Political Risk In New Zealand

1. Political Risk Analysis of New Zealand
General
New Zealand’s open economy is known for being one of the world’s most free market capitalist
economiesi. The country has a relatively high standard of living with GDP per capita of US$30,234 in
2008, comparable to Southern Europe, e.g. Spain US$33,385, but lower than the United States at
US$46,820ii. iiiNew Zealand's labour force is projected to grow from an estimated 2.24 million at 30 June
2006 to 2.65 million in 2031 and 2.79 million in 2061. The labour force is ageing and half of the labour
force will be older than 42 years in 2011, compared with a median age of 40 years in 2006 and 36 years
in 1991.ivA large number of the New Zealanders follow Christianity as their religion. The predominant
sub sects among Christianity are Anglican (14.9%), Roman Catholic (12.4%), Presbyterian (10.9%) and
Methodist (2.9%) Christians. The churches support all religions right to free expression and condemn
religions intolerance.
Political stability
New Zealand has ranked fifth in the world for political stability in the IMD World Competitiveness
Yearbook 2008. vNational party after being in power for nine years lost in Nov 1999. The labour party
has since then been the ruling party with Helen Clerk as prime minister. The labour party is currently in
power with support from progressive party, New Zealand’s(NZ’s) first and United front. In New Zealand
elections are held every three years so the government has to at time make some compromises with
economic growth in order to pursue its political motives.
The next elections are due in November 2008 and it seems that people have decided for a change but
the National party is getting support on the condition that it will not change the policies of labour party.
vi
Despite the recent monetary policy easing the ruling Labour Party is being battered by the dismal
economic climate. In order to form government after the elections the National Party or the Labour
party may have to obtain support from minor parties.
International relations
vii
Historically New Zealand's has developed close ties with Australia and the South Pacific Region. The
quot;Closer Economic Relationsquot; Agreement (CER) with Australia extends free bilateral trade to all goods and
most services and also free movement of labour.
New Zealand has a key leadership role within the South Pacific Forum and is also a member of the South
Pacific regional Trade and Economic Agreement (SPARTECA). It is a member of the Asia-Pacific Economic
Cooperation (APEC) and also of the Cairns group of quot;Fair Trading Agricultural Exportersquot;. Bilateral Free
Trade Agreements (FTAs) with Australia, Singapore and Thailand are in force, as well as a four-way FTA
with Singapore, Brunei and Chile. FTA negotiations are ongoing with China, Malaysia and ASEAN
(concurrently with Australia) and the readiness to begin FTA negotiations has been signalled by Gulf
Cooperation Council.

2. NZ's main trading partners are now in decreasing order Australia, EU, USA, Japan and China. New
Zealand depends on international trade. The EU is NZ's 2nd trading partner (after Australia) with
increasing trade figures since 1990 and resulting in 2005 in a total trade of 6197 mio Euro (or 16% of its
trade). NZNZ exports to the EU consist mostly (67%) of agricultural products (in 2005 mainly sheep meat,
wool, dairy products, fruits, wine) and to a minor extent also machinery, chemicals and commodities. NZ
participates actively in the WTO DDA negotiations.
viii
New Zealand’s relation with US improved after the New Zealand government’s decision to commit
troops to the US-led war against terrorism in Afghanistan in late 2001. US government also welcomed
New Zealand’s dispatch of a frigate to the Gulf in late 2002. A longer-standing issue is New Zealand’s
nuclear-free policy, which prevents US warships from visiting New Zealand. This is seen as an
impediment to a future free-trade agreement (FTA) between the two countries, and tricky issues
surrounding agricultural trade would also need to be resolved. The government’s failure to support the
US-led war in Iraq upset bilateral relations in 2003, although relations have since improved.
ixBusiness environment
While it may have been acceptable in the past for businesses to pursue profits single minded with little
or no consideration for the wider social and environmental impact of their activities, this is not the case
today. The consumer movement and the environmental lobby are now firmly established as vigilant and
powerful watchdogs, and have successfully brought about changes in business practice and in the laws
which govern how businesses must operate.
In Budget 2007 the Government announced significant changes to business taxation and the business
environment - to help develop a more innovative and dynamic economy better able to compete in the
global marketplace. The Budget 2007 sought approval for reducing the company tax rate from 33% to
30%, with effect from the 2008/09 income year. It also reduced the tax rate on widely held savings
vehicles at the new company rate of 30% and caps the Portfolio Investment rate at 30%. Approval was
also sought in the previous cabinet paper to allow shareholders to use the current 33% imputation
credit ratio until 31 March 2010. There was a research and development tax credit introduced and also a
policy changes relating to the imputation credit ratio, resident withholding tax on dividends and the
qualifying company election tax rate.
MDAS is currently the government’s key firm-level response to the market failures affecting the market
development activities of New Zealand firms. Broadly, MDAS seeks to promote new, sustainable and
deeper market development activity by targeting firms that are developing new markets. Firms are able
to apply for a 50% refund of eligible market development activity up to $100,000 per annum. In
November 2006, Cabinet agreed to boost MDAS funding by a total of $33.750 million for the period 1
January 2007 to 31 March 2008.
x
The Employment Contracts Act deregulated the labour market in 2000 and replaced most centralised
wage-bargaining with individual contracts negotiated between employers and their staff. Amendments
to the Employment Relations Act took effect in December 2004. These increase protection for workers
on the sale of a business, and strengthen collective bargaining procedures by making it a breach of good

