PM Key still optimistic NZ economy can grow in line with Treasury forecasts, following global market turmoil, US rating downgrade

By Alex Tarrant

Prime Minister John Key says it is “not in the slightest” way fair to assume Treasury’s growth forecasts in Budget 2011 could be too optimistic, given the recent global market downturn.

New Zealand was well-placed to handle the rout being played out on global markets, as government policies had positioned the economy well for future growth, and with room still left in terms of monetary policy if the Reserve Bank felt it needed to provide more stimulus to the recovery.

Treasury is forecasting Gross Domestic Product (GDP) growth of 1.8% in the year to March 2012 to be followed by 4% growth in the year to March 2013, 3% in 2014 and 2.7% in 2015. Short-term growth rates are expected to be supported by rebuilding work in Christchurch after the devastating February 22 earthquake, high export commodity prices and the Rugby World Cup later this year.

In the short-term, the Rugby World Cup and rebuilding work in Canterbury would underpin economic growth, although a downturn in global growth could hurt the New Zealand economy slightly, Key said on Monday evening.

“If the world slows down as a result of the credit downgrade then obviously that is likely to have some impact on New Zealand – we’re not immune from that,” he said at his weekly post-Cabinet press conference in the Beehive.

“But one of the factors that does help is if you do see that slowdown, you’re likely to see some pull-back in commodity prices and potentially a lower exchange rate. So I’m reasonably confident we’ll meet our forecasts,” Key said.

'Follow the current track'

Asked about today's warning from Standard & Poor's that New Zealand could be facing an export-led downturn as demand dropped off from the US and Europe, Key maintained the view that the government's actions over its three-year term had put New Zealand on a good footing to deal with what was thrown at it.

“I think we took the right course of action. If you go back to 2009 there was a lot of pressure on us from a number of quarters for us to do more and to spend more. We resisted that because we believed that the policies we’d campaigned on and were then implementing, were stimulatory, and I think that was the right course of action to follow," Key said.

“My view is that we’ve always assessed the situation when it’s required, but I am very committed to wanting to keep our [net] debt levels below 30% of GDP if possible. We’ve got the Christchurch earthquake to contend with," he said.

"Most economic commentators, including the Reserve Bank and the Treasury are of the view that we are seeing strengthening of our economy, and our labour markets. So at this point I think we should follow the track that we’re on, and I wouldn’t be looking to have extra stimulation.”

Still room with the OCR

One thing that gave New Zealand an advantage over other countries was that we still had room to move in terms of monetary policy.

“Interest rates are 2.5% in New Zealand, most of these countries you’re talking about have interest rates that are zero. So there’s some room there if it was all required from the Reserve Bank," Key said.

"I think secondly our exchange rate, because it is high – particularly against the US dollar – again gives us some flexibility and there could be some correction there," he said.

"The government is following, I think, a credible, sensible path to get us back into surplus and to protect New Zealanders, and I think that’s the right course of action. We’ll continue to monitor what happens around the world, but I’m comfortable we’re on the right path.”

Banks, companies are stronger; Room in labour market

Key was more optimistic than S&P’s comment that if there was another big global downturn, that it could be longer and deeper than in 2008.

“If you have a look at what’s happening around the world, firstly, back in 2008-2009, the banking system was extremely stressed. Now, that situation is, for the most part, in better shape. You’ve seen a lot of the bad loans being written off around the world, in certain places recapitalisation of the banking system," he said.

"Secondly, there’s no question that corporate balance sheets are a lot stronger. Apple has US$85 billion in cash on their own, let alone a lot of other companies. And in New Zealand corporate balance sheets are very strong, as they are in Australia, so I think that’s better.

"Thirdly there’s been an adjustment in terms of the labour markets. Tragically people have lost their jobs, but that’s put companies in a leaner position than they were," Key said.

"From the government’s point of view, we front-end loaded a lot of our borrowing requirements, so we’re well and truly cashed-up in terms of our borrowing requirements, and we borrowed that money at very, very efficient yields - we’re paying quite low interest rates for that cash," he said.

"So I personally think the world’s in a lot better shape to cope with this.”

The ECB's helping

Another reason markets were turning down as strongly the might was due tof the European central bank today coming out saying that it may take some action.

"That’s one of the reasons why the markets aren’t down in a major way today. You’ve got Korea down about 4% and us down about 2.5%, Australia down about 2% in terms of the stock exchange, but they’re not dramatic moves," Key said.

