Standard & Poor's Signature Conf. Address - Cullen
Keynote Address to Standard & Poor’s Signature Conference 2002
Hon Dr Michael Cullen, Minister of Finance
Embargoed to 1000
Wednesday 5 June 2002
The Hilton Hotel, Prince’s Wharf, Auckland
Thank you for your welcome.
I think we can all accept that New Zealand cannot regard itself as a heavy hitter in the international bond market. The New Zealand government bond market makes up less than 0.2 percent of the JP Morgan global bond index. This puts us firmly into the bantamweight category.
However, despite New Zealand's relative insignificance in global bond markets, non-resident investors maintain significant holdings of New Zealand Government bonds. These currently comprise around 57 percent of holdings. What this indicates is that New Zealand bonds are perceived by fund managers to be a small but trustworthy element of a balanced portfolio.
This is paralleled in the area of foreign direct investment into New Zealand. Officially, New Zealand ranks highest among developed countries in terms of the relative significance of FDI in an economy. The flows of FDI into New Zealand averaged $3.75 billion per annum over the five years up to 2001. This flow has accounted for 23 percent of all investment occurring in New Zealand over that five-year period.
Much of the foreign investment in New Zealand in recent years has been in existing assets and capacity. In 2000, Fletcher Challenge Limited restructured, selling several of its assets to off-shore interests. And in the late 1980s and 1990s, the values were pushed up by the privatisation programme and the sale overseas of large publicly owned assets. The drop in approvals last year, recently announced by the Overseas Investment Commission needs to be seen from the perspective of these large and lumpy sales.
However, the level of overseas bond holdings and foreign investment in existing assets and capacity demonstrates a solid confidence in the New Zealand economy. You might say that while we are technically in the bantamweight category, we generally fight amongst the welterweights.
The government is committed to a policy of encouraging greater linkages with the global economy. We believe that it is an essential component in the progressive transformation of our economy to a higher sustainable growth path. Geographically we may be in the far corner of the South Pacific; but so far as investment, technology and trade is concerned we need to find ways to place ourselves at the doorstep of the world’s major economies and financial markets.
Our aim, of course, is that international interest in New Zealand extend beyond the bond market and investment in existing assets, to include a greater component of greenfields investments which will create new jobs and expand our productive base. However, a bond market that is well regarded is an essential platform upon which to build a thicker capital market.
We are therefore committed to ensuring high standards of transparency in the management of our bond programme and in our securities markets, as well as sound practices in the Crown’s own asset management practices.
I want to comment briefly on each of these in turn.
Given that we are a very small issuer in the global bond market, the government manages its debt programme to maximise investor interest. The New Zealand Debt Management Office (NZDMO), which is responsible for managing the New Zealand government's bond issuance, aims to issue bonds in a cost effective manner by establishing benchmark bonds and being transparent, predictable and even-handed when operating in the domestic bond market. Issuance is directed into benchmark bonds to improve liquidity.
The NZDMO announces the size of the annual borrowing programme and a schedule of bond tenders with the Budget. This reduces uncertainty around upcoming bond supply.
Bond tender arrangements are designed to reduce volatility in a market which could arise from opportunistic or unpredictable behaviour.
- Bond tender details are published in an information memorandum so potential investors have the necessary information to bid effectively in tenders.
- Tenders are undertaken to an open group of domestic and international bidders.
- And the NZDMO consults the market before introducing new polices and practices, reducing uncertainty around policy change.
The approach adopted by NZDMO is being mirrored by the Government Superannuation Fund. The GSF Authority, through its consultants and fund managers, is managing a transition from a portfolio dominated by government stock to one dominated by equities. That involves a tender process to sell-down $1.8 billion of bond holdings. That transition process is about 45 percent complete.
The Earthquake Commission is similarly in the process of diversifying the Natural Disaster Fund to include up to 35 percent in global equities, and is not quite halfway through that process. This sell down of bonds does not directly impact on the bond market as they are sold back to NZDMO; but it does impact on the Crown’s borrowing programme.
As you will be aware, last month’s budget announced a downward revision of the 2002/2003 bond tender from the $5.1 billion signalled in the December Economic and Fiscal Update to $3.4 billion. In addition the 2001/2002 domestic bond programme has been reduced by $350 million to $3.75 billion as a result of forecast improvements in the Crown’s cashflows.
The government recognised when it took office that some work was necessary to improve the law relating to our securities markets.
Experience with the law suggested that it was not working as effectively as it should; for example, in respect of the law relating to takeovers, and the law relating to the enforcement, prevention and detection of insider trading. There were also some respects in which our law did not conform to international standards or best practice. For example, New Zealand is one of the few countries that does not have a statutorily backed continuous disclosure regime.
Also, our securities law was in many respects dissimilar to Australia’s. While complete harmonisation is not a goal to be pursued slavishly, a lack of comparability can affect both international and domestic confidence in our market. This results in transaction costs for investors and companies in understanding two different regimes when transacting across the Tasman.
In response, the government has embarked upon a programme of security law reform designed to increase the integrity of the New Zealand market.
The Takeovers Code was introduced in July 2001 with the aim of protecting minority shareholders in the event of a takeover. The Takeovers Code prevents shareholders from obtaining control of a company without an accompanying ownership stake. The Code achieves this because shareholdings of between twenty and fifty per cent are only allowed under the Code in specific circumstances. .