3. faith for an employer to extend a union-negotiated deal to non-union employees as a means of
undermining the collective agreement. Legislation passed in 2001 gives entitlement to paid parental
leave, and tougher health and safety laws took effect from May 2003 following the approval of the
Health and Safety in Employment Amendment Act by parliament in December 2002. In addition, the
Holidays Act 2003, which came into effect in April 2004, requires that staff be paid at least time-and-a-
half for working public holidays, and provides for minimum paid annual leave entitlements to increase
from three weeks to four from April 2007.
New Zealand faces some serious energy sector challenges both in oil and gas domain. Natural gas
production from Maui field is rapidly declining and at the same time greenhouse gas emissions are
rising. xiIn the Sept 2007 year total electricity generation fell 0.8 percent compared with the September
2006 year. Gas production increased for the first time in a September 2007 year since 2001. Diesel
deliveries increased again and they've increased every September since 1996.
Economic Policy
The economy is an export oriented with main trade partners are Australia, USA, China and Japan. Other
important industries are Agriculture and tourism. As per World Bank it is the most business friendly
economy in the world. The GDP growth rate in the last 5 years has been 3% to 6%. Annual growth in
gross domestic product was 2.6 percent for the June 2008 year. Real gross national disposable income
increased 5.0 percent for the year ended June 2008. xiiFiscal surpluses have been substantial in recent
years, leading the government to reduce personal taxes, adjust income tax thresholds in the 2008/09
(July-June) budget and pencil in further reductions until 2011/12. xiiiAs per economist New Zealand dollar
will depreciate marginally from NZ$1.36:US$1 in 2007 to NZ$1.37:US$1 in 2008, and will then weaken
considerably to NZ$1.61:US$1 in 2009.
xiv
Statistics New Zealand estimates that of every $100 spent by households on goods and services
covered by the CPI, $22.75 is spent on housing and household utilities, compared with $20.02 in 2006.
This reflects increased spending on renting and on purchasing new housing, and higher electricity prices.
Food accounts for $17.83 of every $100 spent, compared with $17.38 in 2006. xvThe increase reflects an
increase of 11.3 percent in food prices over the past two years. Other groups have shown declines in
relative importance, including transport (down from $17.24 to $16.18 of every $100 spent), with lower
spending on cars contributing to the fall. However, the relative importance of petrol has increased to
$5.47 of every $100 spent. xviThe overall wage rate has increased by 3.5 % since the last year and as per
forecasts done by The Economist, Consumer price inflation will average 4.1% in 2008, before
slowing to 3.3% in 2009.
Balance of Payment
xvii
The total level of investment in New Zealand at 31 March 2008 was $275.7 billion, with $87.5 billion
(31.7 percent) sourced from Australia. The level of New Zealand’s investment abroad was $121.9 billion
at 31 March 2008, of which investment in Australia was $34.1 billion (28.0 percent). At 31 March 2003,
Australia was the source of 23.1 percent of the level of foreign investment in New Zealand, and the
destination for 22.3 percent of New Zealand's level of investment abroad.

