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May Finance Newsletter

May Finance Newsletter

By John Paine

As expected the Reserve Bank didn’t increase the Official Cash Rate on the 27th of April. It remains at 7.25%. They say they can’t see any more rises - but don’t expect any drop this year.

I’ve been saying for a while now that interest rates are on the rise. Not the OCR – or the floating rates that it governs – but fixed rates that are governed by international wholesale and swap rates. See last month’s newsletter. Four weeks ago the 2 year swap rate was 6.67%, two weeks ago 6.94%, and it’s now 7.10%.

Last week several banks raised the interest rate on their fixed rate mortgages. Will others follow? Is there more to come? Yes and probably yes.

Much of this has to do with a booming international economy and soaring oil prices increasing the fear that inflation will increase world wide.

Examples of a booming world economy include:

- Australia’s experiencing new highs in commodity prices with the sharemarket responding accordingly to reach record high levels. Housing and business credit have grown and house prices appear to have risen again over the last two quarters. Inflation there rose to 3% in the March quarter. On Thursday the Australian Reserve bank increased its OCR by 0.25% to 5.75%.

- China is the world’s biggest consumer of steel and copper and the second largest user of oil. Figures released in the first quarter this year showed China’s annual Gross Domestic Product rose from 9.9% to 10.2%. Bloomberg reports new lending in China rose 70% in the first quarter from the year earlier, resulting in a 30% growth in investment in factories, roads, mines and real estate. China’s Central Bank raised interest rates for the first time in 18 months with its one year lending rate to 5.85% – up by 0.27%. It also asked the nation’s banks to restrict lending. More tightening measures are expected.

- In the U.S. Gross Domestic Product grew at a 4.8% annual rate. That’s more than double the 1.7% recorded in the last quarter of 2005 - and the fastest growth rate for two and a half years. New home sales gained 13.8% in March – the biggest rise in 13 years. The new Fed Chairman, Ben Bernanke, hinted the Fed may stop raising interest rates soon, but warned that inflationary pressures could change this strategy if energy prices continued to rise. The Fed has raised interest rates by 0.25% 15 times in a row in the 22 months since June 04 from 1.0% to 4.75% now. An increase in May to 5.00% is still expected and the jury’s still out on whether it will pause there or go to 5.25%.

- World growth is forecast to be 4.9% - two thirds of which is reflected in the increased activity in China (9.5%), India (7.3%) and Russia - while in the U.S. growth is expected to be 3.4%, Australia 2.9%, Japan 2.8% and the U.K. 2.5%.

Meanwhile in New Zealand economic growth stopped in its tracks in the second half of 2005. The International Monetary Fund’s latest World Economic Outlook has reduced the forecast for New Zealand’s economic growth in 2006 from 2.5% to 0.9%. Here some Economists are expecting inflation to rise to between 3.6% and 3.8% for the June year.

So what does all this mean to us?

As international interest rates move closer to New Zealand’s our attraction to offshore investors will wane and the downtrend in our dollar should continue. On top of a booming international economy this is good news for our exporters – as has been shown in the BNZ’s latest confidence survey in which pessimism has dropped sharply.

In that survey only 29% of respondents felt that the economy would deteriorate over the coming year. This is the third month in a row when net pessimism has declined with the March reading being a net 46% pessimistic, February 65% and December 73%.

There’s other good news on the immigration front.

According to a recent ASB Economic Note, tourism is down slightly – probably as a result of the high dollar we have experienced over the summer - but net migration is up. Annualising the rate of inflow over the last three months we have a net inflow of about 15,000. This rate of migration increases the New Zealand population by about 0.4%, which together with the natural increase of 0.7%, puts out population growth at over 1%.

The Permanent and Long-term (PLT) inflow - from arrival and departure cards – shows there are arrivals of around 80,000 a year. This has been relatively steady since mid 2004 and “suggests some success with New Zealand’s present immigration laws”.

In the March year;

- the inflow consisted of 55,900 non-New Zealanders coming here and 24,200 New Zealanders returning.
- the outflow (including New Zealanders) is greatest to Australia (36,153) and the U.K. (12,076)

Breaking down the total migrant inflow, including New Zealand citizens, shows the change over the last three years - when the inflow was very strong – as 18,500 less PLT arrivals with 13,100 less from China, 4,000 less from India and 2,000 less from South Korea.

Residential approvals to date by NZ Immigration Service for the current June year show:

- 31% from the U.K.
- 12% from China.
- 8% from South Africa.
- 7% from India.
- 4% from Fiji.

So the turnaround in the strength of the New Zealand dollar and in immigration to our country - two very important factors that affect our economy - shows maybe things aren’t that bad after all.

In fact New Zealand posted a trade surplus in March, breaking a run of 21 months of deficits. Instead of the $267 million deficit economists were predicting, there was a surplus of $59 million. Hooray!

So what do we have to look out for?

Increased wage demands as the cost of petrol and imported goods rises. And with unemployment still at historically low levels you’d imagine the bargaining power employees have is not low.

Judging from the business we are doing at Global Pacific there is no shortage of requests for finance. The main differences we are noting are:

- More non-bank lenders – both residential and commercial - with more lenient lending criteria.
- More sophisticated products like interest rate swaps.
- A tougher stance by financiers on conditions of commercial loans, like higher pre-sale requirement for developments, and stronger and longer leases for commercial and industrial properties. And there’s a reluctance to lend at all on certain types of proposals like inner city apartment developments.

- Many finance companies are desperate to get their money out. Non-bank
financial institutions raised another $1.62 billion of deposits from the public during the March year. According to David Chaston who runs the excellent web site “There’s mountains of money and a slowing economy is going to cause them some interesting management challenges”.

- A squeeze is coming on business profits with bank deposits down and bank overdraft utilisation far higher.

- An increased emphasis on debt servicing ability. In this respect financiers that will capitalise interest against a takeout –the sale or re-financing of the asset subject to certain conditions being fulfilled – are seeing good business.

- A greater difference in views between the lending manager and the credit department – the latter sometimes taking an extremely conservative view. (Hey come on guys you’re a finance company not a bank – especially at those interest rates and fees.)

More than ever borrowers need to identify the lenders they should be approaching for specific loans, a service – if you’ll excuse the plug – Global Pacific is very good at providing.



John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229, Auckland, New Zealand

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Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.


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