Country report NEW ZEALAND
Summary
New Zealand is still facing the consequences of the Canterbury earthquakes in 2011. Government
finances deteriorated further due to increased reconstruction-related government spending. The
economy fared relatively well in 2012 amid the reconstruction activities, favourable weather
conditions and high commodity prices. The strong exchange rate is hindering growth in other
tradable sectors. The country has a large negative net international investment position and a large
persistent current account deficit. A welcome development is that private deleveraging is on-going.
Despite relatively high commodity prices, though, the agricultural sector has not been able to
decrease debt levels. Also the housing market is a risk: prices continue rising and credit standards
are weakening.
Author:
Marcel Weernink
International Macro Economic Research
Economic Research Department
Rabobank Nederland
Contact details:
P.O.Box 17100, 3500 HG Utrecht, The Netherlands
+31 30 21 60973
m.weernink@rn.rabobank.nl
May 2013
Rabobank
Economic Research Department
Page: 1/5
Country report NEW ZEALAND
New Zealand
National facts
Social and governance indicators
rank / total
Type of government
Parliamentary democracy
Human Development Index (rank)
6 / 187
C apital
Wellington
Ease of Doing Business Index (rank)
3 / 185
Surface area (thousand sq km)
268
Index of Economic Freedom (rank)
4 / 179
Population (millions)
4.5
C orruption Perceptions Index (rank)
1 / 176
Main languages
English (91.2%)
Press Freedom Index (rank)
8 / 179
Maori (3.9%)
Gini index (income distribution)
36.2
Protestant (38.6%)
Population below $1.25 per day (PPP)
n.a.
Main religions
Roman C atholic (12.6%)
Head of State
Maori C hristian (1.6%)
Foreign trade
Queen Elizabeth II
Main export partners (%)
2011
Main import partners (%)
Head of Government (prime-minister) John Key
Australia
23
C hina
16
Monetary unit
C hina
12
Australia
16
11
NZD
Economy
Economic size
2011
US
8
US
Japan
7
Japan
6
bn USD
% world total
Nominal GDP
164
0.23
Dairy products
22
Nominal GDP at PPP
139
0.17
Meat products
12
Export value of goods and services
49
0.22
Forestry products
7
IMF quotum (in m SDR)
895
0.41
Wool
2
1905
5-year av.
2.1
1.1
5
5
Economic structure
Real GDP growth
Agriculture (% of GDP)
Industry (% of GDP)
25
25
Services (% of GDP)
70
n.a.
Standards of living
Main export products (%)
Main import products (%)
Machinery & electrical equipment
20
Mineral fuels
15
Transport equipment
12
USD
% world av.
Nominal GDP per head
36637
333
Openness of the economy (2011)
Export value of G&S (% of GDP)
30
Nominal GDP per head at PPP
31114
240
Import value of G&S (% of GDP)
30
Real GDP per head
27580
333
Inward FDI (% of GDP)
1.2
Source: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without
Borders, World Bank.
Economic overview and outlook
The New Zealand economy fared relatively well during the global financial crisis, but the recovery
was frustrated by the damaging Canterbury earthquakes. The first earthquake occurred on 4
September 2010, and was followed by more than 11,000 aftershocks, of which the one in February
2011 was the most damaging. Even so, GDP growth was 1.5% in 2011, and is estimated at 2.5%
in 2013 by the IMF. Growth in 2012 was driven by agricultural exports (due to the favourable
weather conditions and high commodity prices) and the construction sector as earthquake
reconstruction finally got going. Private consumption and business investment is still subdued, also
fiscal consolidation measures are negatively affecting growth. The government strives for an
operational budget balance1 in the fiscal year 2014-20152.The export of services (mainly tourism)
is hampered by the strong currency.
The outlook for 2013 is stable, the IMF expects 2.7% GDP-growth. Earthquake related
reconstruction efforts are gathering pace, though the positive impact will be offset by the on-going
budget deficit reduction, the strong currency, the private sector deleveraging process and the
severe drought that hinders agricultural output growth.
1
New Zealand uses the concept of ‘operational budget balance’ which equals the operational revenues minus
operational expenses.
2
Fiscal deficits are still high as a result of extra government spending in response to the Canterbury
earthquakes.
