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Molesworth & Featherston - 28 October 2003

Molesworth & Featherston

New Zealand's up-to-date business and political insight.
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28 October 2003

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Molesworth & Featherston is compiled from informed business and political sources and published on Tuesdays to be New Zealand's most up-to-date business and political newsletter. For more info see FINE PRINT

Kill Bill

Who says violence in the movies doesn't cause violence on the streets? As if taking its cue from the title of the latest Tarantino splatter movie, the National Party hauled out its chainsaws.

You have to admire the consistency of it – only last week the Nats were arguing against severing links with the Privy Council, and as if to prove the ties to the Motherland are strong the Brash coup was hatched as the UK's Conservative Party set out to topple Opposition leader Iain Duncan-Smith.

With a c.v. to drool over, Dr Brash clearly has the ability to impress people who matter. But until he won the backing of his caucus this morning -- by perhaps 14 votes to 12 .... lucky they allowed those two Don-supporting proxies -- he had never won an election in his life.

After more than a year as his party's finance spokesperson he has yet to land a jab on his mark, Michael Cullen, in his specialist area -- finance. He will find the prime minister is another level up.

Don Brash is an innovator, although we're not certain that quality will always be attractive to a conservative party. He will make quick announcements of clear positions. We can expect fewer people to describe National as drifting or to question what it stands for.

Dr Brash's policy pronouncements are certain to draw news media attention and respect in business circles. They will be remorselessly right wing. Asked to choose between his core beliefs and popular positions, Dr Brash unerringly stands on principle. Unless he can invent a new coat of pragmatism, he will be easy-pickings for the ruthlessly poll-driven Labour, who will paint him as the 'back-to-the-nineties' choice.

So will the clarity and business support Dr Brash brings help the National Party? In our 15 July edition we quoted these comments from Ed Kilgore, the influential policy director of the centrist US Democratic Leadership Council:

“When you energize somebody to vote for you who is already convinced you’re right, you pick up one vote. Maybe you don't even pick up one net vote, because if you’re energizing voters with a lot of polarizing language, you're probably going to help energize the other party’s base, too. A lot of evidence over the years shows that when you turn a swing voter, you pick up two votes. You pick up one for yourself and you deny your opponent one. It's a basic law of mathematics that's kind of important.”

But none of that may matter if centre votes the party loses drift to NZ First and United Future, but Brash dealt with Winston Peters when the latter was Treasurer in the 1996-98 coalition Government and it did not breed respect on the Don’s side.

The new leader will have no trouble building warmer relations with Act, but his establishment credentials, and his internationalism (he is married to a Singaporean) drive Winston Peters up the wall, making the prospect of a centre-right coalition appear more remote. This will help NZ First to cannibalise the centre-right vote, and also help NZ First move votes from the centre-left. Paradoxically, the more remote the possibility of centre-right co-operation appears, the better chance they may have.

As for the vanquished, Mr English might have been looking across the Tasman, where an Opposition leader (the ALP's Simon Crean) saw off a brutish challenge from his predecessor Kim Beazley and is already heading John Howard in the polls. But his caucus saw a repair job too great for the young leader's demonstrated skills.

And what of the party organisation? It is hard to recall a National coup where the President has been such a bit-player and so ineffectual in coming to the aid of the leader (if we set aside those coups where the president instigated the upheaval).

Perhaps the weirdest moment of a very weird coup is the choice of Nelson MP Nick Smith as deputy. The man who four hours before was bagging Don Brash as too right wing, and was organising the numbers for his close friend Bill English’s defence, was standing awkwardly beside the Don -- replacing his other brat-pack friend Roger Sowry -- and mumbling that his first loyalty was to the party and that National thrived when it was centre-right, not centre-centre or right-right. Hardly a ringing endorsement of Don Brash.

His election is a clear sign that the coup organisers had not done the wise thing and organised a deputy in advance. Still, it could be a unifying thing having the two factions represented in the leadership. Of the alternatives, Gerry Brownlee may have pulled out in pique before the vote was taken and Simon Power is keeping his powder dry for another day.

That left Wayne Mapp (ha ha) Lynda Scott and possibly Richard Worth – in his dreams. No contest really.

Still the money pours in

Tax revenue poured into Treasury in the three months to September, with Dr Cullen collecting $10.88 billion – or $283 million more than Treasury predicted on budget night.

The sum would make a fair dent in most of the bids being prepared about now for next year's budget. Stand in Molesworth Street and you can almost hear spending ministers preparing their retorts for bilaterals with Messrs Cullen and Mallard, when told there is no more money.

But where is all the money coming from?

Direct tax revenue is up 4 percent compared to Treasury's prediction. Indirect tax revenue is 0.2 percent up. While some of the growth is due to economic growth holding up better than Treasury thought it would, the economy hasn't grown by 4.6% in six months.

Wot, nufink for the workers?

All that lovely lolly will be watched with interest over at Trades Hall where the natives are getting distinctly uneasy about the recent trend of the Government.

They believe it is hardly acceptable to spend little, water down union-friendly laws (NB the extra week's holiday will be drip fed over two to four years -- a day here, two days there -- rather than implemented in 2005 as they had hoped), refuse to make special allowances for state sector pay demands (such as Laila Harre’s nurses), and treat their protestations for more leftish policies as mere carping by an ungrateful lot. But then, where has the union vote to go? Some of the more conservative could bleed to the Progressives, while the big state unions are finding the Greens more accommodating than Labour. Only NZ First -- with its tendency to pick up conservative blue collared slightly red-necked union voters -- is of real concern to Labour.

