Speech To Hong Kong/New Zealand Business AssociationEducation
Thank you for this opportunity to talk with you this evening.
This is a time of considerable economic uncertainty, and unusual finance market volatility, not just for Asia-Pacific economies such as Hong Kong and New Zealand, but for people and Governments in every country round the globe.
Shocks like the "Asian Crisis" particularly expose, however, where countries are vulnerable through underlying economic weaknesses.
In Japan, it is the banking system. In Malaysia and Thailand over-exposure to speculative investment led to a very sharp economic contraction.
The Korean Minister of Finance told me at the IMF meeting that bankruptcies there are now running at 100 companies a day. Consumption decreased by 12% in the first half of this year and investment by 47%. Korea has 1 million people out of work, with 32% of the banking sector was laid off in September alone.
Indonesia has had its currency drop from 2000 per US dollar to 9300. Interest rates are currently 60%, and inflation is running at 80% a year.
In Hong Kong SAR, the initial financial market crisis in south East Asia led to considerable pressure on its dollar, which is pegged to the greenback. A rise in domestic interest rates since late 1997 to defend the currency peg, falling asset prices, a fall in exports to Hong Kong's Asian neighbours and a fall in tourism, have all contributed to economic weakness in the territory.
October Consensus Forecasts predict Hong Kong's economy will have shrunk by 4.6% in 1998. Its economy is expected to continue to have negative growth in 1999, with latest Consensus Forecasts picking a 1.8% contraction next year.
New Zealand's situation looks very robust by comparison. The Asian Crisis has hit us, but through the loss of markets for our exports as the region's economies have contracted.
It is impossible for New Zealand to be immune from a very large regional downturn. In a normal year, New Zealand exports 21% of its GDP (total annual output), compared with about 8% for a country like the United States. We depend on trade.
Nearly 40% of total New Zealand exports have been going into Asia in recent years. We are among the OECD countries most seriously exposed to down-side risk in Asia.
To add to the problems of 1998, El Nino managed to cost the country around $500 million from lost agricultural production.
You may well ask why it is then, that we have managed to avoid the very sharp economic contraction experienced by Hong Kong, another relatively small trading economy.
In part, it is because our floating exchange rate meant New Zealand could not be a target for speculators.
But the wider answer is that we did not have a structural Achilles heel. Instead, we have an effective, internationally respected, economic framework.
Through the 1990s, Government policy has been driven consistently in line with five fundamentals:
1.An open, internationally competitive economy, with a floating exchange rate and deregulated financial markets. 2.Price stability through an independent Reserve Bank. 3.Responsible fiscal management - running surpluses and paying back debt. 4.Flexible labour markets through the Employment Contracts Act. 5.And a broad-based low-rate tax system. This Government's economic policy framework is actively helping the economy adjust to the world instability without the sort of dislocation seen in New Zealand in the past, or in Asia over the past 12 months. We have not had the shocks of sudden currency devaluation, sharemarket and business collapse, rapidly escalating unemployment, and high inflation. Our businesses are far better placed to react both to challenges and opportunities.
If New Zealand had retained its fixed exchange rate and weak fiscal management, if we had continued with high inflation and protected and subsidised industries, then the impact of the Asian Crisis would be very severe, with the economy probably experiencing contractions similar to Korea and Thailand. The tax cuts and low interest rates are also helping to insulate households from the downturn.
We have not had crisis and shock. Instead, through normal market adjustments the value of the dollar fell nearly 30% against the US dollar from early 1997 before strengthening slightly recently. Short term interest rates have dropped from 8.2% at the end of June to around 4.6% now, leading to sharply lower lending rates.
The market-driven adjustment in the exchange rate particularly, has helped businesses find new international markets, and should produce a further improvement in the current account.
The latest official, August, trade figures are very encouraging in this respect. In the year to August sales into our three largest markets showed a 4.8% increase in Australia, a 4.7% decrease in Japan, and a 25.4% increase in the United States. This means an extra $540 million of NZ goods were sold in the US in those 12 months.
The value of exports to Korea was down 21% ($190m) and sales to Thailand were down 19% ($54m).
But exports to Germany were up 23% ($115m), to Italy 44% ($133m), and to Belgium 53% ($175m). That is why over the 12 months, export sales were up an overall 4.5%. It represents a huge and focussed adjustment effort made by hundreds of firms across the country.
The lower dollar is behind the strong export intentions being registered and has helped sustain solid levels of business confidence. In fact, most of the key conditions for business could not be much better. As the National Bank said in its latest survey of business confidence: "At virtually any other time in NZ's history the combination of record low interest rates, a competitive currency, tax cuts, and share give-aways would result in boom times."
Why isn't it? Partly because high household debt levels through housing investment means a reluctance to spend.
But more importantly, to quote the National Bank again, "The international environment looks shakier by the day and it is no exaggeration to say that it is in its most vulnerable state in 50 years."
The continuing deterioration in consensus forecasts for world growth is tempering what would otherwise be a very positive domestic economic outlook.
October Consensus Forecasts show average growth for New Zealand's top ten trading partners is now expected to be 1.6% in 1999, down from the 2.1% figure used for the September Economic and Fiscal Update.
This is the reason that despite the past week's very welcome sharemarket rally, despite the weight of opinion that the economy began the road to recovery in the September quarter, and despite yesterday's much better than expected employment figure - where we had a drop in unemployment to 7.4% - the Government has to take a conservative approach as it prepares December's Budget Policy Statement.
Responsible government has to be risk averse. That's why we accept Treasury's advice that the world outlook means figures in the December Economic and Fiscal Update may perhaps prove closer to the lower growth scenario in the September update.
