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Global conflicts and trade threats could threaten New Zealand’s financial stability, driving inflation, tighter policies, and triggering recession

Banking / news
Global conflicts and trade threats could threaten New Zealand’s financial stability, driving inflation, tighter policies, and triggering recession
New Zealand Defence Force rehearse ahead of ANZAC Day 2023
New Zealand Defence Force rehearse ahead of ANZAC Day 2023

Geopolitical risks from Russia, China, and the Middle East pose one of the most serious threats to New Zealand’s financial stability, according to the Reserve Bank. 

It pre-published a chapter from its upcoming Financial Stability Report, warning that armed conflict, trade restrictions, or cyberattacks could harm the financial system.

Kerry Watt, the central bank’s director of Financial Stability Assessment & Strategy, said concern about geopolitical tension had been increasing. 

“As a small open economy, dependent on international trade and investment, geopolitical risks are clearly relevant to our financial system. Their potential impacts cannot be underestimated,” he said

Geopolitical risks have featured more prominently in recent risk assessments, with most New Zealand banks identifying geopolitical shocks as the biggest threat to their business in the RBNZ’s 2024 Reverse Stress Test. 

Unlike a typical solvency stress test, which asks banks to predict the impact of a specific recession, a reverse stress test starts with a target capital level and asks banks to imagine a realistic scenario that could result in that outcome.

Most banks included some form of geopolitical event in their scenarios, while others considered scenarios like another pandemic or a natural disaster such as an earthquake or volcanic eruption. 

“In some geopolitical scenarios, global supply chains were disrupted, leading to a resurgence of inflationary pressure and elevated interest rates,” the RBNZ said.

Geopolitical shocks can disrupt trade flows and create uncertainty, affecting economic activity and tightening financial markets by influencing funding conditions and asset prices. These two channels can combine to amplify risks to financial stability.

Interruptions to trade could push commodity prices higher, as occurred when Russia invaded Ukraine, and disruption to maritime trade routes could drive up shipping costs. This would likely lead to tighter monetary policy and higher debt costs for households and businesses, given that a large portion of New Zealand’s imports comes from the Asia-Pacific region.

The RBNZ noted that a “more extreme scenario” involving a major conflict in the Asia-Pacific region with “one or more key trading partners” would be highly disruptive for trade and investment. This may reference a potential scenario where China attempts to use force to reintegrate Taiwan or seizes other territory in the South China Sea.

Whatever the cause, factors like economic growth, unemployment, property prices, and interest rates were the key drivers of the stress test results. Most banks only reached the targeted capital level in scenarios involving severe recessions, with unemployment peaking between 8% and 18%, and property prices dropping 30% to 55%. The RBNZ noted that most of these scenarios were more severe than those used in typical solvency stress tests.

The RBNZ is considering incorporating a geopolitical scenario in its solvency stress test next year. New Zealand’s strict capital requirements, which aim to shield its economy from global shocks, mandate that large banks increase their total capital ratio to 18% by 2028, up from 13.5% today.

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32 Comments

Whenever I speak with CEO's and GM's that operate large companies and other business leaders, its amazing how many of them really have no idea of what is unfolding out there in the global geopolitical environment which has the ability to impact their businesses. You would think many would have learned to keep an eye on the global backdrop after Covid, a lot haven't. 

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Sure - so what should they do about it? 

Identifying the risk is the easy bit - the mitigation plan is the hard bit.

 

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Prepare for supply chain disruptions, source other countries that can supply, pre order in a lot of stock that you know may be impacted, things like that. 

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It is a reliable indicator of their general ability.

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On a more near term event: how many businesses have thought the potential effects of a significant increase in tariffs in the US?  Not just the direct effects but also the indirect transmission effects?

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Geopolitical risks from Russia, China, and the Middle East pose one of the most serious threats to New Zealand’s financial stability, according to the Reserve Bank. 

this implies Russia, China or Middle East intentionally threatens NZ, which is clearly not the case.

There will be conflicts between the all mighty west and those areas in question for sure.  and real threat is the all might west found themselves no longer that mighty any longer. 

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I disagree. The statement suggests that the fallout of the geopolitical tensions will cause financial havoc in NZ. It's not wrong. The only concern is that these tensions have been going on for a while and the RBNZ is only now flagging them as a risk?

China's aspirations may have a direct impact on NZ. A scenario they don't mention here is the importance of the trade routes up to Japan. I China chooses to blockade Taiwan, it will take very little shift to interdict all civil shipping and air traffic in the area. NZ has no current capability to protect its own interests in the area, other than diplomacy, and how well has that done so far?

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I'd agree with you on the potential complications and interruptions  to NZ  in terms of supply chain, financial markets and even political and diplomacy to China. and yes, China's aspirations will have impact on NZ. 

what I was saying is that, China will do what it will do, Russians will do what it'll do.  all of which comes down to how much can the West still control, how much it should control, and how much it should contract along with the power shift.  

when it comes to Taiwan, why should the west interfere Chinese politics? if the West does go ahead and intervene, how well does the west prepare and how far can it go? 

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Taiwan manufactures 90% of the worlds advances semiconductors, therefore them being blockaded would have far-reaching consequences to the rest of the world that would absolutely effect you and I. Just look at the impact of the drought they had a couple of years back. Factories had to close down, new cars around the world couldn't be built and those factories had to scale back, then you have all kinds of appliances using these, which impacts jobs, which impacts the economy.  

