Bill English Speech to INFINZ - delivered by Tony Ryall
Bill English Speech to the Institute of Financial Professionals of New Zealand (INFINZ) Te Papa, Wellington
Delivered by Hon Tony Ryall, Minister for State Owned Enterprises, on behalf of Hon Bill English
Recent events on world financial markets make this a particularly interesting time to be addressing you.
I believe we should all get used to the regular outbursts of uncertainty we have seen in recent weeks and months – this is how the world will be, on and off, over the next decade.
Today I’ll cover the world as we see it, how New Zealand is placed in this environment, the challenges we still face and how the Government’s economic plan is addressing them.
I’ll also cover how the Government’s mixed ownership model fits into the Government’s plan to build a more competitive, faster- growing, export-based economy.
The global outlook
The last few weeks have seen a stream of bad economic news from Europe and the United States, as well as Japan and the UK, where they’re suffering from high debt and low growth.
This is a combination of governments having spent more than they earned, particularly over the last decade, and in some cases the bailouts of the financial sector that occurred in 2008.
The only way to deal with excessive debt is to pay it off or write it off. But in these countries debt is growing and shifting around. So the problems will get worse before they get better
Because it's government debt, finding solutions to stop the growth of this debt is in the hands of the politicians and there are no easy political solutions.
It's not easy to cut pensions, benefits and public services, or to lift taxes.
And it’s not easy to inflate debt away when consumers are so sensitive to price increases. We shouldn’t be surprised that the politicians of Europe and the US are struggling with these giant problems.
We had our own milder version of excessive debt in New Zealand through the 1980s and 1990s. Solving that problem was a long painful process requiring a restructuring of most of the economy.
In fact, it took until 2006 to get net debt back to where it was in 1972 as a proportion of GDP.
So markets are grappling with this new situation and sending us some interesting signals.
World sharemarkets are signalling lower growth, and have mostly fallen 15 to 25 per cent since their highs earlier in the year. But considering how much they had risen, this is not especially unusual.
What is unusual is the plummet in long-term interest rates for those countries still deemed credit worthy. Long-term yields on government bonds in the United States, the UK and most Eurozone countries are below two and a half per cent.
At the same time as interest rates have been dropping sharply, the default premiums built into sovereign interest rates have been widening, to the point where sovereign default risk appears to account for up to half the yield of many stronger nations - and around three-quarters for countries such as Italy and Spain.
So the risk-free rate has dropped significantly – investors are primarily interested in security, to the point where they will accept zero or even negative real returns in exchange for certainty of being repaid.
That puts every country under the microscope. Are their debt levels acceptable? Are there plans to contain debt and get it down? Do the government's policies help or hinder economic growth?
New Zealand's position
So where does New Zealand fit into this picture in 2011?
If I had to sum it up, it would be fair to say that the New Zealand ship is in better shape, and certainly more seaworthy, than it was even three years ago. But at the same time, the global waters have become rougher.
Compared to other countries, New Zealand has come through the recession in reasonably good shape. We did not have a banking collapse, household incomes have continued to grow moderately and unemployment peaked at 7 per cent and is coming down.
Looking ahead we have many opportunities, but also some risks.
Many of our opportunities revolve around our increasing trade with the fast-growing Asia-Pacific region, near record-high commodity prices and our strong fiscal position.
The Government is focused in the longer term on lifting incomes and creating jobs in New Zealand by selling more of our goods and services to our Asia-Pacific neighbours.
We are strongly motivated by this opportunity. It is limited only by our ability to organise our domestic resources to support a stronger export performance.
At the same time, we face two main risks - demand risk and financial market risk.
Both internal and external demand will fluctuate. New Zealand consumers have got the message on debt. The latest credit aggregates show bank lending is barely growing and consumption is flat.
In 2007, New Zealanders spent $1.11 for early dollar they earned. This year will see the first positive household savings rate in 11 years, helped by the lowest interest rates in 45 years.
If consumers stick to a new pattern of saving, the domestic economy will take longer to pick up, but when it does it will have stronger foundations.
