Treasury issued a warning to the Government last August over allowing Housing New Zealand to borrow more against its own name, saying the arrangement posed a “significant risk” that ratings agencies would count the debt as belonging to the core Crown balance sheet.
This could pose problems for the Government should it decide to allow HNZ or other agencies to borrow more in the upcoming 2019 Budget.
The briefing, released to Newsroom under the Official Information Act, dates back to August last year and is the latest in a number of Treasury documents that voice the Ministry’s disapproval of the Government’s borrowing strategy. In the briefing, Treasury says it is a “significant risk” that additional debt taken on by HNZ would be considered by ratings agencies as core Crown Debt.
In the document,Treasury sets out options for the future Urban Development Authority, which Housing Minister Phil Twyford hopes will streamline massive residential construction projects.
However, Treasury laid out concerns over how the UDA would be created and financed, saying it should not be “built from” HNZ because the agency had “limited scope to borrow more against current revenues than is already planned”.
Treasury doesn’t take issue with the amount of debt borrowed by the Government, which is low by international standards, but the fact that the Government has allowed Housing New Zealand to borrow on its own balance sheet, rather than on the core Government balance sheet.
Allowing HNZ to borrow on its own effectively circumvents the Government’s self-imposed budget responsibility rules, one of which is to get net core Crown debt to 20 percent of GDP by the 2021/22 financial year.
But that comes at a cost. Because Government is more creditworthy than a single one of its agencies, HNZ pays more in borrowing costs when it borrows on its own. A budget briefing estimated HNZ will pay an additional $11 million a year in interest over and above what it would cost the Government to borrow.
In Budget 2018, Housing Minister Phil Twyford announced HNZ would be allowed to borrow an additional $2.9 billion to build 6,400 homes over four years.
Essential to this process is that the agencies that rate the quality of New Zealand’s debt understand HNZ’s borrowing to be materially different to borrowing undertaken by the Government on its core balance sheet. If ratings agencies lose faith in the Government, they can downgrade the quality of its debt, which pushes up the cost of borrowing.
A Budget paper noted there was “a risk that credit rating agencies and commentators see substantial borrowing by Crown entities as an attempt to circumvent the net core Crown debt target”.
“The result would be to degrade the net core Crown debt target and New Zealand’s fiscal reputation. The flow on effects could be reduced access to capital markets and higher borrowing costs for the Crown overall”.
Ratings agencies react
However the “big three” ratings agencies already look at both core and non-core Crown debt in some way when looking at how they rate the Government’s debt.
This is done through looking at “contingent liability risks”, which are risks that could impact upon the Government’s balance sheet.
Moody’s analyst Matthew Circosta told Newsroom non-core debt was captured in the “Fiscal Strength” component of its sovereign bond rating methodology.
“Our assessment of Fiscal Strength also incorporates debt owed by the non-financial sector (that is, largely state-owned enterprises) as these pose contingent liability risks to the government’s balance sheet,” he said.
Fitch also told Newsroom it already had a wider definition of Government debt than Treasury.
The third of the big rating agencies – Standard & Poor’s – also looks at non-core debt as a continent liability. Anthony Walker, a sovereign analyst for S&P told Newsroom his agency captured all Government debt.
“All Government debt is captured in our credit rating, either directly through net debt or indirectly through contingent liabilities,”
“We capture all debt issued by New Zealand Government agencies in our debt assessment, and consider debt issued outside of these agencies in private capital markets by non-financial public enterprises as contingent liabilities,” he said.
Walker added that his agency would be concerned if contingent liabilities grew too large, echoing Treasury’s assessment.
“If contingent liabilities become too large we can lower our overall debt assessment,” he said.
However this seems unlikely. The big three agencies all told Newsroom last year that the Government’s strong fiscal position meant it could borrow billions more without risking a credit downgrade.
Circosta repeated some of this optimism to Newsroom.
“The New Zealand Government has indicated its intention to maintain fiscal surpluses and lower Government debt over the longer run. The track record of bringing the budget from deficit into surplus in recent years lends credibility to this objective,” he said.
“We expect New Zealand’s fiscal position to remain stronger than many Aaa-rated sovereigns; Government debt as a share of GDP will, on average, remain below the Aaa median of 36 percent over 2018 to 2020.”
The paper also gestured to apparent disappointment with the speed of progress with the Urban Growth Agenda, Twyford’s wide-ranging policy to enable cities to grow “up and out”.
It refers to a report from MBIE saying: “Progress over the last six months has been slower than Ministerial expectations”.
Twyford was unavailable to comment for this article, but told Newsroom earlier this week he hoped the first legislation to create the Housing and Urban Developing Authority would be ready by mid-year.
Grant Robertson was approached for comment, but is travelling.