English rejects 'NZ like Ireland' tag

Finance Minister Bill English rejects UK hedge fund manager's accusation that NZ 'just like Ireland in 2007', but agrees NZ$ is too high

18th Feb 14, 12:44pm by Lynn Grieveson

Finance Minister Bill English agreed with the assessment by London hedge fund manager Stephen Jen that the NZ dollar was too highly valued, but rejected the claim that our economy now resembled that of Ireland in 2007 before its debt-driven collapse.

Jen, a former IMF official, reportedly told clients in a briefing note that the New Zealand economy had severe structural weaknesses similar to those of Ireland and southern European countries such as Greece and Spain. Here's the Bloomberg article on the note. He said the New Zealand dollar may be 20% overvalued.

Speaking to reporters before this morning's caucus meeting, English said Jen had "completely misunderstood" the difference between New Zealand and Ireland, and how resilient the New Zealand economy was.

"Ireland had a banking crisis and they have got massive public debt. Ours is at reasonable levels. Where they are relevant is this talk about the fact that New Zealand has what appears to be a reasonably high exchange rate and that our households still have relatively high level of debt," English said.

"I think both of those things are in my view correct but New Zealand's in good shape to deal with the adjustments needed if the exchange rate comes down. There's elements of truth in what they say, that we have relatively high levels of household debt, our housing market is still more expensive than it needs to be but New Zealand's households and businesses have shown that they are able to handle those pressures," he said.

English said the fact New Zealand had a floating exchange rate and was not tied into the Euro like Ireland and southern European economies "made a big difference".

However, he conceded there was some truth in Jen's assessment of the kiwi dollar as too high.

"We also think the exchange rate is a bit too high," he said.

"In fact we have been waiting for five or six years for it to come down. But the market seems to have a more positive view about the economy than we do ourselves."

He rejected the suggestion it was time for the Reserve Bank to intervene to bring down the dollar, saying "If our debt levels are too high, if we are too exposed to the risk of offshore investors leaving then eventually some kind of correction will happen.

"The Reserve Bank has said publicly that they are conscious that as they increase interest rates they are concerned about what impact that could have on the exchange rate and I am sure they will take that into account."

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52 Comments

by ngakonui gold | 18th Feb 14, 1:23pm 1392683011

He says the NZ dollar MAY be over valued by 20%.Well it either is or it isn't.Ther are a lot of MAYBE'S in the world.

by Ralph | 18th Feb 14, 1:35pm 1392683722

It's not quite that simple.

Bob Jones (one school of thought) takes the view that value of a floating rate is whatever the market says it is and anything else is an artificial load of cobblers.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10843762

The Reserve Bank has its Trade Weighted Index as a measure of value, but how they calculate that has changed over time.

http://www.rbnz.govt.nz/statistics/twi/

It is also in most governments interests to have an opinion one way or the other, but if that rate is floating who is to say it is more than just that - an opinion.

by steven | 18th Feb 14, 1:48pm 1392684509

but then he is a libertarian...

regards

by steven | 18th Feb 14, 1:57pm 1392685035

If you accept that there is a lot of cheap money from the Fed being dumped into countries like ourselves chasing a return which makes us indeed over-valued, then yes. By the same token when that money runs the drop could be significant, maybe 50%, who knows when fear takes over.

I dont agree with BE, we have survived with no major house correction which has caused Ireland's huge debt...so simply, the fat lady hasnt sung yet.

regards

by dh | 18th Feb 14, 2:16pm 1392686162

English is quoted as saying "Ireland had a banking crisis and they have got massive public debt. Ours is at reasonable levels"

Actually the fund manager was quoted as saying Ireland of 2007.

Ireland 2007 government debt to GDP was about 25%

NZ 2014 government debt to GDP is about 35%

But the crash was really around private debt anyway, which subsequently saw some bailing out into public causing government debt to then soar (or sour, or even sore).

by Stephen L | 18th Feb 14, 2:51pm 1392688311

dh,

As always you can be relied on to introduce facts somewhat dispassionately- well done.