And we are affected by the growth prospects of our trading partners
Global uncertainty doesn’t help. If the large Western economies grow more slowly than expected, then demand and prices for our exports could fall.
But we should remember that export prices are the highest they’ve been for 50 years. And this risk may be offset by a declining exchange rate, since there is historically a close relationship between commodity prices and the NZ-US exchange rate.
The second risk for New Zealand is financial market risk. We remain a highly indebted economy. Both the Government and banks need to go to the global financial market regularly to refinance our existing stock of debt, and in the Government’s case, finance still growing debt.
The Government has moved to reduce our vulnerability to these volatile markets, but the job has only just begun.
In late 2008, we were handed a set of forecasts showing deficits in perpetuity, resulting in net Crown debt rising to over 60 per cent of GDP within the projection period and still climbing.
As a result of decisions across our three Budgets, we now expect to be one of only a handful of developed countries back into surplus by 2014/15. Net core Crown debt is expected to peak at below 30 percent of GDP. This is well below western world averages.
We’ve also had to absorb costs of the Canterbury earthquakes along the way.
Yesterday we made public estimates from EQC that the cost of its claims will be higher than initially forecast. This simply reflects better estimates of the cost of damage as EQC assesses and processes more claims.
It new estimates made headlines, but they should be put in perspective.
The additional costs to the National Disaster Fund will be around $4 billion. But the Government has a $220 billion balance sheet, and about $70 billion of income a year.
As I said before, in today’s economic and fiscal environment, we should get used to ups and downs. Importantly, we are still on track to return to budget surplus in 2014/15 and to keep net Crown debt below 30 per cent of GDP.
The best protection against world shocks is to rebuild capacity within our finances to absorb them. Both government and households have much more to do in this respect.
Our biggest vulnerability remains that we still have high foreign debt, a legacy of excessive household and government consumption and a debt-fuelled property boom.
Indeed, this is the main reason New Zealand remains on negative credit outlook with two of the three major credit rating agencies.
We’ve stressed for some time that problems built up over a long period will take some time to fix. We will remain vulnerable until we reduce this long-term reliance on foreign debt.
As we build a more competitive, export-focused economy, we will need to use our capital as efficiently as possible. In particular, New Zealand needs to reduce its longstanding reliance on foreign debt.
It’s fairly clear what we need to do:
The Government needs to return to surplus and stabilise its debt at a reasonable level.
Households need to continue lifting savings, repaying debt and diversifying their investments away from housing.
The Government also needs to ensure that the $220 billion of assets it holds on behalf of taxpayers are used as efficiently as possible, reducing the need to borrow.
The Government has taken several steps to help achieve this - including the largest tax reform in 25 years, investing heavily in infrastructure, setting a faster path back to budget surplus and making the public sector more efficient.
Extending the mixed ownership model
Another contribution the Government can make to build a more competitive economy is extending the mixed ownership model to four energy SOEs and reducing its shareholding in Air New Zealand, while keeping a majority stake.
I want to talk a little more about that today – and explain why it will be positive for both taxpayers and New Zealand investors if a National-led Government is re-elected in November.
The mixed ownership model is a win-win. New Zealand savers get to invest in good Kiwi companies.
And the Government frees up $5 to $7 billion – about 3 per cent of its current assets – over three to five years to buy new assets like schools, hospitals and ultra-fast broadband, without having to borrow from overseas lenders and increase our debt.
The Government will retain at least 51 per cent control of these five SOEs on behalf of all New Zealanders – the same model used successfully for Air New Zealand for nearly 10 years. And Kiwi investors will be at the front of the queue for shares.
The Government manages $220 billion of assets owned by taxpayers – everything from hospitals, state houses, roads and schools to the NZ Super Fund, electricity companies and shares in Air New Zealand.
And these assets are growing rapidly. Over the next five years, we will increase taxpayers’ assets by about $35 billion - or 16 percent.
This figure is net of depreciation - in gross terms, the Government will acquire around $78 billion of extra assets in the next five years.
So any suggestion the Government is selling the family silver is rubbish.
