12 October 2008
Note: All transcripts are copyright to Front Page Ltd but may be used PROVIDED attribution is made to TVONE and Agenda
AGENDA
Presented by RAWDON CHRISTIE
RAWDON Well the political response here to the world financial crisis has at best been muted. Two leading figures in the New Zealand economy Stock Exchange Chief Mark Weldon and New Zealand Institute Director David Skilling have put up their own proposals to help steer New Zealand away from financial disaster. Titled 'Economy on the Edge Swan Dive or Belly Flop – A draft strategy for coming out of the crisis stronger' the Institute's report lays out a series of possible government actions including a variety of bold tax changes and a restructuring of our SOEs. David Skilling joins me now. Good morning David.
You described the New Zealand policy response as weak and inadequate, is that true of both parties.
DAVID SKILLING – New Zealand Institute
Yes I think it is, Our view is that the global financial crisis is about to become a very real economic issue for New Zealand because of our exposure to both overseas credit markets and also the global economy and in that context we simply think that the policy announcements, the commentary from both Labour and from National simply don’t give due credit to that challenge, we need to see much much more.
RAWDON We've just been listening to Bill English for the last 20 minutes talk about his party's position this morning, has that given you any renewed confidence has that changed your mind on this?
DAVID No, no I think giving personal tax cuts to stimulate consumption in the economy is certainly part of the answer but it's simply not enough, this is not a normal cycle where we just go down you know prop up the economy but I mean hopefully come out a couple of years down the track, this has got big structural elements to it as well and I think while focusing on personal consumption is part of the answer, ensuring that businesses continue to invest to employ people is critically important and demands a more aggressive government response than we've seen from either party to date.
RAWDON And credit is available for businesses to invest?
DAVID That’s exactly right.
RAWDON So how much of this is the result do you think of the parties focusing on the election at this stage, is the election part of our undoing here?
DAVID Well I guess I point at two things, one this is unfolding very very quickly and our exposure in New Zealand is very different to the exposure in say the US or the UK where it's very much about banks falling over, we fortunately don’t have that problem. So it is moving qui9ckly there aren’t any obvious or easy answers but the proximity to the election clearly makes things more complicated. My guess is politicians become fairly risk averse the closer the election looms they prefer to fight the election on the issues they thought they were gonna fight it on rather than start throwing up new ideas and open themselves up for attack, so I think that is unfortunate. My view is that we can't wait another four or six weeks until we have a new government post election before we start grappling with these ideas seriously, we need to start doing that now.
RAWDON You just mentioned the UK and other global situations, now there's been a call for a unilateral approach globally on this, governments and banks working together, we've heard about the G7, I heard the top 20 nations should be meeting together to try and come up with a unilateral solution, should we have a part in this?
DAVID Well we're probably not one of the G20 in terms of economic size and I think our politicians in terms of the government, Alan Bollard and the like are across the global conversations that are happening. The complication as I said is that our issues our exposure in New Zealand are different in a sense from the issues that are being talked about in these fora which is how do we capitalise - back the banking system how to ensure liquidity. Our exposure I think is very much around the real economy so although we need to keep up to speed with what's happening globally, having a seat at the table is probably not the top priority it's battling with the issues that are under way in New Zealand.
RAWDON So while we're a pimple on the face of global economics we're also in quite a good state apparently, so what sort of opportunities should we be looking for at this stage?
DAVID Well I think we're in a good state now my guess is that this will become more and more real over the coming months in terms of businesses finding the credit is drying up the global markets that are going soft, so I think that we do need to be you know taking advantage of the situation to put in place things that are going to put us in stronger shape into the future, so there's some short term downside risk management things, making sure that consumers keep on spending but businesses keep on investing, but I also think there's a silver lining to this cloud, which is if we play our cards right because we don’t have the same issues in terms of our banking sector that many other countries do that we can actually start putting in place things that will make us stronger. We can begin to be clever I think about things like attracting capital, attracting people back to New Zealand who perhaps want to get out of the UK or the US, and things of that nature, so you know this is not just unrelenting gloom and we have to manage our way through it. I think taken properly there are some real opportunities here for New Zealand to position itself for real strength.
RAWDON Attracting people back would be quite a small part of this though, what about you mentioned attracting capital.
