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New Zealand Cuts Surplus Target on Growth, Currency Pressure

Dec. 18 (Bloomberg) -- New Zealand’s government projected a narrower budget surplus in 2015 than it forecast in May as the global slowdown, a rising currency and weak domestic demand hinder the nation’s recovery.

The operating surplus will be NZ$66 million ($56 million) in the year through June 2015, Finance Minister Bill English said in a fiscal update released in Wellington today. That compares to a NZ$197 million gap projected in May’s budget.

English maintained a surplus target for the period as the Treasury Department said the economy will expand at a slower pace in coming years. Weaker global growth will curb exports which make up 30 percent of the economy, while New Zealand’s dollar, the best performing Group of 10 currency this year, is forecast to remain close to its current level on a trade-weighted basis until the first half of 2014, it said.

“We will for some time yet see Europe and the U.S. deal with the problems of low or no growth,” English told reporters. “The high kiwi dollar is a factor of these weaknesses offshore. It is a headwind to our efforts to tilt the economy toward exporting and investment.”

Kiwi’s Strength

The currency, which has gained 8.6 percent against the U.S. dollar this year, was little changed after the release. It bought 84.41 U.S. cents at 2 p.m. in Wellington.

The projected 2014-15 surplus compares with a forecast NZ$7.34 billion deficit in the year ending June 30, 2013. That’s narrower than the May forecast of NZ$7.9 billion amid lower-than-expected finance costs that offset weaker tax revenue.

The shortfall is forecast to narrow to NZ$2.01 billion in the year through June 2014. Surpluses will then grow beyond 2015, according to the Treasury.

“The overall trend toward budget balance in the 2015 fiscal year has not changed,” Steven Hess, New York-based sovereign risk analyst at Moody’s Investors Service, which has a Aaa rating on New Zealand debt, said in an e-mailed response to questions. “As a result it doesn’t affect our overall view of the creditworthiness of the government.”

Net government debt is expected to rise to 27.8 percent of gross domestic product in the year ending June 30, 2013, from 24.3 percent a year earlier. Debt is likely to peak at 29.5 percent of GDP in 2015.

The government will borrow NZ$14 billion by selling bonds in the year ending June 30, 2013, up from the NZ$13.5 billion program announced in May. The Debt Management Office will offer NZ$200 million of bonds each week in the three months through March, including a monthly offer of inflation-indexed bonds commencing Feb. 7, it said in a statement.

Christchurch Rebuild

Domestic demand is being hampered by cautious household spending and rising unemployment, the Treasury said. The government’s spending cuts are also contributing while exports will detract from growth until 2015, reflecting increased demand for imports for the Christchurch rebuild, the strong currency and weak tourism inflows, it said.

New Zealand’s annual economic growth is forecast to be 2.1 percent in the year ending March 31, the Treasury said today. That’s weaker than the 3.3 percent pace in May’s forecasts.

“The economy is growing moderately,” said English. “Improved household savings is weighing against short-term growth as is the government’s fiscal consolidation.”

Slowing Growth

Growth has slowed in the second half of 2012 after GDP increased 1.6 percent in the six months through June. A Dec. 20 report will probably show third-quarter growth of 0.4 percent for an annual pace of 2.5 percent, according to the median forecast of 12 economists in a Bloomberg survey.

Growth will accelerate to 3 percent in 2013-14 as rebuilding gets under way in earthquake-damaged Christchurch , the Treasury said.

Christchurch, New Zealand’s third-biggest city, was hit by a series of temblors in 2010-11, including a Feb. 22, 2011, quake that killed 185 people and shut the central business district. Damage is estimated at NZ$25 billion, up from NZ$20 billion assumed in May, and the rebuild cost is estimated at NZ$30 billion, the Treasury said.

Growth will slow to 2.5 percent in 2014-15 and 2.4 percent a year later, today’s report showed.

Central bank Governor Graeme Wheeler this month signaled he will keep the official cash rate at a record-low 2.5 percent until late next year. Fourteen of 16 economists in a Bloomberg News survey expect no change until at least July.

Interest rates are likely to start rising from late 2013, the Treasury said today.

“Their outlook has certainly become realistic,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington, who projects 2.2 percent growth in 2013, slowing to 1.5 percent in 2014. “The Reserve Bank will have to eventually take the foot off the accelerator, but the need to stand on the brake doesn’t arrive until the later years.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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