The Takeovers Panel has an Australian member, Denis Byrne, as a way of increasing the integration of the Australasian security markets, and to avoid potential conflicts of interest.
The Security Markets and Institutions Bill is currently before select committee and is designed to ensure confidence in the New Zealand market by increasing the effectiveness and the efficiency of the law governing securities markets and its regulatory institutions and the comparability of that law with the law of other jurisdictions.
The Bill implements a statutory continuous disclosure regime which requires a public issuer who is aware of price sensitive information that is not generally available to the market, to give that information to the registered exchange with which it is listed immediately after the public issuer becomes aware of that information.
The regime also contains a requirement that directors disclose their securities dealings at the time they occur. These measures are designed to act as a deterrent to insider trading, counter the distortion of the market through rumours and enable investors to make informed investment decisions.
It also places obligations on securities exchanges to assist and inform the Securities Commission of possible contraventions of the law and other material information. These obligations will ensure the Commission has the information it needs to be able to effectively enforce the law. It will also provide a signal to the market that obligations exist between the Commission and the exchanges regarding the passing of information.
There are new requirements in the Bill for the approval of rules of securities exchanges and allowing for the implementation of percentage ownership limits on exchanges, as well as providing the Securities Commission with an explicit power of oversight of securities exchanges. These powers will allow the Commission to monitor exchange activity and rules and will signal to the market that there is an effective co-regulatory system for securities exchanges in New Zealand.
The Bill also gives the Commission a power to issue directions to exchanges in relation to their dealings with listed issuers which will send a further signal to the market that the Commission has the powers necessary to implement this effective system of co-regulation.
Under the Bill the Securities Commission is also given the power to act as a public civil enforcement agency for insider trading and continuous disclosure. Giving the Commission this role will act as a deterrent to breaches of insider trading law and the continuous disclosure regime. Furthermore, unlike a private individual, the Commission will not be dissuaded by the time or cost involved in taking an action and so will be more likely to take proceedings where it is in the public interest to do so.
The Bill introduces a legal mechanism to enable the implementation of mutual recognition agreements which recognise overseas regulatory requirements for cross-border offers of securities or, in appropriate cases, unilateral recognition of those overseas regulatory requirements. Agreements implemented under this mechanism will reduce compliance costs associated with cross border offers. These changes will increase the efficiency of securities market law and its comparability with the law of other jurisdictions.
Finally, the Bill makes amendments to the provisions governing the operation of the Securities Commission and Takeovers Panel so as to increase their effectiveness and flexibility in exercising their monitoring and investigation functions. These changes include the ability for the bodies to conduct meetings using modern communications technology and the ability to accept written undertakings. They also include removing each regulatory institution’s exclusive law reform role, given their increased enforcement functions.
This is not the end of the government’s reform programme. Three discussion documents have been released in the last week on Market Manipulation, Insider Trading, and Penalties & Enforcement. I would urge those involved in the financial markets to study these closely and work with the government to suggest further improvements to our regime.
In respect of the government’s own asset management, a number of points are worthy of mention.
Clearly the most significant element of the Crown’s asset holdings in future will be the New Zealand Superannuation Fund. The Fund will have positive contributions for the next 25 years. After its first 10 years the Fund is forecast to have approximately $30 billion under management, and after 25 years approximately $100 billion.
Since we are just in the process of appointing the Fund guardians, I do not wish to pre-judge the detail of the investment policy and fund management structure that they will adopt. The concept of fund guardians is a new one, but the legislation establishing the Fund outlines a number of processes which make clear their powers and responsibilities, and will require the guardians to invest the fund on a prudent commercial basis.
The guardians must manage the Fund in a manner consistent with best practice portfolio management and with maximising the return to the fund without undue risk. In managing the Fund, the guardians must also “avoid prejudice to New Zealand’s reputation as a responsible member of the world community”. They must establish investment policies, standards and procedures and review them annually. These are published in an annual statement, and each year the guardians must publish a report that certifies whether or not the investment policies, standards and procedures have been complied with.
To round things out, at least every five years there has to be an independent review of how efficiently and effectively the guardians are performing their functions.
In light of all this, I think it is important to emphasize that the New Zealand Superannuation Fund exists primarily to achieve financial objectives in respect of offsetting the expected future costs of providing retirement income to the retiring baby boom generation.
There will be side effects. It will discipline short-term fiscal policy at a time when a favourable demographic structure might otherwise have tempted governments into tax or spending plans that would be impossible to sustain but painful to reverse. It will increase the level of national savings. And, it is likely to deepen capital markets.
However, it is not to be used as an instrument of government policy beyond its basic mandate. The guardians have a clear legislative mandate to manage the fund in accordance with the principles set out in the Act. I may give directions to the guardians regarding my expectations of risk and return for the Fund, and they must have regard to those directions, but I cannot give a direction that is inconsistent with the requirement that the Fund be run on a prudent and commercial basis. I would not expect that the guardians would view the New Zealand bond or equity markets any differently to another similarly sized fund seeking to maximise returns over the long term.
This illustrates again the government’s commitment to transparency. The bond and equity markets do not exist for any other purpose than to link investors into the real economy of New Zealand. Our goal is to transform that economy by working on the fundamentals to improve productivity and value creation. What we ask of the bond and equity markets and the various regimes that govern them is that they accurately present the opportunities and risks, so that those wishing to supply the financial capital to fuel New Zealand’s growth are able to make fully informed and mutually-beneficial decisions.