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Insights 18: 22 May 2020
Column: Roger Partridge on NZ's economic opportunities
 
Podcast: Bryce Wilkinson comments on foreign investment
 
Research Note: The rule of law or the law of rulers

International confidence matters
Dr Oliver Hartwich | Executive Director | oliver.hartwich@nzinitiative.org.nz
This week, opinion polls revealed that the Government is more popular than ever. On current figures, Labour could comfortably govern alone, the Prime Minister’s ratings are stratospheric, and nine in ten New Zealanders approve of the Government’s handling of the public health crisis.

The Ardern Government has no problems pleasing the domestic crowd, for now. But harder times lie ahead. One risk from the dire fiscal outlook is that international markets could lose confidence in New Zealand.

Several factors should make us worry about New Zealand’s international standing. New Zealand has one of the weakest Net International Investment Positions (NIIP) in the world. Put simply, as a nation we owe the world more than the world owes us.

At the end of last year, New Zealand’s NIIP stood at a negative $171 billion, more than half our annual economic output. Even Mexico, Nigeria and Venezuela are not as indebted to the rest of the world as New Zealand.

The Covid-19 crisis will deteriorate this position further, not least because it hurts two important export industries, tourism and education.

To be clear, a high NIIP can be sustained if the rest of the world has trust. New Zealand’s NIIP used to be higher a decade ago and did not cause trouble back then.

But there is a difference, and that difference is the alarming signals New Zealand is sending to the world today.

Over the past couple of months, the Reserve Bank has embarked on a virtual money printing exercise. By August, ANZ believes quantitative easing could reach $90 billion – about a third of GDP. This may not only destabilise the NZ dollar, it also conflates monetary and fiscal policy.

The Government is also making it harder for foreigners to buy New Zealand assets by changing the Overseas Investment Act – another warning sign for international investors.

Meanwhile, the Reserve Bank has stopped banks from paying dividends to their overseas parents for this year. Again, that is not what international investors or analysts like to hear.

All this, of course, follows other abrupt policy changes over the past couple of years such as the ban on oil and gas exploration.

Those watching from outside will soon begin to wonder what is going on in New Zealand: Is this still a place in which they really want to be invested?

New Zealand experienced once before how abruptly analysts in Sydney, London and New York can give a country the thumbs down. Though S&P maintained New Zealand’s triple A rating until 1983 and Moody’s until 1984, these ratings were worth nothing once market participants lost trust in New Zealand around the time of the 1984 election. Markets always have trust in a country right until the moment they don’t.

The situation today is different because New Zealand no longer has a fixed exchange rate. But that does not mean we can relax.

To see what happens when international markets lose faith in a country with a free-floating currency, just look at Turkey. Incidentally, Turkey is a country with an NIIP nearly identical to New Zealand’s.

For a while, Turkey was a rock-star economy. The Turkish Lira was moving towards parity with the US dollar in 2008. But then, an erratic and interventionist Government combined with a compromised central bank wreaked havoc. Today, the Turkish economy is a shamble, and the Lira only buys 15 US cents.

It hardly needs spelling out what a currency collapse means. A country experiencing it will be materially poorer as its people can no longer afford the goods and services they took for granted. And as people’s savings devalue, a plunging currency brings pain and misery to countless families.

New Zealand is not Turkey, but to avoid the same fate we must be more cautious.

We are a small country that barely matters to the world. For investors, New Zealand is a nice-to-have, not a must-have.

Through our negative international debt position, as a country we are vulnerable to international markets suddenly withdrawing support. New Zealand has far less leeway than larger economies. To keep international investors’ trust, we must remain squeaky clean in our fundamental economic institutions.

If we are not, New Zealand will come out of the Covid-19 crisis as a broken economy and a failed state.

Budget 2020's response to Covid -19
Dr Bryce Wilkinson | Senior Fellow | bryce.wilkinson@nzinitiative.org.nz
Last Friday, I was invited to appear before Parliament’s Epidemic Response Committee on Tuesday 19 May. The topic was Budget 2020.