This week

Parliament is in recess this week (that's why it's coup season).

Outside the House this week…This Friday is the closing date for submissions on government proposals to streamline the way small businesses pay tax. (See ‘Send us your money’, Molesworth & Featherston 22 September 2003). The timeline for decisions has been designed to enable the government to make a big splash announcement at a small business conference to be held early in the new year.

Building consents figures to be released on Thursday are a top indicator of demand in the domestic economy. Our Reserve Bank pointed to ‘robust domestic demand countering weaker conditions in parts of the export sector’ when it decided last week to keep interest rates where they are.

Trade holes

Horrible merchandise trade figures today may just be a continuation of typical bad trade news in September.

A trade deficit of $721 million indicates the balance of payments deficit is getting worse quickly. But we have had a September trade deficit every year since 1960.

We imported 5.9 percent more than September last year and exported 8.1 percent less by value. Statistics NZ believes the trade deficit for the year was $3.2 billion. Once the investment deficit is added into that figure, our current account position is going to be truly ugly.

Higher imports are not necessarily a bad thing, especially if the imports are capital equipment. Monthly figures are too unreliable to be sure – import of ‘transport equipment’ are up, ‘capital plant’ imports are down, oil imports are up. But there is no sign at all of transformation in the industrial base of New Zealand’s exports, as the government seeks to increase the proportion of complex manufactured goods rather than commodities.

How Aussies see the world

The Australian central bank is noticeably more upbeat than our central bank about the outlook for the global economy.

Assistant governor Malcolm Edey says economic data is encouraging in Asia – including Japan and for the US - while the outlook for Europe remains ‘disappointing’. For G7 countries, the RBA is certain that growth is clearly up from its recent trough but still below the long-run average.

The downturn has been comparable in size to that of the early nineties but ‘noticeably less severe than the early 80s’.

The Bank believes the US is growing more strongly than expected. Consumers are spending at a good pace, housing permits are at record levels and business confidence is much better – non-manufacturing businesses are recording their highest levels of confidence in recent years.

The Australian reserve bank says a rebound is also underway in East Asia. China, for example, which dipped sharply because of Sars and knock-on effects of the US slowdown, registered third quarter growth equivalent toan annual rate of nine per cent.

Japan is usually the whipping boy of the world economy these days, but recorded 3 percent GDP growth over the last year, the fastest of any G7 economy, and the RBA believes the economy is in a cyclical upswing.

Only in Europe has the pace of growth eased markedly, and the Australian bank believes there is not much evidence of an upturn getting started.

Infrastructure companies reviewed

It’s stable and steady in the infrastructure sector according to global ratings agency Standard & Poors.

New Commerce Commission regulations affecting the electricity industry are unlikely to affect the credit ratings of Vector, PowerCo or Transpower. In its latest report card on New Zealand’s utilities and ports, S&P said increased certainty of prices and cash-flows could even improve credit ratings.

S&P says the announcement of Contact Energy's 155MW oil-fired reserve generation plant 'adds certainty to the security of supply' and signals ‘the level of intervention from the government on the market participants’ decisions could be less intrusive, as the government will now be retaining the risks and rewards of plant ownership while the operator is remunerated for its operational expertise only.’

The agency believes that ports have done well out of buoyant domestic demand and strong exports of low cost dairy and forestry.

Its comments on major infrastructure companies:

Contact Energy: Performed to expectations in the nine months to June 2003. Contact's major shareholder, Edison Mission, is on credit watch, but Contact is not expected to be affected by its parent’s problems.

Genesis Power. Financial performance in 2003 exceeded expectations, mainly because it was able to generate more during the shortages in the first part of this year.

Meridian Energy. A delay in Project Aqua is improving Meridian’s performance because it’s delaying the debt needed to fund the project. Meridian is likely to take a ratings hit next year as it takes on more debt, but its cash-flows should restore normal service in 2005.

Mighty River Power. Financial performance has been a bit weaker than expected because of the energy problems early this year, which cut its generation.

NGC's return of half a billion dollars of capital to shareholders – funded by debt – is seen positively by the ratings agency.

Port of Tauranga. Performed strongly over the last three months as trade grew strongly, but its dependence on forestry will reduce some of its potential to grow.

Ports of Auckland. Better-than-expected performance this year because of New Zealand's strong trade growth.

Transpower. A significant restructure under a new chief executive, and the prospect of industry regulation are not expected to much affect the company.

Vector: Bought United Networks in the last financial year and came in more or less on expectations.

Watercare: “The medium-term financial profile will be subject to a sustained deteriorating trend” as the company tries to meet its price regulation.

Media notes PC

We would like to thank those Radio NZ staffers who misinformed us of the identity of the new chief executive – we enjoyed their comments almost as much as we enjoyed the gloating from those who pointed out we got it wrong.

The new chief executive, Peter Cavanagh, was last sighted as head of television at SBS in Australia, where one staffer told us he was nicknamed ‘PC’. His departure from SBS in 2002 was reported like this: ‘Former head of SBS TV Peter Cavanagh left the broadcaster in August last year before his contract expired amid concerns he would lose some of his responsibilities in a restructure.’

Quote of the week

“Is there something that sticks out that makes you an exceptional pole-vaulter?”

Adrian Chiles to Sergei Bubka, the UK's Radio 5 Live (reported in Private Eye).


***** Fine print *****

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Molesworth & Featherston is compiled from informed business and political sources and published on Tuesdays to be New Zealand's most up-to-date business and political newsletter.

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