DAVID Yeah the way we think about it's a series to time prices there's some short term momentum confidence building things that you can do that aren’t gonna change the game but give a sense of real momentum attracting people back, helping businesses manage cashflow over the next couple of years. I think in a slightly longer term sense by which I mean the next two or three years as opposed to the next six or twelve months, you know if the government's got a two hundred billion dollar balance sheet – we've talked a lot about debt and deficits and the appropriate borrowing profile and the like, but look at the asset side of the balance sheet the government's got 30 billion dollars plus of financial assets, a good bulk of which are invested offshore, we've got 25 billion dollars plus in SOEs and our view is that asset side of the balance sheet isn't being deployed as productively and efficiently as it could be, and there are real opportunities there I think to do some quite creative things to ensure that then investment into infrastructure, into New Zealand firms is a lot stronger than it would otherwise be, it doesn’t have anything to do with the ownership of the SOEs it doesn’t have any implications for the government's debt profile, but we think the government has by virtue of a 200 billion dollar asset position the scope to do something quite creative very much focused on the real economy in ensuring that productive investment continues to be strong over the next two and three years and beyond that.
RAWDON How much risk is involved in something like that?
DAVID Well look there is risk to be sure but I also think there's risk in adopting what on the surface appears to be a prudent position, we heard Mr English just now talk about prudence, my view is that we treat this as a normal cycle and try and make sure that everything's tidied away, the very real risk is that we get run over, we don’t grapple seriously enough with the scale of the challenge. So there are risks on both sides, risks of inaction as well as risks of action. I think that you know this is a time for taking a few risks, I'm reminded of FDR, obviously I'm not making analogy here to the great depression necessarily, but FDR came in and said look we've got to engage in bold decision experimentation and it seems to me that’s the recipe for New Zealand as well, we've gotta try a few things, not all of them will necessarily work, but on things like using the asset side of the balance sheet more productively there's plenty of overseas precedent that gives you a pretty good degree of confidence that there is some real upside from moving in that direction.
RAWDON So what do you want from a government, you know it's all very well issuing strategies and suggestions but you know what do you think this country needs to hear from our politicians to have the confidence they're doing everything they can to make the best of the situation?
DAVID Well a couple of things, one I would like to have more confidence that they understand the full potential seriousness of what we're going to experience over the next year or two. This is not just a normal cycle there are some deep structural things here in terms of New Zealand's reliance on foreign credit, so I'd like the politicians to go beyond just business as usual and you know a bit of personal tax cuts and really give a sense they understand. I'm not expecting a full 15 point plan, this is difficult but even in terms of simple things you know bringing together an informal summit of business leaders, financial leaders and politicians grappling with these issues and trying to come up with some short term things that they could possibly do and it seems to me that basic conversation about well what are the ideas that ought to be on the table even that first step isn't taking place. The reason we put out our paper during the week was a frustration, but look there aren’t ideas being put on to the public agenda,, we don’t claim to have a monopoly on wisdom but we thought we'd try and kick start the conversation by putting up some ideas, getting them kicked around, hopefully there are some better ideas out there as well, but we've got to start talking about this we can't wait for another six weeks or two months till we have a new government and they can unveil their plans.
RAWDON Some are saying we should wait a bit longer than even six weeks or two months they're saying early next year we'll open the financial books, see what the situation is, hopefully the banking crisis has settled or we know which direction it's heading in and then have a look at our direction.
DAVID Yeah well you know the words banking crisis and settle down are not words that I would use in the same sentence at the moment, if you go back a fortnight even and think about what the world looked like then compared to what the world looked like now it's a very different environment and I think as I said over the next two or three months I think we're likely to see this crisis which at the moment looks like it's happening on the other side of the world coming a lot closer to home in terms of firms finding it much more difficult to roll over borrowing to refinance and the like, so I don’t think that we can say well look let's just wait this out for two or three months, you know regroup after we've all come back from holiday and see where we are. I think that a proactive approach where we start to do some momentum building things short term which might not be game changing in and of themselves, but let's get a start, let's start grappling with this with the seriousness that I think it deserves.
JOHN ROUGHAN – New Zealand Herald
Are you saying that the government should be announcing these sort of things now, the sort of urgent cures like tax holidays for R&D and capital gains and provisional tax and all this, or are you saying that these are policies we're putting up to you to consider if this crisis really hits New Zealand because so far it hasn’t really hit us, as you said apart from the share market doesn’t feel like it's here yet, so would it be panicky to come out with all these urgent decisions now?