My remarks began by pointing out that one measure of the scale of the coming recession is the two-year decline in real Gross Domestic Product (GDP). Treasury projects that real GDP will be 5.6% lower for the year ended June 2021 than in the year ended June 2019. That would be the biggest two-year decline since 1951-1953.

However, this calculation overlooks forgone real GDP growth. Treasury’s Budget 2020 forecast for real GDP in fiscal year 2021 is 11% lower than it forecast in December 2019.

Yet even these underestimate the full cost. By 2024, the cumulative projected lost GDP will be 27% of 2020 real GDP. Since annual nominal GDP is about $320 billion, that loss represents $48,000 per household.

Researchers will debate for decades how much of that decline was due to the lockdown and if that cost was proportionate to the statistical value of saving lives.

To add some wind into the coming economic doldrums, Budget 2020’s has pulled together $50 billion of additional spending.

All of it, and more, is to be funded from borrowing. The cumulative fiscal deficits between 2020 and 2024 using the OBEGAL measure (operating balance before gains and losses) rise to $100 billion.

But Government is primarily shifting money around, which benefits some at the expense of others and transferring net worth from the Crown to the recipients. Those missing out might have otherwise benefited from that Crown net worth.

The losers hardly know who they are, but the winners know what they have gained. This is why deficit spending might be politically seductive, but is actually highly dangerous.

Those were my core points for the committee. The rest of my presentation covered why a Government spending led recovery strategy is not the most efficient way to get the country back on its feet.

In tough times, it makes sense for the Government and households to spend more than they earn. But poorly-justified spending and restrictive regulations do not make sense.

The only way for New Zealand to generate greater income is to create new jobs and boost productivity. Entrepreneurs do not need Government to lead them. They need to be freed up to find a market niche and do their best to satisfy that need.

In other words, Governments should aim to keep regulatory and tax barriers low rather than high.

Dr Bryce Wilkinson's speech to the Epidemic Response Committee can be found here.

Let's be more direct about investment
Nathan Smith | Chief Editor | nathan.smith@nzinitiative.org.nz
It’s not exactly clear why there is so much nervousness about overseas interests buying something like the Auckland port. It’s not like they can take the port with them.

Surely a US dollar is just as good as an NZ dollar, and foreign capital is often the only way many early stage companies can get any funds, given the shallow pool of high-net-worth Kiwi investors.

Maybe it’s not the investment that bothers people, it’s how some investments might look.

I mean, it wouldn’t look too great for a Japanese interest to buy a significant stake in Sealord, for example. Last year, Japanese whaling ships resumed whaling in Japan’s territorial waters, although not yet into Antarctic waters. But I would certainly twiddle my moustache if I saw Kyodo Senpaku Co. on Sealord’s books.

That’s not the only one. With all the hoopla about Beijing’s murky involvement with its telcos, do Kiwis really want to read about one of them building the next Covid-19 tracing app? If data is the new oil, then at least in this case perhaps a renminbi isn’t the same as a US dollar. It just wouldn’t smell right.

Speaking of weird-smelling deals, I could totally understand the raised eyebrows if a Saudi Arabian interest bought a bunch of equity in Southland sheep farms. Kiwis have a notoriously short memory for political scandals, but that one would be particularly ironic.

And while only political hacks and teenagers care about hypocrisy, the comedy potential of a European car company buying shares in Z Energy’s new emissions-friendly business plan would help fill 20-minute stand-up routines in bars across the country.

By the way, has anyone looked at the shareholdings of New Zealand vineyards? I’m looking for French interests. No wine company outside France can use the name “Champagne” to market their bottles, so they use the bland term “sparkling wine” instead. Money is money, but seeing French investors supporting Kiwi wine strikes as a bit too… French.

And there’s something very colonial about rich Americans buying bolt-holes in Queenstown in case they need to escape a return of tyranny in their beloved US of A. What about Kiwis? If the safest fortresses in Queenstown will be full of Californian tech nerds during the next Apocalypse, are the rest of us expected to hide behind flax bushes in Eketahuna? This is New Zealand, dammit!

Come to think of it, without some overseas money, how will we get the necessary US dollars to buy potatoes and bread when the Kiwi dollar hyperinflates? Good question.
 
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