Opinion - Pattrick Smellie: Confirmation from HQ

Pattrick Smellie

Friday 27th March 2009

Remember where you read it first: "New Zealand is in a better position than most advanced countries to face the global storm, given its sound macroeconomic policies, including a flexible exchange rate, low level of public debt, flexible labour markets, and healthy banking sector".

So says the International Monetary Fund, reporting back on one of their regular jaunts through Wellington to take the pulse of that plucky, reliable, champagne-taste-on-a-beer-budget economy, New Zealand.

In the past few weeks, coinciding miraculously with claims first made in Smellie Sniffs The Breeze in February, the IMF's assessment has become the official line on how things are here.

The rate of bad news is tapering off. Fixed-term mortgage rates have turned back up, and superannuation funds are moving out of bonds and into cash, preparing for an equities up-tick.

Sharebroking websites, which have had a dreadful time since late last year, are seeing growing traffic as the savers start emerging, looking higher yields.

However, there is another part of the story, which we forget at our peril, the bit in the IMF report that falls under the general heading: "Downside risks in the outlook are high and linked to the unprecedented uncertainties surrounding the depth and duration of the global recession."

In that context, this week's GDP and balance of payments statistics were a bit of a gift, both coming in slightly less awful than pessimists had predicted.

If all goes well, this is the bottom of the cycle for both of these critical measures.

Likewise, the stunning slump in the US GDP reported this week was within the range of expectations and regarded as "the bottom of the cycle".

If we just try to ignore the jumpy talk of replacing the US dollar as the world's reserve currency - no matter how inevitable that looks over time - it was the second largely positive week in a row.

The US toxic assets plan, and the thrum of presses at the world's mints printing more money, show some early signs of working.

At home, there are tax cuts kicking in from Wednesday next week and, compared with Australians and Americans, New Zealanders are almost recklessly optimistic. According to the latest Westpac McDermott-Miller confidence survey, we�re only mildly net-pessimistic.

Perhaps it just goes to show the power of a summer holiday. The depths of northern hemispheric gloom have occurred in the depths of an uncommonly icy European winter.

What remains to be seen, however, is whether this apparent upturn is merely respite, a brief period spent apparently safe on a precipice which is about to collapse.

We are far from out of the woods.

"I have to tell you, what we are seeing at the moment is the early part of the wave," one of New Zealand's most respected merchant bankers, Rob Cameron, told the Commerce select committee during hearings this week.

"It's going to get a lot, lot, lot more difficult for companies," he said, while arguing for much streamlined, lower cost rules for certain types of capital-raising to be implemented swiftly.

The IMF says something similar about where we sit at the moment, as a highly indebted country which is forecasting the government debt-to-GDP ratio will blow out to beyond 50% by 2013, almost twice what it was at the end of the good times last year.

"A key vulnerability for New Zealand is the high level of short-term external debt, mostly owed by banks," the IMF report says. "A low probability but high impact event would be a loss of investor confidence in banks or the sovereign. This could lead to a further increase in the cost and/or reduced availability of external funding, which would require a more painful economic adjustment."

Ouch - when the IMF talks about "a more painful economic adjustment," you just know it's a euphemism.

Dwell a moment on how carefully they've thought about what we'll do if a really bad "global disruption" hits us now.

"The government�s wholesale funding guarantee and increased term funding from banks' Australian parents have provided important cushions. If in the event of a large shock these prove insufficient, official foreign exchange reserves, the government�s offshore borrowing capacity, and some use of the swap facility with the U.S. Federal Reserve should limit the extent of a disruptive economic adjustment."

Hopefully it never comes to that.

But it explains why the Key Government isn't riding a fiscal wheelbarrow the size of Barack Obama's.

As the IMF puts it: "There is very limited scope for additional fiscal stimulus beyond the sizable stimulus already in the pipeline."

In fact, what the IMF says - and will get - is a plan in the May 28 Budget to "stabilize gross public debt in the medium term and bring it back to around the current level in the longer term".

Interestingly, the IMF also suggests that the RBNZ consider how it might use quantitative easing - ie, money-printing - as well as conventional monetary policy which "by contrast with many advanced countries � remains effective in New Zealand".

It is hardly unimaginable that there are further shocks in store for the global financial system. If that happens, we'll get a massive version of the swaps rate pressure that had our banks scrambling this week to match the flood of mortgage-holders seeking to lock in recent historically low interest rates.

Read the IMF, and the tea-leaves carefully. There is cause for cautious optimism, but it's still against a bleak and volatile global background.

The IMF report is here.

Comments from our readers

No comments yet