DAVID No I don’t, I mean I think that the downside fiscally and otherwise of what we're proposing is actually reasonably limited as Rawdon said, I mean things like attracting people back is it doesn’t have a hug fiscal cost associated with it. I don’t think it's panicky but I do think that we need to give a sense that we are grappling seriously with this and I think doing it early is better than waiting until the crisis hits. I mean if you already talk to businesses and people in the markets about what they see two or three months down the track in terms of ability of New Zealand firms to rollover debt in what is a very tight global market I think there is a sense that actually this is coming close to home very very short term. I agree we don’t see immediate signs like ala New York in New Zealand at the moment, but I would note that the NZX is off 30-35% over the last 12 months so it's not simply a crisis that’s happening over there…
JOHN That’s expectations but are business not yet finding that they actually aren’t getting credit any more, or they're having difficulties?
DAVID Well there are some deals that have been reported in the media in the primary sector for example over the last month or so where credit has been reported to be an issue, certainly anecdotally, I don’t have numbers for this but anecdotally you're hearing concerns, not necessarily this week but you know two or three months down the track when we've got big amounts of debt to rollover, you know will we find it as easy to access credit on the terms we have and I think the answer to that is no, but my sense is if we wait until it's blindingly obvious that there is a clear and present danger in terms of the crisis we've probably left our run a little bit late, so I agree you don’t want to throw caution to wind and sort of give a sense of panic, you want to communicate a sense of control and confidence, but my sense is that politicians and others grappling with this issue talking about it sensibly, putting up some serious options for consideration and doing that as soon as possible is the right way to go, and if you benchmark New Zealand's response to date against the type of responses that you’ve seen even in Australia who also doesn’t have a banking crisis I think that we really have been left behind.
VERNON SMALL – Dominion Post
David I'm interested in what you said about our need for reliance on foreign credit and our need to do something about that, and bringing this discussion to this week's political events, what do you make of National's decision to detune the Kiwi Saver Scheme and as Bill English was indicating tipping a little bit into short term consumption. Wouldn’t it be better to maintain Kiwi Saver and boost it so that we become less reliant on that overseas credit?
DAVID Yeah I don’t know at this stage we need to boost Kiwi Saver, in the longer term I think there is an argument about that but short term I don’t think that’s an issue. Look I think the National decision was disappointing to walk Kiwi Saver back when essentially what they’ve chosen to do is finance personal tax cuts to simulate consumption out of a savings vehicle, and I think that gives a sense that the way we see ourselves riding out of this crisis is by reliance on people spending, which is what New Zealand has traditionally done. I think that the major exposure we have over the next several years is around savings and investment in a productive base and I think Kiwi Saver is a really important part of that both in terms of directly providing capital, but also in terms of creating that savings culture which is something that New Zealand hasn’t had historically. So you know if there's any time that we become aware that our culture of consuming not saving is a problem it's now. The reason we have this exposure to what's happening in New York and London is because of our deep exposure to foreign credit we're so reliant on it, so this is not the time it seems to me to be upping that exposure to partly reduce debt.
VERNON And the other side of that investment issue is the one you’ve addressed about the large government entity if you like which would be like the Singapore government's one which holds a lot of state assets and then uses its strength in its balance sheet for economic good. How do you actually see that working out, I mean we've got most of our assets are say the energy generating SOEs and Transpower, how can you put all those into one entity?
DAVID You want to apply laws to things like Transpower for example you know probably put that to one side, but there are a bunch of I guess smaller out and out commercial enterprises that have growth opportunities and they could if they're given the management and the capital ….
VERNON But three energy generators you wouldn’t want those in the same …
DAVID Well if you look at a company like Meridian for example whose got real deep expertise around renewable energy has made some investments in Australia a few years back around hydro which did incredibly well returned the government a bit dividend, it's things of that nature, so if you're looking for companies that can be freed to invest both domestically but also offshore our view is that you can put them in a different management structure that would give them more freedom, you may recall a couple of years back Trevor Mallard Minister of SOEs announced a big plan for allowing SOEs to expand and since that announcement not very much has happened so I just think the structure in which they're held at the moment makes that investment makes that expansion more problematic but we're talking you know 10 billion plus of SOEs, that’s a big sum of money and it seems to me if the challenge is really increasing investment in the real economy now is a good time to be thinking about moving in that kind of direction.
RAWDON Dr Skinner thank you very much for joining us this morning, much appreciated.