I do think the Irish had massively overbuilt housing, meaning the value of the collateral crashed leading to massive debt defaults. By this measure I do think we are different.

Where the point is very valid in my view is on the exchange rate. Although even Bill English acknowledges it is too high, he admits he has been passively waiting for five years for it to magically come down.

This position is his single largest failure in my view- with on many other things some relatively capable micro management. The micro stuff is dwarfed by this macro error and passivity.

Left totally free, we are open not just to Fed money looking for a home, but any other country that wishes to increase their wealth by printing or through an undervalued currency. Think Germany, Japan, China, Switzerland and others. That money ends up here either loaned to us for increased debt, or in buying our assets, thus keeping NZ relatively wealth poor. It has given us the benefit of short term cheaper international consumption, and not as far as I can tell been used to build alternative wealth.

by dh | 18th Feb 14, 3:27pm 1392690456

I don't know if we are so different to Ireland- If you take the view that the New Zealand housing market has something to do with the New Zealand Economy (which I'm not so convicnced about given it's openness), then this is kind of important:

Assuming I haven't misplaced a decimal or similar, if I check the total value of Irish property to M3 in 2007, the ratio is less than half the ratio of total present value of New Zealand property to NZ M3. So if something does happen to property, NZ has less than half its ability to support those price valuations than Ireland had.

It is true that New Zealand has much less debt in proportion to the value of its housing market than Ireland did in 2007. but that reflects the money that has been appearing from elsewhere in New Zealand housing (whereas you can account for Ireland's). If you measure debt against something other than housing, we are actually pretty similar to Ireland. Household debt to nominal disposable income for Ireland in 2007 was about 90%, present NZ is about 150%.

I think the risks are there, but I also think house values are divorced from the NZ economy so shouldn't be used as a measure of comparison.

by Roger Witherspoon | 18th Feb 14, 7:27pm 1392704838

I think Ireland was strong armed by Germany and France into rescueing the Irish banks by guaranteeing their debts, thus saving the Irish, French and German banking systems from bankruptcy. The Euro area has been trying to pretend the German and French banks are not bankrupt ever since.

The analogy to us is if the Aussies had to save their banks and strong armed us into helping them, which is quite conceivable. Thus our government would go from 35% of GDP in debt to a much higher ratio overnight, just like Ireland. So our currency would presumably drop a fair bit if that happened, unlike Ireland.

I think it is interesting to compare our fortunes to Ireland's though. I find it intrigueing that the one thing the Irish defended against the French and Germans was their low (14% from memory) corporate tax rate which the Irish thought was the basis of their modern economy, based on IT (Google, Microsoft) and pharmaceutical manufacture. The Germans think that low a corporate tax rate is akin to underarm bowling. We are too anti big business (not without reason) to consider "buying" modern jobs by reducing the corporate tax rate to a similar rate as in Ireland, so we continue with 20% unemployment for under 25s and a backward looking agrarian economy.

If we did aggressively reduce our company tax rate it would have two obvious benefits - office jobs would be moved here from Australia (and the Aussies would give us grief and tear up the CER which they think of as a form of third world aid anyway) and companies would retain earnings rather than pay them out. This would be a similar policy the Germans used to encourage savings to build up in their Mittelstat companies and is why they do not have a current account (ie long term savings build up) problem.

Of course an idea like that couldn't be considered here, presumably because it might work and some of us might benefit more than others.

by dh | 18th Feb 14, 7:47pm 1392706051

To be fair, Ireland's youth unemployment rate these days is much worse than New Zealands and back in 2007 was exactly the same as New Zealand's was then, so the low corporate taxes did not benefit the young (and haven't since).

by Roger Witherspoon | 19th Feb 14, 7:26am 1392747965

Rats. Oh, well it's still a promosing line of enquiry. They did rather go mad and become a house building economy but that is supposedly due to the low interest rates in the Eurozone to rebuild Prussia.

by MikeM | 18th Feb 14, 3:24pm 1392690269

I'm confused by Mr English's comments in which he acknowleges that NZ households are carrying too much debt but then goes on to say that they are well positioned to withstand a sudden "adjustment" of our currency.

by dh | 18th Feb 14, 4:59pm 1392695986

Household income and household debt is measured for all New Zealanders.