4. xviii
New Zealand's two other main international investment partners are the United States of America
(USA) and the United Kingdom (UK). At 31 March 2008, these two countries combined were the
destination of 29.5 percent of New Zealand's investment abroad, and the source of 33.3 percent of
foreign investment in New Zealand. Most of New Zealand’s international assets and liabilities continue
to be held by the finance and insurance industry, although the manufacturing industry is also significant.
Together, these industries held 76.6 percent of New Zealand’s assets abroad, and 68.9 percent of New
Zealand’s international liabilities.
xix
At 31 March 2008 New Zealand's foreign currency external debt was $109.9 billion. Of this debt, 92.2
percent was hedged in some way. The year ended June 2008 current account deficit was 8.4 percent of
GDP, and the revised current account deficit to GDP ratio for the year ended March 2008 was 8.0
percent.
New Zealand is dependent on foreign capital inflows to finance its chronic current-account deficit. Total
gross overseas debt as a proportion of GDP reached 113.6% in March 2001, but had risen to 115.7% by
March 2006. Strong debt accumulation by the private sector (mainly financial corporations) has played
an important role in the growth of overseas debt, although the risk of foreign-currency exposure is
reduced by a high level of hedging of foreign currency debt. In contrast to the private sector, the public
sector has had a steadily declining direct influence on the current-account deficit and gross foreign debt
levels. The public sector’s share of total gross external debt fell from over 31% in 1993 to 11.4% of GDP
by March 2006.
Effect of Global financial crisis
xx
In the first instance, global growth forecasts will be reduced as risk and uncertainty increase the cost of
credit, while investors will simply be more risk averse to new investments. This means that banks will be
much more wary of who they lend to, irrespective of interest rate hikes. BusinessWeek has named New
Zealand as one of the 13 countries likely to be hit hardest by the global credit crunch.
NZ’s net international liabilities now exceed $150 billion and act as a significant drag on the country’s
ability to reduce the current account deficit over the short to medium term. Debt makes up the vast
bulk of NZ’s international liabilities (around 88 per cent of the total), and increases in interest rates since
early 2007 have made servicing that debt more expensive.
The extent of NZ’s external imbalance leaves the country vulnerable given that international investors
are re-pricing risk and credit is becoming internationally more expensive in light of recent events. In this
respect, its large external deficit leaves NZ susceptible to a change in investor sentiment as the country
relies heavily on external funding for its investment needs. With banks obtaining about a fifth of their
money from offshore, it is a moot point whether there is any chance of a significant decline in household
interest rates.
Despite the above, NZ is in a very useful position in terms of our fiscal and monetary policy settings
should the impact of the global financial crisis be more prolonged and deep-seated.

5. In terms of monetary policy, the Reserve Bank has, until recently, maintained a relatively tight stance in
light of inflationary pressures. With the Official Cash Rate (OCR) currently sitting at 7.5 per cent, there is
plenty of room for dropping it further. NZ banks are also not involved in many of the complex financial
transactions that have caused significant losses for many large global institutions. But despite the lack of
direct involvement, NZ banks will be indirectly affected by financial prices as added uncertainty will
ensure that investors become increasingly risk averse.
In respect to NZ’s fiscal position, operating balances have declined but are still in positive territory, while
NZ has operated cash surpluses until recently. Therefore there is still room for further fiscal stimulus if
this was considered absolutely necessary. NZ government debt is also low by international standards,
providing a cushion against a potential downturn. While the pre-election Economic and Fiscal Update (6
October 2008) shows a significant deterioration in NZ’s fiscal position, by international standards, New
Zealand is still in a reasonable position to weather any significant global downturn.
Growth in NZ is expected to pick up in 2009 as a result of a number of positives likely to impact on
output at that time. These include the combined effects of personal income tax cuts which have just
started recovery in agricultural production from the drought of 2007/08, added expansion in the dairy
sector as a result of significant conversions, and finally, expectations of further, perhaps significant, cuts
by the Reserve Bank in the OCR.
Things to watch
Trade fiction with main trading partners
Change in policies due to new government
Declination of economic growth

