Fresh from a night of turmoil on global stock markets, Prime Minister John Key remained firm in his belief the New Zealand economy would grow as forecast, allowing government to keep net debt below 30% of GDP and reach a budget surplus by 2014/15.
Key was also pessimistic on whether private sector debt would grow by as much as forecast in Budget 2011, saying New Zealanders would heed what was happening overseas by remaining more cautious in terms of spending, and as savings increased.
Finance Minister Bill English on Tuesday morning said he would expect to see these type of events crop up again over the next four to five years as debt problems in the US and Europe got worse (see video below).
Stock markets tumbled overnight as international investors had their first day of trading following Standard & Poor's downgrade of the US government's credit rating from AAA to AA+ on Friday evening. Many are fearful of a new recession in America's largest economy and a meltdown on European Sovereign Debt markets.
S&P followed the US downgrade by issuing a statement yesterday that New Zealand was among a number of countries that would be negatively affected by a further slowdown in the US, saying the government may need to step in with its balance sheet to take some of the impact from a fresh global downturn. See more in Gareth Vaughan's article here.
'In OK shape to handle it'
Following that news, Key told TV3's Firstline on Tuesday morning that New Zealand was "definitely in OK shape".
"Of course there’s volatility in the international markets – that’s highly predictable, this is the first day, if you like, that US and international investors have had a chance to reflect their views about the credit downgrade in the United States, and actually the programme that the United States will have to follow to ensure that it doesn’t suffer another downgrade," Key said.
"It’s important to note that Standard & Poor’s didn’t just downgrade the United States, it actually put them on negative outlook, which means there’s a one-in-three chance it’ll be downgraded again in the next three years if they don’t actually take remedial actions," he said.
"But I think if you look at New Zealand, our debt position in terms of government [net] debt is around about 20-odd per cent of GDP, we’ve put it on a track to ensure it tops out at under 30% of GDP, despite the fact that when we came into office, if we hadn’t taken that action it likely would have topped out...at least 60% of GDP and carried on going," Key said.
"Secondly, if you think about the amount of cash that the government’s holding, it’s a lot of cash vis-a-vis 2008/09 when we didn’t have a lot of cash and we were struggling to actually fund ourselves. Again, when we came into office, everyone thought there would be a decade of deficits. The changes we’ve made mean that actually we’ll be back in surplus in two or three years’ time," he said.
'Not 100% on private sector debt track'
Meanwhile, speaking to media in Parliament this morning on his way to caucus, Key said he was "not 100% sure" that private sector debt would rise as high as expected, as consumers remained cautious.
“In the end these things are in the hands of New Zealanders. They will I think take their leave from what they see from around the world, and I think they will continue to be cautious. I don’t think any of us should be terribly surprised by what we’re seeing," Key said in Parliament Building.
"Back in the back-end of 2008, early 2009 we all said this was the worst recession since the Great Depression, that’s proven to be correct. But I think New Zealand has reacted to that. Our companies certainly have, our individuals have and the government has," he said.
Foreign borrowing decisions by New Zealand banks from global markets was up to the banks depending on their lending policies.
“But what I can say is New Zealand banks, which are really effectively subsidiaries of the Australian banks, had an awful lot of trouble raising capital on the international markets in the early part of 2009. Now, again, they took that on board, they’ve raised a lot of capital – my understanding is they’ve got a lot of cash on their balance sheet," Key said.
"Secondly, they’ve diversified the tenure of that debt – they’ve got a longer duration on their balance sheet, as has the New Zealand government," he said.
"These things will flush their way through. The volatility will continue because the wrangling will continue in Washington about ultimately whether they can reach the target that Standard & Poor’s has set the US government, which is a US$4 trillion debt reduction over the course of the next 10 years."
English: 'Short-term problems may get solved, but will pop up again'
The volatility seen overnight was concerning given, if there was a renewed crisis in the US and Europe, demand for New Zealand exports might come off, Finance Minister Bill English said this morning in Parliament.
“But otherwise we’re in reasonable shape to weather this kind of event," English said.
"I think we’re going to see these events episodically over the next four or five years – every now and again they’ll crop up because the debt problems in the US and Europe are getting worse, not better. Events in the last few days are just another crisis of confidence," he said.
"They’ll solve the problem in the shorter-term, and it’ll crop up again later.”
Last night at his post-Cabinet press conference, Key said it would not be fair to assume Treasury's growth forecasts in the 2011 Budget were now too optimistic, following renewed fears of further recession in the US and Europe.
The Rugby World Cup and rebuilding in Christchurch would underpin growth in the short-term, Key said.
The government has said the economic recovery in New Zealand would be export-driven. When asked whether the latest fears could unhinge export growth, Key replied it was too early to make predictions on what the US rating action would mean for New Zealand, although there was still strong demand from the Asian region.
(Updates with videos of Key and Finance Minister Bill English this morning, removes Key videos from yesterday (see them here) with comments on private sector debt)