You seem to be assuming that New Zealanders (a) own most of the 650 billion of the 700 billion value of New Zealand housing and (b) have someone that can buy it if needed (for it to count as a real asset there would need to be a purchaser).

Household nett financial worth excluding housing is around 47 billion. So if NZ people own most of that 650 billion of housing stock and need to free up cash in an emergency, There is only enough other wealth to buy 1/13th of it.

This is why (a) it is either a structural risk because the balance is far more tilted than it was in Ireland or (b) the value of houses has little to do with the New Zealand economy.

by dh | 18th Feb 14, 5:57pm 1392699422

Because in a a situation of economic shock (as we are talking about in this article) if you want to deploy $650 of the $700 billion in assets that you mentioned you are going to need someone to buy them. Ireland certainly found that people weren't buying the houses at face value after their crash, and Ireland had a lot more money in other asserts than it did in housing.

by Andrewj | 18th Feb 14, 6:50pm 1392702619

ZZ, if interest rates rise and house prices fall these debt free househlds will stop spending and the economy will tank. Unemployment will go up, will the government increase taxation to make benefit strech?

http://www.youtube.com/watch?v=1QtdPfz_faM

by Roelof | 18th Feb 14, 7:51pm 1392706292

Keep in mind that Govt debt has gone from $10 billion in 2008 to over $60 billion today...

( more than $13000 debt per person )

And... that debt is still growing...

Of course ... property owners benefit as some/much of that money finds its' way into land values.

Just because 75% of households are mortgage free does not , necessarily, mean we are rock solid, as a Country

by kiwimm | 19th Feb 14, 10:22am 1392758545

ZanyZane loves to spout opinions devoid of factual backup. In this article alone, we have already had several incorrect figures. But don't let that get in the way of a good narrative. Personally, I will follow the numbers.

According to this 2012 report (page 13) about 33% of houses are owned mortgage-free, 33% owned with a mortgage and 24% rent from a private individual and 10% other (housing corp etc). A high proportion of the rented homes will also be mortgaged to take advantage of the tax break that allows deducting the interest against the earnings. So nowhere near 75% quoted above.

by cowboy | 19th Feb 14, 10:27am 1392758844

I think the rental numbers are much higher portion, and skew the results enormously.

I suspect the 75% debt free, reflects that ALL the rental properties are removed from the data, leaving, landlords with houses/asset pools, and self-owned houses. Of which it wouldn't surprise me to learn many people have two or three houses, officially rented out, yet their own house is mortgage free, and possibly in trust.

by kiwimm | 19th Feb 14, 10:33am 1392759223

Even if you exclude rentals the ratio of mortgage-free to mortgaged is 33:33 so 50% of non-rented houses have mortgages

by cowboy | 20th Feb 14, 11:09am 1392847770

compulsory superannuation is just taxation.

If I'm starting/growing a business, and paying wages trying to meet extra cost of compulsory superannuation is just another straw for the camels back.

the wealthy can afford it without trouble.

the non-wealthy already can't afford todays' costs let alone the extra.

and correct, increased interest doesn't help.

the system is broken (w/respect to globalised high pop density - we're using a model based on low population density and minor comsuption designed in Middle Age Europe and the world no longer resembles that world)

by MikeM | 19th Feb 14, 11:13am 1392761581

It doesn't matter who has debt and who hasn't. The fact is NZ net debt is approx 150% of GDP. Aggregate debt v aggregate income is the main metric. Those who don't have debt are not immune to the wider economic impacts caused by asset impairments, higher interest costs for those who do have debt or foreign political/economic events.

