New Zealand Treasury Sees Hard Times on Eve of Election

The New Zealand Treasury sees hard times ahead in its November Economic and Fiscal Update of 7 November 2008, produced on the eve of the election.

The release of the document by outgoing Minister of Finance Michael Cullen of the Labour Government apparently caused consternation at No. 1 The Terrace because it was labeled "In Confidence" and was not intended for release.

National finance minister-designate Bill English has publicly complained Cullen has breached constitutional convention by failing to obtain the incoming government's approval to release sensitive information.

Cullen, seeking to make some political hay while he still has his hands on sensitive material, claimed that the paper shows the incoming National government is misleading the public into thinking that the Treasury briefing to National gave a rosier picture.

The released document, which looks like a cut & paste by a substance-abusing economist, downgrades the Treasury's earlier GDP forecasts against a backdrop of weakening international demand and a slowing domestic economy.

If anything, updated global forecasts by both the OECD and the IMF in the last 24 hours indicate that the Treasury's forecasts will need to be adjusted downwards yet again.

The Treasury predicts GDP growth in NZ's top 20 trading partners will grow by 1.8 percent in calendar year 2009 but the OECD is projecting a GDP growth rate for the OECD area of -0.3 percent.

Year................Treasury........OECD (OECD Area)

2008....................2.8.........................1.4

2009....................1.8.......................-0.3

2010....................3.0.........................1.5

The Treasury is now forecasting that the New Zealand economy will contract by -0.5 percent in March year ending 2009, growing only by 1.4 percent in 2010 but bouncing back by 3.2 percent in 2010. The IMF shows a similar track in the year ahead, but sees a smaller bouncer back in 2010 for New Zealand.

NZ Real GDP %
.......................... Treasury (March yr)...........IMF (Calendar year)

2009.............................-0.5................................0.7 (2008)

2010...............................1.4.................................1.5 (2009)

2011...............................3.2.................................2.3 (2010)

The Treasury expects unemployment to rise to 5.5 percent in March 2010 and maintain that level in 2011.

Hard times indeed...

New Zealand Deposit Insurance Capped at $1 million Per Account

John Whitehead, Secretary to the Treasury, has announced that New Zealand's opt-in two year limited deposit guarantee scheme will cap the size of deposit that is covered by the guarantee to NZ$1 million per depositor per guaranteed institution.

The contingent liability of the deposit guarantee is estimated at NZ$450 billion.

The Reserve Bank and the Treasury have yet to announce whether wholesale deposits between banks will be subject to a deposit guarantee. Thus far, the government has held that such a guarantee is not necessary.

Deposit Insurance to be Tightened Up for Finance Companies

In a sloppy exercise in policy formation, the Reserve Bank and the Treasury have belatedly moved to tighten up the deposit insurance regulations that will apply to finance companies following trading bank representations.

Finance companies that are rated BB or below or are unrated will now have to pay a fee set at 300 basis points each year on cumulative deposits to receive a deposit guarantee.

Non banks will also face tighter regulatory requirements, reporting standards, and be subject to government inspection.

Non-resident depositor accounts will be covered by the deposit guarantee but they will be capped at the 12 October account level plus 10 percent per year (for the two year guarantee period) to allow for interest and deposit variations. Foreign depositors note: there is, therefore, a limit to the guarantee on your deposits! Reserve Bank revised regulations press release here.

No doubt this limit on the guarantee on non-resident deposits will have a chilling effect on foreign deposit inflows into New Zealand. This is hardly a reassuring signal at a time when credit availability is tight in NZ financial markets and offshore funds are necessary to continue financing credit lines in New Zealand.

The Green Party has criticised the failure of the monetary authorities to regulate lending by finanicial institutions and the institutions themselves for profligate lending (Green Party statement here). The Greens have also demanded that deposit guarantee regulations be accompanied by reciprocal guarantees of responsible lending practices and social responsibility by financial institutions.

As argued in a previous post, a privilege granted by a government - a deposit guarantee - should be accompanied by a duty - including a risk-based fee - on the part of the financial institutions to comply with tightened regulations on lending activity and balance sheet management, something that was largely missing from the first draft of the deposit guarantee policy released to the public.