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New Zealand Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 43 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 declining 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 Zealand's fiscal accounts remain in better health compared with most developed market economies. The government posted a budget surplus equivalent to 0.3% of GDP for FY2014/15 (July- June), fulfilling its promise made in 2011 to return the government's accounts to positive territory by FY2014/15. We expect the country's fiscal surplus to continue growing over the coming years, and this will be supported by continued spending restraint, which should keep government spending relative to GDP stable even as the welfare burden grows.

Following cuts totalling 100 basis points (bps) since its June 2015 monetary policy meeting, we are forecasting the Reserve Bank of New Zealand (RBNZ) to cut its official cash rate by another 50bps to 2.00% in 2016 as a result of a weak economy. With inflation remaining well below its medium-term target of 2.0%, the central bank will also be pressured to ease interest rates in an attempt to spur inflation. 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. While the New Zealand dollar is likely to range trade against the US dollar in the short term, we maintain that further kiwi weakness is likely over the medium term as the country's high elevated level of external indebtedness leaves the currency exposed to capital outflows amid weak dairy prices and a precarious property market.

Major Forecast Changes We have revised lower our 2016 real GDP growth forecast to 2.3% (from 2.5% previously) given the significant downside risks to economic activity in the agriculture and construction sectors. We now expect the RBNZ to cut its benchmark policy rate by 50bps to a new historical low of 2.00% (versus 2.25% previously) given the central bank's dovish rhetoric, continued downside risks to economic activity, and below target inflation. We have revised stronger our 2016 average forecast for the New Zealand to USD0.6500/NZD (from USD0.5800/NZD previously), and this is further elaborate in the currency forecast section. Despite our upgrade, we remain bearish the NZD against the USD as its high level of external indebtedness continues to leave the currency exposed to capital outflows as the economy remains subdued amid a weak agricultural sector and a precarious real estate market.

Table Of Contents

New Zealand Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth Downgrade As Agriculture And Construction Weaken8
New Zealand's real GDP growth in q-o-q seasonally adjusted, annualised terms picked up to 49% in Q315 (versus 28% q-o-q in Q215)
due to strong growth in manufacturing and services However, we are revising down our 2016 real GDP forecast to 23% (versus 25
%previously) given the significant downside risks to economic activity in the agriculture and construction sectors
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy And Public Debt Outlook 11
Risks That Could Undermine Optimistic Fiscal Outlook11
New Zealand's public finances remain in healthy shape, which is positive for the country's medium-term growth outlook, and we
maintain our forecast for the budget to come in at a surplus of 06% of GDP in FY2015/16 (July-June)
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES 12
Currency Forecast 13
NZD: Bearish Case Still Intact Amid Poor Fundamentals13
While the New Zealand dollar is likely to range trade against the US dollar in the short term, we maintain that further kiwi weakness is
likely over the medium term as the country's high level of external indebtedness leaves the currency exposed to capital outflows amid
weak dairy prices and a precarious property market
TABLE: BMI CURRENCY FORECAST13
Outlook On External Position 14
TABLE: MAIN EXPORT AND IMPORT PARTNERS15
TABLE: MAIN EXPORTS AND IMPORTS15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE15
Monetary Policy 16
NZD To Falter Amid Deepening Easing Cycle16
The New Zealand dollar will be driven lower over the coming months as real interest rates fall amid a slowing economy and a high level
of external indebtedness, coupled with the talking down of the currency by the RBNZ
Monetary Policy Framework 17
Chapter 2: 10-Year Forecast 19
The New Zealand Economy To 2025 19
Deleveraging Will Weigh On Growth19
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
TABLE: LONG-TERM MACROECONOMIC FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestic Politics 22
Warm Bilateral Ties To Aid Investment In Iran22
Wellington's lifting of UN sanctions against Iran on February 18 will be positive for New Zealand as Iran has the potential to become a
new dairy market amid slowing Chinese demand The country's positive image in Iran will further help boost the efforts of New Zealand
businesses, benefitting the country's exporters
TABLE: POLITICAL OVERVIEW22
Long-Term Political Outlook 23
Stability To Prevail, But Not Without Challenges23
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 rein in the budget deficit, 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 27
SWOT Analysis 27
Operational Risk Index 27
Operational Risk 28
TABLE: DEVELOPED STATES - LABOUR MARKET RISK28
TABLE: DEVELOPED STATES - LOGISTICS RISK32
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK34
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK37
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Tail Risks Mounting Amid Sub-Par Growth39
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: MACROECONOMIC DATA and FORECASTS43

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