by dh | 20th Feb 14, 12:06pm 1392851167

One person on a wage of 100000 borrowing 1500000 not a problem- They are going to have to cut back a bit on discretionary spending while paying off the loan, but that doesn't have much effect on all the people in the economy whose income depends on dicretionary spending as it is not affecting other people. Now imagine the effects on the wider economy and jobs if every single person in the economy needs to cut back on their discretionary spending.

by cowboy | 20th Feb 14, 11:11am 1392847860

actually that's pretty sweet. if it's leverage (ie business) not consumer (ie government) debt.

debt only a problem if it can't be serviced by real value inputs.

by dh | 20th Feb 14, 12:02pm 1392850937

At the end of 2012:

Number of Households: 1114600

Amount of Household Debt: 191940000000

Total Household Income:132347000000

So Business sector is not being counted. Though some proportion of the total will be people funding their idea for a business off the mortgage, I suspect it is not the majority.

by cowboy | 20th Feb 14, 1:13pm 1392855218

whats all the household debt doing? Is it people buying/building equity in their future shelter, if which case it's a capitalise service cost, a service cost which does need supply throughout the future. So in that case, buy now, with leverage isn't a bad deal.

OR

Is it an inflated market where now promisary debt is being created to pay off previous owners over-promised debt. (ie buying large dead equity with what should be living liquidity)

by Rob | 19th Feb 14, 1:17pm 1392769039

Those numbers are somewhat confusing. If 75% of NZ households are debt free, then why not compare the 220 billion debt with the net worth of those house which that debt is loaded up againest. 220 billion is far more than 25% of $700 billion.

Banks certainly shouldn't lend more than a house is worth. but if the OECD and other ratings agencies say the NZ market is over valued by 20%(which I pressume is on average so some places will be a lot more), then aren't they doing this in at least some situtaions?

by Robert M | 18th Feb 14, 3:33pm 1392690822

Good points dh and Stephen L. Bill English performs valiantly here - mostly what he says is correct, but is only part of the story, and he does the typical ministerial thing of rubbishing opponents without getting into details. Why doesn't the journalist look up some numbers to go with the story?

I find the similarities and differences between NZ and Ireland very interesting and worthy of closer study. We didn't have the big construction boom they had and our real estate bubble is smaller. Our interest rates never got as low as Ireland's (2.5%?) so the NZD protected us here. Our productivity and per capita GDP are lower than Ireland's (NZ: US$32K, Ireland $46K) and we have run bigger current account deficits. Ireland has run a surplus for the past 3 years and their worst year in the past decade was 2009 at -5.7%. (NZ -8% in 2008). Our net debt to GDP is very similar. Australia and NZ are the only two countries with large net debts that have not seen a crash.

I don't quite understand English's argument about our currency. He seems to be saying that its ability to correct in a crash is a strength. But then he also says a crash is unlikely.

Stephen Jen has done NZ a service by pointing out these risks, which no one seems to know the true extent of, and we have a responsibility to study them fairly.

by DFTBA | 18th Feb 14, 5:09pm 1392696570

If black oil is our 3rd largest export, why is NZ importing up to NZD7.7 billion worth of it a year?

That doesn't make any sense

by kiwimm | 19th Feb 14, 10:29am 1392758943

If all NZ oil was used in NZ, we would only produce enough to meet 47% of our needs.

Total recoverable oil field size was 534m barrels of which only 166m barrels remain. Hardly a growth industry to repay our national deficit.

by David Chaston | 18th Feb 14, 5:19pm 1392697179

Talk to NZ Refining in Whangarei/Marsden Point. They don't have the facility to make all the various products we need from the type of crude we produce. Their refining facility is small by world scale. To change it to 'meet our needs' would cost billions, and then the output would cost NZ consumers much more than the export-refine-import process we have now.

They doubt we would ever be prepared to pay the costs for local refining 'of everything'. But they are making big investments in areas that are locally competitive. They did get shareholder approval to spend $365 mln to expand capacity.

by steven | 19th Feb 14, 11:37am 1392763064

Maybe try some research?

