New Zealand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Proximity to Asia and Australia
- Tourist appeal and large agricultural sector
- Small public debt; balanced public accounts
- Dynamic demographics thanks to immigration
- Quality of life
- Economy dependent on foreign investment
- High household and corporate debt levels (particularly in the agriculture sector)
- Dependence on demand from China
- Shortages of skilled labor
- Housing shortage
- Weakness in R&D
Dynamic Growth Despite Continuing Dangers of the Housing Market
Sustained by domestic demand, activity, is expected to remain firm in 2018. Household consumption will likely be boosted by higher wages, falling unemployment (4.6% in October 2017), and continuing low-interest rates (1.75% in November 2017). In addition, lower income households will receive increased family allowances, a 5% increase in the minimum wage, and a reduction in income tax. Public spending is expected to help sustain economic activity through investments in infrastructure and social welfare.
Exports are set to be revitalized, thanks to the improving terms of trade linked with rising milk prices (one-quarter of exports), and by firm external demand. The arboriculture (apple and kiwi) and wood sectors are also likely to perform better. However, the level of indebtedness among farmers is high due to the need to offset losses caused by persistent low prices, which means that they are vulnerable to price movements and any major climate shocks (e.g. droughts, earthquakes). The tourism sector is also expected to perform strongly, although its contribution to growth will likely be smaller.
The monetary policy imposed by the central bank is likely to be less accommodating in 2018, due to the goal of maintaining inflation at its target level (1-3%). The slowdown in the property market and in credit will help limit the risks associated with higher financing costs. The housing market is expected to contract because of the reduction in demand linked with the excess cost of housing, the high levels of household indebtedness (170% of disposable income) and the reduction in immigration. The construction sector is likely to feel the effects of this slowdown, and also to suffer from a labor shortage.
Strong Budget Situation and Current Account Deficit Under Control
The budget is expected to be very close to balance. Spending on social and health care is set to continue to be the main expenditure item, especially as these are due to rise under the “Family Income” program. This covers income tax exemptions for those on very low incomes, as well as increases in family allowances. Substantial infrastructure investments are also expected, notably with the reconstruction of the roads and railways damaged in the November 2016 major earthquake. The increase in spending should be limited, however, and offset by a slight increase in revenues. Public debt, already low, will likely fall, but will continue to be held by non-residents. In addition, the country will have to find a way of dealing with an increasing deficit in its social security system (ageing population).
The current account is expected to worsen slightly in 2018. This is subject to a structural deficit due to the income balance deficit (3% of GDP in 2016) linked with the repayment of external debt (90% of GDP), the low domestic savings rate, and the outward transfer of profits by foreign firms. Moreover, the balance of trade is set to remain in deficit (1% of GDP), as the growth of exports will still not cover that of imports. The balance of services, however, should be in surplus (1.8% of GDP), mainly thanks to tourism.
The New Zealand banking sector is essentially well capitalized, although the low household savings rate means that banks have to borrow on the financial markets and are thus exposed to their volatility. The level of concentration in the sector –just four key banks (mainly subsidiaries of Australian banks) – and high household debt levels are also potential areas of vulnerability.
A New and Fragile Coalition Government
In the September 2017 parliamentary elections, the conservative National Party, in office since 2008, lead the vote at 45% (56 seats out of 120), but failed to obtain an absolute majority and thus form a government. Following five weeks of negotiations, the center-left Labor Party (second place with 46 seats) formed a coalition government with the support of the populist New Zealand First party (9 seats) and the Green Party (8 seats). Led by the new Prime Minister, the Labor Party’s Jacinda Ardern, the government’s policies are expected to be less welcoming in terms of immigration and foreign investors, and to be more expansionist regarding the budget. Nevertheless, disagreements between the coalition member parties could derail the coalition, especially as the National Party will be a powerful opposition force in Parliament.
In economic terms, the reduction in business failures looks set to continue, and the business climate is strongly positive, with the country situated at the top (out of 190 countries) of the World Bank “Doing Business 2018” rankings.