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This is not just Chinese politics unless you are gullible enough to swallow the propaganda that China spits out. Taiwan is now and has always been an independent, democratic nation. It is a persistent reminder to the CCP that they seized power illegally, and ultimately they failed to fully eliminate the enemy they defeated. 

Yes China will do what it will do, but it's actions will have a big impact on NZ, and we will have to choose sides. To not do so may wll mean we won't like the outcome.

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Because the world is increasingly multi-polar and moving away from the hegemonic US dollar system. The threat is the uni-polar hegemon, not the rest of the world.  

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I don't think anyone in Ukraine or Taiwan would agree with you.

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Yes, I think it would be better to refer to geopolitical risks that exist in those regions. By ascribing the causes of the risks to specific countries while excluding others the statement becomes political (and incomplete).

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Interesting that they note 'geopolitical tensions' without asking 'why?'

And the why is the bigger threat. 

By several orders of magnitude. The wars will not reduce because benign democracy breaks out. They will increase because an overshot population and a diminishing resource-pile says that there will be ever-more who will be ever more desperate. The usual limited-intellect approach is to blame some 'other' and use that as an excuse to fight them. 

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Let me tell you that the chance of a war around anywhere bordering China is not zero but close zero.

For NZ biz, investing in China, sell to China, buy from China. NZ as a whole will be just fine if doing these.

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Investment in China or from China not secured until run by CCP. It is becoming more and more dangerous now. 

 

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I'm willing to bet $1000 that China will invade Taiwan by end of 2025 and probably much sooner.

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the US invades Iraq, Syria etc...

China protects one of its own provinces - Taiwan from being seperated by its illegal separatists supported by the US.

See the difference? Smart axx?

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LOL!

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Lets make something clear Xing. The CCP has NEVER governed the Island of Taiwan. Chiang Kai-shek fled there with the remnants of the Nationalist armies after being defeated by the communists, and establish a true democratic state. It is no more a province of China than Madagascar is of Mozambique. 

The Nationalists are no more illegal than the communist insurrectionists who took over China all those years ago. Please peddle your rubbish somewhere else.

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Unlikely. Taiwan is more likely to fall with the US, as will Israel, as likely will we (we are part of the dollar hegemony - it is only a matter of time that it gets superseded by a Brics denomination or combo thereof). Then whither US unrepayable debt? And rather than go down the gurgler, most dying hegemons go to war (nothing to lose coupled with growing internal angst). 

Buckminster Fuller wrote a great piece about this, decades ago. Think it was in his 'Operating Manual for Planet Earth'. The in-pirates are challenged by the out-pirates, who eventually find a technology which obsoletes the in-pirates weaponry. The out-pirates become the in-pirates. Rinse and repeat - except ultimate scarcity which Einstein fully got: "I do not know with what weapons World War III will be fought, but World War IV will be fought with sticks and stones." 

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If you're serious, we should agree on an escrow service....

China is smart enough to know that war - and by extension the destruction of the Taiwanese economy - is not in their interest.

I'm willing to bet that Taiwan will at some point be a part of China again, but through a political event (such as the rise of a pro-Chinese political party in Taiwan).

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The chances of Taiwan becoming part of China are no more than Eire becoming part of the UK.

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I'm 100% serious, let me know what you have in mind.

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Would be easy to blockade Taiwan, but the only way to take Taiwan would be to disable Guam and South Korea US forces....    this would be World War 3,  Xi has seen how bogged down Putin became in Ukraine.  They are not even going to land on the beaches without massive losses.

I just do not see Xi physically taking Taiwan with the US so strong.

Sure if the US was to suffer some massive hit to capability ...    but I feel Xi's timeline is longer then his life.  IE I think within the next 100 years he wants to see Taiwanese realise they are better off with China then US.

He wants Taiwan but I do not believe he will take by force while US stands next to Taiwan.

 

 

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Trouble is, as an example, do HK people feel better they are now part of China? I dont mean the CCP stooges.

China’s track record is not great as all they can offer is a dictatorship - where you can be jailed for ‘making trouble’……

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HK is unsustainable - in the real sense of the word - irrespective of regime. 

It's just an ecology/physics thing, like an overstocked paddock. Works while the supply of ex-paddock hay keeps coming. 

Stops working when the energy and material supply ceases, or even curtails substantively. 

Cannot be fixed by culture, cannot be assuaged by proxy. 

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I struggle to think how any rational calculus could conclude that the benefits of invading Taiwan could outweigh the costs. Yet imperialist actions are often not rational.
China would lose many lives if they invaded Taiwan. Yet Russia is also losing many lives, and that hasn’t stopped Putin.

There would be big economic fallout for China. But maybe imperial ambitions outweigh becoming the next North Korea. 
I favour the theory that China will not invade Taiwan, and that they will try and coerce Taiwan over time. Yet, I certainly do not rule out the possibility of an invasion. Maybe a 30% chance 

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The RBNZ statements on geopoliitcal risks are only there to prepare for the next OCR announcement in a few days.

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The RBNZ drops are done??  Interest rates have bottomed already???
Looks not to far fetched the way bond yields are ratcheting upwards in a big way.....

The shrieks and howls from the Housing Ponzi squad will be deafening!!
- another silver bullet goes into the NZ housing market vampires

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Gee, there’s been a few good conspiracy theories today!

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RB rhetoric continues to be about inflation despite inflation about to fall through the bottom end of their target range.

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