We have light sweet crude which commands a price premium over sour and our refinery is setup for sour crude and indeed few refineries in the world are. Hence to refine sweet here would be to lose money.

regards

by King of the whiners | 18th Feb 14, 5:20pm 1392697232

Your comments regarding NZ oil production are comprehensively wrong. NZ oil production hit a peak in 2008/9 when the off shore Taranaki Maari and Tui fields came on-stream. Since then the trend of production has been remorselessly downwards (25% plus drop), and in the interim no meaningful fields have been discovered - despite numbers of offshore wells being drilled. In the last 24 months over a dozen dry offshore wells have been drilled. On shore small scale success by the likes of TAG oil in the Taranaki have not radically altered this picture. There may or not be more oil to be found (the prospects at the moment seem mixed at best), but your claim that NZ oil production is growing is completely incorrect.

by kiwimm | 19th Feb 14, 10:00am 1392757255

Ireland is not short of white oil either with annual exports of NZ$4.5b (vs $13.7b for NZ)

by steven | 19th Feb 14, 11:43am 1392763410

Pretty sure all the oil majors have already done siesmic exploration if not fourfold over. Frankly if there were any fields of reasonable size they would have been got at by now. Ergo unless lucky they dont exist or are so deep and small as to be un-economic.

Our oil production is also declining btw....its value might have increased per barrel but there is less barrels everyday.

regards

by Ralph | 18th Feb 14, 5:35pm 1392698106

Reading the bloomberg article seems more about what he didn't say. The claimed similarities are;

current account deficit
debt/credit driven growth
low savings

Leaving aside if these are true or not he does not address some key major differences;

our independent currency
low publuc debt
banking system is not collapsing

I think the currency idea is simply that if we "crashed" our exchange rate would fall and deliver a boost to export earnings. But the big one for me is our banking system isn't collapsing so what exactly is the trigger event?

by dh | 18th Feb 14, 5:44pm 1392698656

Well, back in 2007 Ireland's public debt was lower than our public debt is now. And prior to their credit crunch their banking system was not collapsing either.

So the only "positive" difference is the independent currency.

by Ralph | 18th Feb 14, 5:47pm 1392698858

I would suggest fact you haven't proved any actual risk to our banking system but noted on the debt if it is true. In that absence there is also no trigger event.

If they used public debt to bail out the banks the bank failure and public debt are seemingly connected issues.

by starfish1 | 18th Feb 14, 4:15pm 1392693316

Both the Australian and New zealand currencies could come under pressure in the second half of 2014 if the Chinese economy continues to cool. There will be less demand for commodities gonig into 2015 and therefore commodity currencies like the kiwi and emerging market currencies will start to weaken and come under pressure. This coupled with higher interest rates will start to bite at a local level.

by David Chaston | 18th Feb 14, 5:30pm 1392697859

Pull the other one. You have a very dodgy memory indeed! On Nov 22, 2000 it was US$0.3922, the lowest post float level.

Apart from a very brief rise for a month or so after that level, exports actually fell consistently until 2006!

A low exchange did us no favours at all. Inflation jumped to 4% and stayed at the upper end of the RBNZ band, only held within it by really high interest rates.

It was not a good time at all. No-one would thank you if we went through that again.

by dtcarter | 19th Feb 14, 5:48pm 1392785282

Why would he confuse things with buy or sell rates? .3922 is the mid-market rate.

The RBNZ has no power over superannuation.

by Andrewj | 18th Feb 14, 5:33pm 1392697992

depends on how much short term foreign debts those pesky banks have.

I started of in business with a loan from Westpac at %18 in the 80's but it went to %22. I made it but my costs were a third of what they are now.

by Ralph | 18th Feb 14, 5:37pm 1392698224

Excluding or including interest?

