NZ Institute: The Emporor has no clothes in heavy mountain weather

The New Zealand Institute has issued its second installment of its series of papers on the implications of the global financial crisis for New Zealand, following on from its “End of the Golden Weather” paper released late last year.

The Emporor Has No Clothes: New Zealand’s vulnerability in the face of the global financial crisis argues that New Zealand’s recent prosperity is based on credit-fuelled rising property values driving consumer spending, and export growth in the agriculture and tourism sectors.

Their key point is that New Zealand is very vulnerable to impacts through the credit channel on business activity and investment. The policy response required entails focus on maintaining the availability and stability of credit, rather than compensating for sluggish demand.

There is also a significant (but not large) risk that there will be an abrupt withdrawl of credit from overseas lenders, however this risk is mitigated by the relatively strong position of local banks compared to their overseas counterparts.

The institute also published a presentation outlining suggested remidies for this situation entitled Heavy Mountain Weather: Funding risks for New Zealand and proposed solutions, which concludes:

• New Zealand is being impacted through the growth channel (especially commodity prices, tourism and other export markets). But it is the credit channel where the greatest risks remain.
• New Zealand is different to the rest of the world. We have some advantages (a stronger banking system) but different vulnerabilities (dependence on offshore funding). New Zealand faces tighter fiscal constraints that limit options that involve increased government spending.
• New Zealand’s response must include an ability to support strategic New Zealand businesses, should they face funding difficulties that threaten their viability or makes them vulnerable to foreign take-overs.
• The response should leverage the Government balance sheet and create a conduit for Government strategic investment in companies, should this be required. The response should also include leveraging private sector investment through a government underwriting function and measures to attract overseas funds to invest in high return projects.
• A range of options should be considered; including the creation of a New Zealand growth fund that would leverage SOE assets, invest in other companies and run on a clear commercial basis with transparent governance.
• The rest of the response should contribute to a long term game plan for the country: to position New Zealand ahead of other countries in seizing opportunities as the world emerges from the global recession.
• The long term game plan should also correct the policy mistakes that have left a legacy of very high indebtedness to the rest of the world and increased New Zealand‘s vulnerability in the present crisis.

Both papers are well worth a read.

You can also listen to or download the author Benedikte Jensen discussing the papers in a segment from this morning’s Morning Report programme on National Radio.