May 2013
Rabobank
Economic Research Department
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Country report NEW ZEALAND
Impact of Canterbury earthquakes on public finances
Government finances are strong in an international perspective, but are exposed to future
ecological risks. As the Canterbury earthquakes showed, New Zealand is exposed to natural
disasters. The financial impact of the earthquakes was reduced by the Earthquake Commission
(EQC), a government agency that provides insurance against natural disasters to owners of
residential properties, and reinsurance abroad. More than half of the estimated NZD 13bn cost to
the government will be covered by the EQC. Most assets of the EQC will thereby be exhausted and
will need to be replenished (homeowner premiums are increased to do this more rapidly). Any
earthquakes in the near term will, therefore, directly affect government finances.
The two-speed economy
The country very much depends on the exports of agricultural commodities, which make them
exposed to adverse weather conditions (like the recent drought) and the volatility in commodity
prices. The main export partner remains Australia (export share is broadly stable over the last 10
years), but trade with China is increasing fast. This is the result of the free trade agreement
between China and New Zealand that entered into force on 1 October 2008. Since then, exports to
China grew fourfold. This makes New Zealand vulnerable to negative economic developments in
China, especially since their main trading partner, Australia, is also strongly exposed to the
country3. Moreover, less demand from China could significantly affect commodity prices.
The terms-of-trade gains resulting from the increase in commodity prices resulted in an
appreciation of the exchange rate. Since interest rates in New Zealand are also relatively high, the
appreciation is amplified by increased foreign holding of New Zealand government debt. The
strength of the exchange rate has a negative impact on other tradable sectors, like manufacturing
and tourism and thereby lead to a widening of the current account deficit. Efficiency gains are
needed to preserve employment in these sectors. Unemployment is still relatively high compared to
pre-crisis levels, since the labour market suffers from a skills mismatch. A high number of
construction workers is needed for the reconstruction efforts, whereas many workers in the tourism
sector are unemployed.
Figure 2: external assets and liabilities
Figure 1: Current account breakdown
% GDP
% GDP
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Net current transfers
Net income
Balance on goods
Net current account
Balance on services
Source: Statistics New Zealand
(2012Q4)
160
% GDP
% GDP
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
Assets
Direct investment, equity
Portfolio investment, equity
Other investments, trade credits
Other investments, deposits
Financial derivatives
Liabilities
Direct investment, other
Portfolio investment, debt
Other investments, loans
Other investments, other
Reserve assets
Source: Statistics New Zealand
3
According to the IMF, Australian GDP shocks are transmitted almost one-to-one to New-Zealand mainly
through the financial linkages between the two countries. The Fund estimates that a 1% growth slowdown in
China would give a negative shock to Australian GDP by 1/3%.
May 2013
Rabobank
Economic Research Department
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Country report NEW ZEALAND
High external debt levels
New Zealand has a long history of current account deficits (figure 1), causing a large negative net
international investment position (NIIP) (the largest among the AAA-rated countries). The foreign
liabilities reflect the low amount of private savings in New Zealand, which was negative over a long
period. Households are currently in a process of deleveraging that constrains private consumption
in the short term. Whilst the private sector is busy repairing its balance sheet, the government is
increasing its borrowing to finance the budget deficit stemming from the earthquake rebuilding
efforts. Part of this debt build-up will be offset by foreign reinsurance, lowering the effect of the
Canterbury earthquakes on external debt levels. Going forward, tightening of fiscal policy (in light
of the government’s wish to return to a balanced budget in 2014-2015) will improve the overall
savings rate in the country, thereby reducing imports and improving the country’s balance sheet.
The risks involved in having a strongly negative NIIP is somewhat reduced by the characteristics of
the external liabilities of NZ, like its composition and currency denomination. Most external debt is,
either directly or through hedging, denominated in the local currency. In the case of an adverse
shock, the exchange rate will act as a first buffer by rebalancing resources towards the tradable
sector, while the local currency value of the debt is almost unchanged and so the country’s ability
to service its debt will be less affected. In the meantime, the depreciation of the currency will lead
to an increase in the value of foreign assets. A tail-risk event would be a ‘sudden stop’, in which
investors decide to not rollover existing external debt. The likelihood of a ‘sudden stop’ is reduced
by the composition of the foreign liabilities. In the fourth quarter of 2012 New Zealand had foreign
liabilities equivalent to 149% of GDP, of which 34% of GDP is in the form of equity and 81 % of
GDP is in debt & loans (mainly government debt and debt of New Zealand banks, which almost all
are subsidiaries of Australian banks).
