest rates so the government had cash to pay for costs such as those associated with the Christchurch earthquake.

The government's NZ$16.7 billion deficit for the year required an average NZ$320 million a week over the year, Key said.

Asked whether bringing forward the government’s borrowing requirements for next year was pushing up the New Zealand dollar, Key replied:

“I think it’s actually the opposite way around. The DMO are the ones that look at their forward maturities, but they make the decision on when is the best time to borrow. I think they weigh up what is going to [have] the least impact, if you like, on the taxpayer, and on the overall economy.

"So where interest rates are low, as they are at the moment, [and] actually there’s a strong appetite to buy New Zealand bonds, then that often helps to do that at the moment," Key said.

"Now not all of that necessarily comes from offshore, some of it’s domestically borrowed – there’s a range of different things happening there," he said.

(Updates with video of English on debt & NZ dollar, PM Key's comments)