This is a very large commitment to public investment. It’s more than the entire value of the NZX, and about as much as all of the managed funds owned by New Zealanders.
The $78 billion of new assets will be funded from a wide range of sources. Some, like roads, come from dedicated taxes, and some come from returns on commercial investments. But over a quarter - some $21 billion - will be funded from the Crown through extra borrowing.
We think both the Government and the New Zealand private sector will be better off by having local investment in these assets.
The mixed ownership model will improve the balance sheets of both taxpayers and investors, bring better commercial discipline to the companies concerned, and provide them with easier access to capital to grow.
In fact, the $5 billion to $7 billion mixed ownership programme is pretty modest. As I say, it’s about 3 per cent of all current assets owned by taxpayers, and about one-sixth of all the net new assets the Government will accumulate over the next five years.
New Zealanders at the front of the queue
We have promised that New Zealanders will be at the front of the queue for shares. We would rather pay dividends to New Zealanders than interest on rising debt to foreigners.
Overseas investors will play a role in helping to get a good price for taxpayers. They will also help deliver a robust and liquid market for New Zealanders.
But it's important to remember that these companies will remain firmly - and overwhelmingly - in New Zealand control.
In total, we expect that across the programme New Zealanders will own at least 85 to 90 per cent of these companies - including the Government's cornerstone shareholding.
There are solid reasons for expecting such strong domestic support for these shares. For example:
New Zealand retail investors currently have $105 billion sitting on the sidelines in term deposits, $108 billion in financial assets and between $100 billion and $150 billion of investment property. This adds up to total investments of over $300 billion, excluding their own homes.
The 34 registered KiwiSaver providers have about $9 billion invested and will double in size over the next four years.
New Zealand institutions (excluding KiwiSaver funds) have $59 billion under management.
Government CFIs (including the NZ Super Fund, ACC and GSF) have almost $40 billion under management.
Iwi are estimated to have over $10 billion of assets. So the mixed ownership programme is small compared with the size of the local capital pool. 8
New Zealanders are also telling us they are hungry for other investment options, particularly with the shine having come off the investment property and finance company sectors.
This has been apparent in the strong domestic demand for corporate bonds. More than $11 billion of non-government debt has been issued over the past two years alone. Many INFINZ members will have participated.
What’s more, lower wholesale interest rates and a reduced demand for highly-geared property reinforce this appetite.
Final arrangements for the Government’s mixed ownership programme will be made next year – after we have taken the policy to the election in November and after scoping studies have been completed. But there are some aspects I can confirm today:
As I’ve mentioned, the Government has already made two important commitments: That it will retain a shareholding of at least 51 per cent in each company, and that New Zealanders will be at the front of the queue for shares.
It’s our clear intention to prioritise New Zealand investors so they will have the first opportunity to buy shares.
We will invite participation from all New Zealand investors. They will include retail investors, Kiwisaver funds, other managed funds, Crown financial institutions such as ACC and the NZ Super Fund, Iwi, community trusts and all others.
We expect most will be long-term shareholders.
In addition, we will ensure the widest possible spread of shareholders. To achieve that, it’s the Government’s intention to impose a maximum shareholding cap on the mixed ownership companies. That cap is most likely to be 10 per cent.
For the reasons I’ve outlined, the Government expects a strong and ongoing demand for shares from New Zealand investors.
Let me repeat, we expect New Zealanders will own at least 85 to 90 per cent of the shares – and quite possibly more, with most being long-term holders.
This is an opportunity for them to diversify their investments away from housing and finance companies and help lift their savings rates.
At the same time, it will free up money for the Government to invest in important assets like hospitals, schools and broadband – without borrowing from foreign lenders. That has got to be good for the economy.
This is just one policy we will take to New Zealanders at the election to help build a more competitive, faster-growing economy supported by higher savings and less debt.
We’re confident we can build on the good progress we’ve made over the past three years. We’ve come through a number of significant challenges in pretty good shape.
Over the next three years, New Zealand has the opportunity to grow solidly, create more jobs and increase wages. The Government wants to take advantage of that opportunity.