6. Appendices
Figure 1: Real GDP Growth
Real GDP Growth (Annual percent change)
10
8
6
4
2
0
2003 2004 2005 2006 2007 2008 2009 2010 2011
New Zealand Emerging and developing economies
Advanced economies World
Copyright: ©IMF, 2008 Source: World Economic Outlook (October 2008) (World Economic Outlook - October 2008)
Figure 2: Main Economic Indicators
Figure 3: Current Account

7. Figure 4: Foreign Trade
Figure 5: Election results

8. References
i
The Heritage foundation. (2008). 2008 Index of economic freedom. Available:
http://www.heritage.org/research/features/index/. Last accessed 27 Oct 2008.
ii
International Monetary fundI. (2008). New Zealand Country Info. Available:
http://www.imf.org/external/country/NZL/index.htm. Last accessed 27 Oct 2008.
iii
New Zealand goverment. (2008). Demographic trends 2007. Available:
http://www.stats.govt.nz/NR/rdonlyres/6476A1DB-472E-412A-9890-
0C09A3B2ED37/0/Chapter8_Nationaldemographicprojections.pdf. Last accessed 27 Oct 2008.
iv
CIA. (2008). The world factbook. Available: https://www.cia.gov/library/publications/the-world-
factbook/geos/nz.html. Last accessed 27 Oct 2008.
v
Anonymous. (2008). New Zealand. Available: http://en.wikipedia.org/wiki/New_Zealand. Last accessed 27 Oct
2008.
vi
Economist. (2008). Outlook for 2008-09. Available:
http://www.eiu.com/index.asp?layout=RKArticleVW3&article_id=553766640&country_id=&channel_id=&category
_id=&refm=rkHome&page_title=Latest+risk+analysis. Last accessed 27 Oct 2008.
vii
European commission. (2008). Trade Issues New Zealand. Available:
http://ec.europa.eu/trade/issues/bilateral/countries/newzealand/index_en.htm. Last accessed 27 Oct 2008.
viii
Economist. (2008). Outlook for 2008-09. Available:
http://www.eiu.com/index.asp?layout=RKArticleVW3&article_id=553766640&country_id=&channel_id=&category
_id=&refm=rkHome&page_title=Latest+risk+analysis. Last accessed 27 Oct 2008.
ix New Zealand goverment. (2008). Welcome to the New Zealand Treasury. Available:
http://www.treasury.govt.nz/. Last accessed 27 Oct 2008.
x
Economist.(2007). Country Profile New Zealand. Available:
http://www.economist.com/Countries/NewZealand/profile.cfm?folder=Profile-Forecast. Last accessed 27 Oct
2008
xi Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct 2008.
xii
Economist.(2007). Country Profile New Zealand. Available:
http://www.eiu.com/index.asp?layout=VWCountryVW3&country_id=1820000182. Last accessed 27 Oct 2008
xiii
Economist. (2008). Country report New Zealand. Available:
http://www.reportbuyer.com/countries/asia_pacific/new_zealand/country_report_new_zealand_september_200
8.html. Last accessed 27 Oct 2008.
xiv
Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct 2008.
xv
Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct 2008.
xvi
Economist. (2008). Country report New ZEaland. Available:
http://www.reportbuyer.com/countries/asia_pacific/new_zealand/country_report_new_zealand_september_200
8.html. Last accessed 27 Oct 2008.
xvii
Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct 2008.
xviii
Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct
2008.
xix
Geoff Bascand. (2008). Government Statistician. Available: http://www.stats.govt.nz. Last accessed 27 Oct 2008.
xx
Business NZ. (2008). Economic conditions index. Available:
http://www.businessnz.org.nz/file/1547/081017October%20(2).pdf. Last accessed 27 Oct 2008.