New Zealand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Proximity to Asia and Australia
- Attractive tourist destination
- Large and competitive agricultural sector (world’s leading exporter of dairy products)
- Contained public debt
- High quality of life
- Excellent business environment
- Island nation
- Reliance on foreign investment and capital
- High household and corporate debt levels (especially in agriculture)
- Reliance on Chinese demand
- Shortage of skilled labor
- Lack of R&D and low labor productivity growth compared to other OECD countries
- Environmental issues, notably due to the importance of the intensive agriculture
- Socio-economic inequalities between Maoris and non-Maoris despite Prime Minister Ardern’s commitments on this issue
SLUGGISH ECONOMIC GROWTH IS EXPECTED
Despite lifting most COVID-related restrictions in September 2022, the economy is set to decelerate further in 2023 amid high inflation and rising interest rates. Fuelled by food, energy, and housing prices, inflation reached a three-decade high in the second quarter of 2022. While the price increase will decelerate in 2023, second-round effects from higher prices the preceding year will drive inflation. It is expected to continue to affect consumer confidence, which hit an all-time low in mid-2022, and, in turn, household consumption (57% of GDP). In addition, the high level of household indebtedness (173% of disposable income in Q2 2022), declining housing prices, and slower population growth due to lower immigration since the pandemic will also constrain private consumption growth. In the face of accelerating inflation, the Reserve Bank of New Zealand (RBNZ) increased interest rates in late 2021. Following the invasion of Ukraine by Russia, the central bank became more aggressive, increasing the size of hikes first from 25 bps to 50 bps and then to 75 bps, with the policy rate standing at 4.25% on 10 January 2023. With inflation expected to remain high, RBNZ could be prompted to make additional hikes in 2023. Rising interest rates and the housing market downturn will impact investment, which is expected to slow. Public investment in infrastructure projects, including transport, should boost gross fixed capital formation. Exports of services should recover as tourism (14% of GDP, 16% of jobs in 2019) rebounds gradually after the country allows fully vaccinated international travelers to enter the country in August 2022. However, exports of goods could take a hit from the global economic slowdown, with China and the US accounting for 32.5% and 10.5% of the total in 2021. In addition, recession risks in Europe loom on export prospects (EU and UK represented 8.6% of goods exports in 2021).
A DURABLY SIZEABLE CURRENT ACCOUNT DEFICIT
After higher expenses from the Delta and Omicron outbreaks during FY2022, the government is set to return to fiscal consolidation in FY2023. The budget for the year ending in June 2023 reveals lower expenditures, despite durably high spending on health (15% of the total) and introducing a USD 1 billion cost-of-living package to support low and middle incomes amid rising inflation. In the long term, the government aims to post fiscal surpluses from 2024 to 2025. While public debt should increase, its share relative to GDP will remain relatively low compared to most developed economy peers.
The current account deficit is expected to remain high in 2023. With export growth to decelerate, the trade deficit should continue to weigh on the existing account, while persistently elevated energy prices will support the import bill. Meanwhile, the deficit in the trade of services is likely to narrow as easing border restrictions will help tourism receipts. The income account, structurally in deficit due to profit repatriation by foreign investors and debt servicing costs (external debt accounted for 88% of GDP in 2021), should remain sizeable. The current account deficit is traditionally financed by significant financial and capital inflows, mainly in portfolio investment.
TORN BETWEEN ECONOMIC STAKES AND DEMOCRATIC VALUES REGARDING CHINA
New Zealand is a stable parliamentary democracy with strong institutions. Rewarded for managing the crisis in the parliamentary elections in 2020, the Labour Party obtained an absolute majority in Parliament. While its leader Jacinda Ardern conserved the highest share with 40% of poll respondents in September 2022 mentioning her as their “preferred Prime Minister,” ahead of Christopher Luxon (the leader of the National Party and leader of the Opposition), she resigned in January 2023. Chris Hipkins was then sworn in to succeed her. While his results in the first polls since he became PM were similar to the lasts of Ardern, the tight advantage over the Opposition suggests a loss of seats in the forthcoming elections. In 2022, local elections resulted in the Labour Party losing in two major cities, Auckland and Wellington.
Regarding foreign affairs, the country has chosen to maintain a friendly stance towards China. Despite rising tensions between the latter and the US, with which New Zealand has a security alliance, and Taiwan, the country has attempted to maintain a balanced stance vis-à-vis Beijing, given its strong economic ties with the second-world economy. That being said, it was among the signatories of a statement presented at the UN Committee on Human Rights calling for China to respond to findings of human rights violations against the Uyghur in Xinjiang. Regarding the invasion of Ukraine by Russia, New Zealand condemned the Kremlin’s actions and introduced sanctions in April 2022. Additional measures focusing on the defense and security sectors were implemented in October.