Since the New Zealand banking sector is still reliant on offshore wholesale funding, although
somewhat reduced in the recent years, the country is exposed to a possible worsening of global
financial conditions and market sentiment. This could be the case if the European sovereign debt
crisis were to escalate once again. It could cause a reversal of financial flows, thereby increasing
liquidity and funding risk. Moreover, the financial sector is highly exposed to the greatly indebted
agricultural sector, thereby increasing banks’ credit risks. Even though agricultural commodity
prices are relatively high, the sector has not been able to decrease debt levels. A terms-of-trade
shock will deteriorate the financial position of this sector, possibly increasing the amount of nonperforming loans. This could trigger a funding problem for the banks, which in its turn will cause a
rationing of credit and higher loan rates.
Housing market
Another key risk for the New Zealand banking sector is its exposure to the domestic housing
market. House prices remain elevated, whereby the major surge in the price level occurred in the
period 2000-2008. Housing affordability is poor on all measures. During 2012 prices started to rise
again, especially in regions with supply shortages. In Auckland and Christchurch, residential
property prices picked-up particularly strongly, whereby the amount of high loan-to-value ratios
increased as well. This signals a current easing of mortgage lending standards, which could lead to
a housing bubble. The Reserve Bank of New Zealand is investigating the possibility of using
macroprudential measures to restrict these developments. Since an income- or interest rate shock
could trigger an undesired sharp correction in house prices, which would in turn weaken
consumption and bank balance sheets, it is a development to monitor closely.
May 2013
Rabobank
Economic Research Department
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Country report NEW ZEALAND
New Zealand
Selection of economic indicators
2008
2009
2010
2011
2012
2013e
2014f
3.3
Key country risk indicators
GDP (% real change pa)
-0.6
0.3
0.9
1.5
2.1
2.1
C onsumer prices (average % change pa)
4.0
2.1
2.3
4.0
1.1
1.6
2.1
C urrent account balance (% of GDP)
-8.7
-2.7
-3.5
-4.1
-5.0
-5.6
-6.4
3.3
Economic growth
GDP (% real change pa)
-0.6
0.3
0.9
1.5
2.1
2.1
Gross fixed investment (% real change pa)
-1.9
-13.6
-0.6
4.8
5.0
7.5
7.8
Private consumption (real % change pa)
0.2
-1.4
2.6
2.0
2.0
2.1
2.3
Government consumption (% real change pa)
5.1
1.0
1.2
2.0
0.5
1.1
1.0
Exports of G&S (% real change pa)
-1.1
2.4
3.6
2.7
2.6
3.5
4.5
Imports of G&S (% real change pa)
3.0
-14.3
10.7
6.7
4.1
5.3
4.3
Budget balance (% of GDP)
0.5
-2.6
-3.8
-7.8
-6.3
-2.4
-1.3
Public debt (% of GDP)
17
23
27
35
39
39
38
Money market interest rate (%)
5.0
2.5
3.0
2.5
2.5
2.8
4.0
Economic policy
M2 growth (% change pa)
C onsumer prices (average % change pa)
7
0
7
15
12
13
12
4.0
2.1
2.3
4.0
1.1
1.6
2.1
Exchange rate LC U to USD (average)
1.4
1.6
1.4
1.3
1.2
1.4
1.5
Recorded unemployment (%)
4.2
6.1
6.5
6.5
6.5
6.2
5.8
Balance of payments (m USD)
C urrent account balance
-11567
-3247
-4994
-6709
-8216
-8800
-1731
1306
2344
2738
805
790
450
Export value of goods
31192
25336
31883
38351
38409
39780
41750
Import value of goods
32922
24030
29539
35613
37604
39000
41290
-394
99
-309
-890
-996
-1270
-1410
-10091
-4888
-6998
-8268
-7735
-8040
-8600
648
234
-29
-287
-291
-280
-270
3987
679
127
509
-1365
-1100
590
-88421
-109555
-113378
-114053
n.a.
n.a.
n.a.
78996
96561
112928
122735
n.a.
n.a.
n.a.
167417
206116
226306
236788
n.a.
n.a.
n.a.
Trade balance
Services balance
Income balance
Transfer balance
Net direct investment flows
-9830
External position (m USD)
International investment position
Total assets
Total liabilities
Key ratios for balance of payments, external solvency and external liquidity
Trade balance (% of GDP)
-1.3
1.1
1.6
1.7
0.5
0.5
0.3
C urrent account balance (% of GDP)
-8.7
-2.7
-3.5
-4.1
-5.0
-5.6
-6.4
Inward FDI (% of GDP)
International investment position (% of GDP)
3.7
-0.6
0.5
2.1
1.2
1.4
2.4
-66.5
-92.1
-79.8
-70.3
n.a.
n.a.
n.a.
Source: EIU
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