Where is the biggest increase?

by Andrewj | 18th Feb 14, 5:54pm 1392699286

In 1984 my farm costs were %30 of gross sales, now sheep farmers costs are closer to %85 of gross sales.

Biggest increases have been in rates (huge), insurance, accountancy,fetiliser (biggy), electricity and so on.

by Ralph | 18th Feb 14, 6:08pm 1392700119

Wow. Farm accounting is so different to a computer business. So many costs in my business are variable and can be ejected on the way down if things go the wrong way. Of course, in reality that means people loose their jobs so it's not exactly pleasant.

by Andrewj | 18th Feb 14, 6:14pm 1392700440

Everything that was not tied down got ejected, staff, fertiliser, fencing. In the late 90's things picked up for a bit but the tax regime had changed and not so many write downs. We got rich on capital gains, its what farming has been all about for many.

People forget how hard it is to pay down debt when you need tax paid capital to do it. Borrow 10 mil for a dairy farm and you need to earn zillions to pay it back.

by Ralph | 18th Feb 14, 6:25pm 1392701128

Capital gains?!?

I can get that from a house rental and not have the pain of having to work the land. Oh hold on, maybe something in that.. ;)

by cowboy | 18th Feb 14, 7:07pm 1392703646

Rent - fixed.

Rates - fixed.

Insurance - fixed.

Wages - already too low.

Petrol/diesil - already minimum.

Basic feed - grass already minimum.

Interest - externally set, and low.

Power - externally set, (must operating milk shed, must refrigerate).

Equipment - often low for years at end and in dire need of deferred maint.

Fencing - usually minimal anyway.

Fertiliser - low, and diminishing return...fertiliser is the "advertising" of the farming world.

There's a reason NZ has a reputation for a Number8 wire (aka "Jury/Jerry Rigged") culture/mentality. There's a reason most farms have recycled wire and gates made of re-used plastic, and why dozens of farmers are killed or injured each year by equipment with temporary patches or just plain faulty.

The cashflow volume is much better than my old computer consulting/retail business, but everything is so limited to feed and animal handling that the margins are even lower that box-dropping retail.

by cowboy | 18th Feb 14, 7:10pm 1392703818

Are you including "Rent" ie the proper yield of 3 - 5% of Capital Value of the land and plant (excluding mortgage) as part of that Gross, and are you including _all_ labour costs as if you had to properly hire waged staff for _all_ business & farm work?

by Alter Ego | 18th Feb 14, 6:16pm 1392700585

They are called overheads as you well know AndrewJ and these I keep banging on about as they have added no actual benefit to any commercial entity that I know about.

So why do they keep inflating and escalating?.

My mantra is to pay for the overheads of State, and the Welfare State.

If a business cannot control its inflated overheads, those costs, even though they may be tax deductible, will eventually crush most businesses.

Even when the interest rates were forced down to accomodate the over leveraged, what did they do, they borrowed more, hoping and praying for a 'Capital Gain' to bail them out.

There are 3 blocks for sale in my Daughters road. Cannot make a bean.

Some call this land banking and as a Farmer, Andrew, you must acknowledge that if you investigated all the Real Estate for sale in New Zealand, most are sold on this principal, not the profit, that one can aspire to, working the damn things as a farm.

by Andrewj | 18th Feb 14, 6:33pm 1392701616

You are so right, but 'eating your arm', is not a good or long term solution to hunger.

by cowboy | 19th Feb 14, 10:23am 1392758637

however starving, while the gentry and priesthood prance about giving tax-paid pearls to the poor, is even less of an answer

by Andrewj | 18th Feb 14, 6:39pm 1392701954

If I could just get an account in the Caymans, I could cut the taxman out, that would help a lot.

How did you go about getting yours?

http://blog.longreads.com/post/how-to-write-about-tax-havens-and-the-su…

by Grant A | 19th Feb 14, 7:42pm 1392792126

Bank retail rate with a 200 point spread to get me down there ? damn banks ..ripped...interbank rate low certainly 0.3900's