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New Zealand Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

The New Zealand economy is experiencing a gradual deleveraging cycle, which will weigh on real GDP growth over the coming years. While depressed oil prices will provide some support to corporate profit margins and economic activity, these positives will likely be offset by the joint deterioration in the dairy and construction sectors, which remain the two key pillars of the economy. New ealand's fiscal accounts remain in better health compared with most developed market economies. The New Zealand government has a strong commitment in keeping expenditures in check amid weak revenue collection, and we believe that it will continue to maintain its budget surplus, which is positive for the business environment as the private sector will be less crowded out by the government. Following a better than expected outcome in FY2015/16 (July-June), we are upgrading our FY2016/17 budget surplus forecast to 0.9% of GDP, from 0.4% previously. Following a sixth 25-basis points (bps) cut in 14 months at its August 11 monetary policy meeting to a record low of 2.00%, we are forecasting the Reserve Bank of New ealand (RBN) to cut its official cash rate by another 25bps to 1.75% by Q117. We believe that the RBNZ will remain pressured to reduce interest rates over the coming months as it attempts to meet its medium-term inflation objective of 1.0-3.0% while also providing continued support to the domestic economy, which is still suffering from weak investment from depressed dairy prices. Despite the gradual improvement since 2008, New Zealand's external accounts remain the economy's weak link and a persistent current account deficit poses risks of large-scale capital outflow. In order to correct these imbalances, we will need to see domestic savings rise sharply, while investment growth cools, which will undermine economic growth to some extent. Although the New Zealand dollar is likely to range trade against the US dollar in the short term, we maintain our negative view on the currency over the medium term. New Zealand's high level of external indebtedness leaves the currency exposed to capital outflows as the dairy sector remains weak while the overvalued property market is looking increasingly precarious.Major Forecast Changes We have upgraded our FY2016/17 budget surplus forecast to 0.9% of GDP, from 0.4% previously, as the New Zealand government will continue to committed to reining expenditures in check amid weak revenue collection. We have upgraded our 2016 average forecast for the New Zealand dollar to USD0.6700/NZD (versus USD0.6500/NZD previously) given its strength since the start of 2016, but we remain bearish against its trade-weighted partners over the medium term.

Table Of Contents

New Zealand Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Growth To Remain Weak................................................................................................................................................................8
New Zealand's real GDP growth remains robust in y-o-y terms, coming in at 3.1% y-o-y in Q116, but in q-o-q (seasonally adjusted
annualised terms), it slowed to 1.9% (from 3.0% q-o-q in Q415), and we maintain our forecast for the New Zealand economy to grow at
a subdued rate of 2.3% in 2016 and 2.5% in 2017. The dairy sector remains weak, and this will be compounded by slowing construction
growth, while a strong services sector will not be able to offset the slowdown.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 10
Prudent Fiscal Management Positive For Bonds.......................................................................................................................10
The New Zealand government has a strong commitment in keeping expenditures in check amid weak revenue collection, and we
believe that it will continue to maintain its budget surplus, which is positive for the business environment as the private sector will be less
crowded out by the government. Following a better than expected outcome in FY2015/16 (July-June), we are upgrading our FY2016/17
budget surplus forecast to 0.9 % of GDP, from 0.4% previously. We maintain our bullish view on New Zealand bonds as the supply of
bonds is likely to fall at a faster pace due to debt repayment and continued demand amid rate cut expectations.
Structural Fiscal Position........................................................................................................................................ 11
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
Currency Forecast.................................................................................................................................................... 13
NZD: Medium Term Outlook Still Not Bright...............................................................................................................................13
Although the New Zealand dollar is likely to range trade against the US dollar in the short term, we maintain our negative view on the
currency over the medium term. New Zealand's high level of external indebtedness leaves the currency exposed to capital outflows as
the dairy sector remains weak while the overvalued property market is looking increasingly precarious.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................13
Outlook On External Position.................................................................................................................................. 15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................15
TABLE: MAIN EXPORT AND IMPORT PARTNERS...............................................................................................................................................15
TABLE: MAIN EXPORTS AND IMPORTS...............................................................................................................................................................16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................16
Monetary Policy........................................................................................................................................................ 16
More Easing Ahead Amid Dovish RBNZ.....................................................................................................................................16
We maintain our forecast that the RBNZ will cut its OCR by another 25bps to 1.75% by Q117, following a sixth 25bps cut in 14 months
at its August 11 monetary policy meeting. We expect the NZD to come under pressure as real interest rates decline, particularly against
a backdrop in which the central bank is still concerned about currency strength.
Monetary Policy Framework.................................................................................................................................... 17
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................17
Chapter 2: 10-Year Forecast................................................................................................................... 19
The New Zealand Economy To 2025...................................................................................................................... 19
Deleveraging Will Weigh On Growth...........................................................................................................................................19
The main factors that contributed to New Zealand's solid real GDP growth outturn over the past decade will not be in play to the same
degree over the next 10 years. Population growth will slow, terms of trade support will be hard to come by, and we expect New Zealand
households to eventually experience a protracted deleveraging cycle. These factors should see real GDP growth average 2.4% over the
2016-2025 period, below the 3.6% growth rate seen over the 1999-2007
boom years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics..................................................................................................................................................... 22
Failure To Ratify TPP Would Be Significant Blow For Asia......................................................................................................22
The failure to ratify the TPP by 2017 would have considerable negative spillover effects on its Asian signatories, as these countries
require the TPP to provide the external impetus that will enable them to achieve bigger national objectives.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................22
Long-Term Political Outlook................................................................................................................................... 27
Stability To Prevail, But Not Without Challenges.......................................................................................................................27
New Zealand is likely to remain one of the most stable states in the world over the coming decade. The government's main challenges
are to maintain its budget surplus, improve the business environment to attract greater foreign investment and raise opportunities for the
indigenous Maori population. In the realm of foreign policy, New Zealand is likely to continue relying on Australia as its guardian. A key
wild card is whether New Zealand deepens political ties with its neighbour, possibly in the form of a confederation.
Chapter 4: Operational Risk................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk....................................................................................................................................................... 32
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................32
TABLE: DEVELOPED STATES - LOGISTICS RISK..............................................................................................................................................36
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................39
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................41
Chapter 5: BMI Global Macro Outlook................................................................................................... 43
Global Macro Outlook.............................................................................................................................................. 43
EMs Past The Worst, But Structural Problems Persist.............................................................................................................43
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................43
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................44
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................45
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................47

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