If so that economic scenario would flow through to the fiscal numbers and could mean slightly larger deficits in the two out-years. The difficulty of course is that nobody in the world knows with certainty what the numbers are going to do.
Our job is to manage through the uncertainty.
To maintain a framework that works for business and to build on it.
Businesses don't want higher taxes, or high government spending driving up inflation and interest rates. They want to be able to negotiate with employees to manage their businesses better. They want to be competitive and to expand.
That expansion, driving economic growth and job creation, is what New Zealand wants too.
That's why the Government has undertaken a whole range of measures to cut the cost of doing business in New Zealand.
Opening accident compensation and rehabilitation to private sector competition to improve efficiency. Deregulating the Post Office to create exactly similar cost advantages for letter, parcel and courier post operations. Removing tariffs from vehicles to reduce transport costs in New Zealand. That's saving people $3000-6000 on every new car sold. Removing the prohibition on parallel importing. More recently, locking into legislation a timetable for the total removal of all other tariffs by July 2006. If New Zealand wants its exporters and their staff to compete successfully in world markets, then they deserve the benefit of low world input prices, to help them do it. We have already restructured the electricity distribution industry, and users are now benefiting from the savings that generated. Now we?re looking in detail at splitting ECNZ into three separate units to improve the level of competition in generation, with a decision due late this year. Reform of road management, resource management, the rating powers of local authorities, are all under way. The Government is continuing to sell businesses which perform better in the private sector, to reduce debt, debt servicing costs, and the risks imposed by the State on taxpayers. Already this year we have sold the Government's shareholding in Auckland, Wellington, Palmerston North and Rotorua airports and the Coleridge hydro station. The float of Capital Properties NZ is underway, and we are in the process of calling bids for Solid Energy.
The Crown Accounts released today show the fiscal benefits. Government sells above book value and gains the benefits on its operating balance. The savings in finance costs through debt repayment far exceeds the dividends received and the Crown further benefits on its fiscal numbers.
But as important as these are, the transfer of the ownership to private investors improves investment opportunity and creates a stronger and broader shareholding for the company. Moreover, the risks of ownership of these companies is no longer carried by the taxpayer.
Reducing debt and removing avoidable risk from taxpayers are very desirable goals in the context of the Asian crisis, and the inevitable strain it puts on our operating balance.
We are, therefore, now conducting a scoping study into Contact Energy, to examine systematically whether there would be benefit in considering the sale of the company.
And the issue of primary sector reform will receive increasing prominence as individual boards write to government with their plans on November 15.
We recognise there are many complex issues involved and that each industry will have its own view on the best way ahead. What is driving our active promotion of reform of the agricultural industries are four facts.
the declining trend for commodity prices and its effect on farmers' incomes. They deserve higher incomes, not less. this loss of wealth in rural communities has been forcing social adjustment for some decades. We want to reduce that pressure so rural communities can prosper. agricultural exports represent half of total exports and growth in this sector of the economy is fundamental to New Zealand's overall success. the National government is following an outwardly aggressive approach to free trade and the removal of trade barriers. We believe we can achieve much wider access to the wealthier markets within APEC and beyond for our producers but that will require acceptance of the removal of statutory monopolies - and we should position ourselves for that earlier rather than later.
It is not our responsibility as Government to force change on primary producers, but it is our role to help them to understand the future, and encourage them to face it.
That is an exhaustive list of work the Government has already done, or has in progress. It all has one aim. To make conditions better for business. It is private sector businesses, and private sector investors who create our nation's wealth.
New Zealand has made huge gains from the orthodox economic framework National now has in place, which is designed to improve our international competitiveness and growth.
Our economy has become hugely stronger since the framework was put in place in 1991. The economy grew by 37% from 1991 till March this year.
The Government has run five surpluses in a row, cut debt in half, lowered taxes and kept inflation low, and businesses have prospered, employing 250,000 more staff, and strengthening their balance sheets.
That is why in the face of this world trading shock, we are not going to sit on our hands. New Zealand needs a government that is preparing for the 21st century, not one stuck in the 1930s.
We will act to further improve the economy. We will act to ensure jobs are created. We will act to strengthen the government's books and focus its policies on those most in need.
We are applying four high-level principles across government activity:
increasing New Zealand's international competitiveness, growth, and incomes enhancing the fiscal position with sound public policy targeting social assistance to those in need and promoting self-responsibility ensuring low income people are not taxed to pay benefits to the better-off.
In these volatile international conditions it is fundamental that the government rebuilds its surpluses to build a reasonable buffer against any further international shocks. Any move into Budget deficit must be as shallow and short-lived as possible.
We have very prudently, in recent years, provided for a buffer, 2-3% of GDP, in the form of a surplus, to cushion us against unforeseen international economic shocks.
We have used up that buffer coping with the crisis to date. We are moving back, slightly, into deficit for a couple of years?borrowing to fund some of our spending.
We can tolerate that, in small quantities, for a very limited period. But significant downside risk still remains. No way can we, at this
stage, permit the deficit to balloon.
As I said earlier, it could well be that by the time Treasury completes the December economic and fiscal update, the global numbers and the forecasts for New Zealand have declined a bit further.
The prudent course therefore involves:
Continuous monitoring of the quality of expenditure to avoid building up debt on projects of minimal value
Plus continuous further reform aimed at cutting costs to improve economic efficiency.
This Government isn't embarrassed by common-sense policies which work for New Zealand. The impact of the Asian crisis means now, more than ever, it is vital to ensure the quality of our economic and other programmes.