New Zealand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Proximity to Asia and Australia
- Touristic appeal
- Large and competitive agricultural sector (world’s leading exporter of dairy products)
- Balanced public accounts and contained public debt in normal times
- High quality of life
- Excellent business environment (ranked 1st in the Doing Business ranking)
- Island nation
- Reliance on foreign investment
- High household and corporate debt levels (especially in agriculture)
- Reliance on Chinese demand
- Shortage of skilled labor
- Housing shortage and soaring prices (+85% since 2008, including a 10% increase in 2020)
- Lack of R&D and low labor productivity growth compared to other OECD countries
An economic recovery expected in 2021
Even before the country recorded its first Covid-19 death, New Zealand imposed quarantine requirements for anyone entering the country in mid-March 2020, closed its border to foreigners and shut down all non-essential services. These strict measures led to a sharp decline in New Zealand's GDP in 2020. However, the country is expected to return to a high growth rate in 2021. That being said, after declining by an estimated 6% in 2020, private consumption will be curbed by household deleveraging (their debt amounts to 90% of GDP and 163% of their disposable income) and low population growth (reduced immigration). Moreover, gross fixed capital formation is not expected to reach its pre-crisis level in 2021. Nevertheless, investment will be driven by public investment and the development of numerous public-private partnerships to build road and social infrastructure. Exports of services will remain weak in 2021 because of the fall in tourism, while exports of goods, especially agricultural goods such as dairy products and beef for China, should not suffer from the crisis.
In terms of supply, the primary sector seems to have held up well, as the agricultural sector, which represents 5.8% of GDP, has hardly been affected by the crisis, unlike the mining industry (1% of GDP with gold and coal). New Zealand’s agriculture should continue to do well in 2021, as growth in demand, especially for proteins in Asia, should support the prices of meat, dairy and horticultural products. The secondary sector has been hard hit by the crisis, but should make a comeback in 2021 with the resumption of construction, capital goods manufacturing and so on. Services will probably continue to struggle in 2021. It is unlikely that tourism, which accounts for 15% of GDP and 19% of jobs, will pick up again this year, with a second wave of infections hitting the country in the second half of 2020, especially since local tourism is constrained by the impact of the crisis on wages and employment. However, other types of services, such as catering, could see their activity increase again in 2021. The various sectors will be supported by sustained fiscal stimulus. Regarding monetary policy, the central bank’s official rates are at almost zero and should remain low, which will facilitate credit.
Although still significant, the public deficit is shrinking
New Zealand has sound public finances, making it easier to implement ambitious stimulus plans when needed. In May 2020, this made it possible to release NZD 50 billion (17% of GDP) as part of the Rebuilding Together budget program to fight the crisis. These funds are in addition to the initial NZD 12.1 billion package announced in January 2020. Government spending is therefore expected to increase by 24% between FY 2019 and FY 2020 and by a further 10% between 2020 and 2021. The stimulus plan, combined with the recession and the slowdown in world trade, pushed the public balance into the red in 2020 and it will remain negative in 2021, despite a slight improvement. The plan is being partly financed by the country's central bank, which extended the limit of its asset-buying program in May 2020 to purchase a large number of government bonds over 12 months. Public debt will continue to increase, but its GDP share will remain relatively low. Accordingly, the country will not be punished by the financial markets.
The current account deficit is expected to widen slightly in 2021, but will remain small. In 2020, the decline in domestic demand weighed on imports, while agricultural exports were still in high demand. As the domestic situation improves, imports are expected to recover in 2021. The goods surplus will continue to offset partly the services deficit that emerged in 2020, following the collapse of tourism and transport, and will start to decline very slowly in 2021. The income account, which is structurally in deficit due to profit repatriation by foreign investors, should remain stable. The current account deficit will be financed mainly by portfolio investment and FDI.
A stable political situation
New Zealand is a stable parliamentary democracy with strong institutions. After having been postponed from September to October due to the occurrence of new Covid-19 cases in Auckland, the parliamentary elections of 17 October 2020 resulted in the victory of the Labour Party of outgoing Prime Minister Jacinda Ardern. Rewarded for its management of the crisis, the party won 65 seats out of 120 and is thus the first party to obtain an absolute majority in Parliament for more than a decade. Even though this victory allowed the party to govern alone, Jacinda Ardern invited the Green Party to join her in government under a "cooperation agreement".