New Zealand’s economic upside

New Zealand became the envy of the world in June when it was able to lift all domestic social-distancing restrictions. The economic challenges are not over, though – especially while the national border remains closed.

ZAUNMAYR The New Zealand economy has been able to open earlier than expected – at least domestically. Is there any possibility of the economic hit from COVID-19 not being as severe as expected and, as a result, of funding tasks surprising on the down side?

SPEIZER We have already seen a positive surprise in the recent high-frequency data. This caused us to upgrade our economic outlook slightly compared with the depths of the crisis. For example, we are expecting unemployment to peak at around 8 per cent this year rather than 10 per cent.

This is still not a great situation, but it is not as bad as we had thought. If this faster rebound has durability we will continue to tweak our forecasts.

However, there are some big risks out there. The big one is obviously a second wave of COVID-19 infections, which we are already seeing in the US and elsewhere. This would slow the economy and, for New Zealand, may push out the timing of the travel bubbles we were expecting later this year.

We are also unsure of what the labour market will look like when the wage-subsidy schemes expire. It is too early to draw conclusions.

RAYNER Some aspects of the outlook have surprised to the upside as we outlined in the June monetary policy review. This included the move to level-one restrictions and a higher level of fiscal spending than we had expected in the May monetary policy statement. We have also seen some trading partners relax restrictions, which has provided some confidence on the outlook for export demand.

Downside risks remain. We are in a fragile world with many countries struggling to contain the virus. Until that happens there are significant risks to us as a small, open economy.

ZAUNMAYR What are issuers doing to position for ongoing volatility whether geopolitical, economic or directly related to a second wave of COVID-19?

BUTCHER It is important to remember that six months ago we were not talking about COVID-19 – we did not even know what it was. We have been through a dramatic three-month period and I think we just need to keep pre-funding because it is not that expensive to do so.

If things turn around, fantastic. But if they do not the benefits from being cautious are well worthwhile. We were slightly ahead of the curve going into COVID-19, but not that far ahead. This has been a lesson for us.

We are not trying to pinpoint a moment in the future where the recovery might take place. It is such a moveable, volatile situation that is hard to plan for or predict.

DIREEN I agree on the point around getting ahead of the curve as we simply don’t know how the next year or so will play out in health, economics or geopolitics.

When it comes to our drivers, demand for housing was at an unprecedented level even before COVID-19 and there was a significant state-housing shortage. The demand will only be greater as the underlying economic impact is felt in coming months.

BISHOP We have done a fair bit of pre-funding and we are holding more cash than we typically would. We are expecting a large drop off in our revenue next year through people not using public transport as much and less demand for events at our stadiums. We will need to fund some of this revenue shortfall through debt.

Our initial forecasts were possibly a bit pessimistic. But, as others have pointed out, if things get worse again this can change quickly.

MARTIN We have taken a similar approach by front-loading our funding task and increasing our funding by more than the forecast underlying cash requirement. This means our forecast programme of NZ$60 billion (US$38.9 billion) for this fiscal year is forecast to leave us with a larger cash buffer than we would ordinarily forecast. This will allow us to manage any short-term funding or liquidity risks.

We also have flexibility in our short-term Treasury bills programme and have reinvigorated the foreign-currency ECP programme. We also have a limited overdraft facility with the reserve bank.

Recent times have shown us we need to have all options available. Hopefully we will not require them, but it is good to know they are there.

WILSHER We did some investor-relations work recently where every offshore investor mentioned and applauded New Zealand’s response to the COVID-19 crisis and the subsequent health and economic benefits. How positive is sentiment around ‘New Zealand Inc.’ at the moment and are borrowers seeing this come through in their own investor-relations work?

MARTIN We took the opportunity between the budget and our upcoming debt transactions to do a series of domestic and global investor engagements. This covered investors in almost 30 cities, over two weeks. There are definitely some benefits to doing investor engagements virtually.

How well New Zealand has done in mitigating the health risks of COVID-19 is widely acknowledged. However, there is also a lot of conversation around the long-term impact on the economy and specific industries, particularly from the closure of our international border.

We heard few concerns around New Zealand’s sovereign credit risk or indeed any concern about our increased funding task. There is recognition that New Zealand came into this on a strong platform, and ultimately we are likely still to be in a strong position, relatively, on measures such as net debt.