"I think that’s partially because the ECB’s have indicated they might buy European sovereign debt if it’s required. So personally, I don’t think this is going to be as bad as what we saw in 2008 and 2009," he said.

'The US needs to take its medicine like we did'

Asked about the government’s basing of New Zealand’s recovery on export-led growth, while the US and EU slowed down, which in turn would probably lead to slowdowns in China and Australia, Key was still optimistic.

“I think it’s a slightly different situation in the US. Non-farm payroll numbers weren’t too bad on Friday. Overall, I think what you’ve got is just a situation where Standard & Poor’s is telling the United States it needs to take its medicine," Key said.

“We were of the same view back in 2010, 2011 – when we put together our budgets – that we had to take a responsible view and keep an eye to what the rating agencies were saying. If we didn’t do that we’d be downgraded," he said.

"I think that’s the challenge, is how efficiently the US can work through an environment where it has less spending. But I think it’s a little bit too early to make predictions of exactly what that means. You’ve still got a strong Asian market."

The US downgrade would have some impact on New Zealand, but Key personally was less pessimistic than he was in the back-end of 2008.

'Private sector debt issue serious'

The government had taken seriously Standard & Poor’s issues surrounding New Zealand’s high private sector debt, Key said.

The main reason for New Zealand’s AA+ credit rating being placed on negative watch in November last year was a revision by Standard & Poor’s on the way it assessed a nation’s total debt, as governments around the world increasingly bailed out failing private companies. That led the rating agency to take into account private sector debt more when rating a sovereign.

“That’s why we made the changes in Budget 2010 and Budget 2011, in particular raising consumption taxes and dropping personal taxes, dropping taxes on savings, trying to get rid of the anomalies in the system, taking NZ$1 billion out of the property market effectively. All of those things were all attempts to lift national savings, as is the potential case that we’re looking at whether we have auto-enrolment for people that aren’t in KiwiSaver, but are currently in the workforce," Key said.

There could be more done to encourage banks to increase funding from domestic sources, “but if you look at how you can increase national savings, which is the basic argument, you ultimately have to go back and say, ‘how do we do that,’ and that is, New Zealanders generally need to be wealthier, that gives them greater opportunities to save, and they have to have opportunities to save," Key said.

"That’s one of the arguments around the mixed-ownership model, is about extention of the assets available for New Zealanders to invest in,” he said.

'Asset sales could be delayed a few months if needed, but time on our side'

Meanwhile, asked whether the government could delay its mixed-ownership policy if markets were still weak, Key said that was possible, although it would be lame to assume the government would not raise if forecast figure of up to NZ$7 billion from the partial privatisations of Meridian, Genesis, Mighty River Power, and Solid Energy.

The State asset sales were some way off, with National having to first win the election the mobilise the mixed-ownership policy.

“Overall if you look at the very long-run history of bond markets versus the equity markets, the long-run return of equity markets is a margin above the bond markets. So if you invest in equities for a long period of time, history tells you you make more money than if you invest in the bond markets,” Key said.

“I think these are very strong assets that New Zealanders will want to own. I don’t think there’ll be any question there’ll be a very strong appetite for shares in SOEs, if we’re in a position to be able to roll out that policy," he said.

The government would assess the markets in the lead up to the sale, like in any other case.

“Whether you’re a public entity or a private sector company looking to go to the equity markets, you always have to have a mind for what’s happening. But we’ve got time on our side, and what’s happened today isn’t necessarily going to be what the position’s going to look like in 12-18 months time,” Key said.

Asked about timing problems due to the possibility of weak markets, Key replied:

“You’re talking about potential timing implications something in the order of months. If you go and Labour’s plan, they are saying by their own numbers – forget about our analysis of it, which will be a lot more robust than theirs – but even by their own numbers, they’re going to run more debt than us for the next decade. That’s much more worrying I would have thought to the rating agencies.”

It was not a good analysis to assume the money raised by the sale may be nothing like NZ$7 billion.

“I really don’t. It’s pretty lame to make the case that, if there’s going to be slight volatility in the markets then all of a sudden you’re never going to get NZ$7 billion. The history of IPOs shows you that sometimes, products don’t go to market, or a company doesn’t go to market, but it’s usually a timing differential of a few months, maybe six months," Key said.

(Updates with asset sales comments, videos, more comments from post-cab)