New Zealand: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Low milk prices and the Chinese slowdown are affecting the economy
Growth is expected to be slower in 2016 than in 2015. The country is exposed to several downside risks. The Chinese slowdown could reduce New Zealand's exports to China (its largest trading partner) and Australia (the country’s second largest trading partner and China’s biggest trading partner). The persistently low milk prices, compared with the 2014 peak, are expected to take their toll on the dairy sector (25% of goods exports and 3% of GDP). The full scale of the El Niño meteorological phenomenon remains uncertain but could significantly affect the agricultural sector. The gradual winding down (by 2017) of the rebuild program in the Canterbury region (following the 2011 earthquake) is expected to have a negative impact on construction, although investments in the Auckland region are very dynamic. The strength of domestic demand is, however, expected to limit the negative aspect of these risks. Between June and September 2015, the New Zealand Central Bank (RBNZ) cut its key rate by 100 basis points to stand now at 2.50%. This more accommodating policy is expected to sustain household consumption, despite high household debt levels (155% of gross disposable income). Exports will benefit from the past depreciation of the currency. Depreciation pressures might persist considering the tightening of the Fed’s monetary policy.
It should be noted that the authorities have both budgetary (low debt and deficit) and monetary (relatively high interest rate compared with the Fed and the ECB) room for maneuver to boost economic activity if necessary.
Moreover, the signing of the Trans-Pacific Partnership agreement (TPP) in October 2015 will be an opportunity in terms of growth, employment and exports (40% of New Zealand’s exports are to TPP countries), particularly for the agriculture sector and dairy products. Another multilateral agreement (the Regional Comprehensive Economic Partnership, RCEP) being negotiated, which would bring together, among others, China, India, Japan and South Korea, could further increase economic opportunities. The signing of these agreements would enable the country to raise the share of exports in GDP to the authorities' desired target of 40% by 2025 compared with 30% in 2015.
Public finances in good health but worsening current account
Despite the economic slowdown, the return to a budget surplus remains a government priority, because the country is heavily indebted to non-residents and because of its aging population (leading to a rise in health spending). Its budget deficit is therefore set to decrease further and to be balanced in the medium term. At the same time the public debt is expected to fall gradually.
The current account balance, which runs a structural deficit because of the income balance deficit, is expected to worsen slightly in 2016. The import slowdown is not expected to offset that of exports, hit by the economic slowdown of the country’s two main partners (China and Australia).
New Zealand’s banking sector is well capitalized and stress tests have shown the banks to be resilience in the event of a property crisis. However, the sector seems vulnerable because it is very concentrated (dominated by four banks) and exposed to high household debt, particularly among farmers. Meanwhile, because of the low household savings rate (3%) the banks are borrowing on the financial markets and are therefore exposed to the volatility of these markets, which could increase if the Fed raises its interest rates.
A country favorable to the business environment
John Key, Prime Minister since 2008, will have as his main challenge that of revitalizing the economy in view of the upcoming parliamentary elections, which will be held no later than November 2017.
New Zealand is second (out of 189 countries) in the World Bank’s latest Doing Business rankings. Notably, the country ranks first with regard to starting a business, getting credit, protecting minority investors and registering property.