-
Source: Reuters -
Related
This week's surprise credit rating warning from rating agency Fitch is probably a blessing in disguise for New Zealand, and not just because it knocked the top of that soaring Kiwi dollar on Thursday.
Fitch's move to put New Zealand on a negative watch is a much needed international and public reminder that as a country we can not realistically go back to the heavy borrowing, consumption and housing driven growth of recent years.
It is just not sustainable. We need more investment in productive assets not housing.
The message from Fitch is stark.
New Zealand's current account deficit is too big and it is not clear how New Zealand is going to get it under control, given the outlook for growth in coming years is weak.
It is a little surprise that Fitch's move comes after fellow rating agency Standard and Poor's actually restored our credit outlook following the Budget in May.
However, at the time of the Budget there was less focus on the renewed strength in our housing market and the government seemed to pull out all the stops to appease S and P.
Fitch seems less impressed with the belt tightening by the government.
However, it's the upturn in housing and renewed levels of borrowing by Kiwis over recent months that is, in my view, likely to be causing Fitch concern.
The relaxing of the 20% deposit threshold by trading banks also won't help.
Fitch seem to be saying "sorry you Kiwis you are kidding yourselves if you think the world is going to let you just borrow off foreigners and buy houses to get yourself out of trouble".
It is actually the same message that we have been hearing from our own leaders.
The Reserve Bank Governor Allan Bollard warned again this week that a return to the housing boom of recent years needs to be avoided, whilst the head of Treasury was actually brave enough earlier this year to call for a capital gains tax for a similar reason.
Prime Minister John Key this week also chimed in on the issue acknowledging the high current account, stressing the need for New Zealand to earn more through its exports and increase it productivity.
Desperately seeking solution
The problem, it seems to me, is that there is a strong consensus growing about the need to do something and rebalance the economy, but a clear solution that is politically viable has not been put forward.
The review of tax laws by a specialist panel offers hope.
The review seems highly likely to call for some sort of change to the rules around property investment, but that will take time and will need to be managed very carefully politically.
Perhaps, in the end, it will still fall to the Reserve Bank to fix the problem.
However, the central bank has been struggling to find an answer to this issue for years.
Reserve Bank governor Allan Bollard acknowledged again this week that simply raising interest rates to curb borrowing - as we saw it do between 2003 and 2007 - is a blunt instrument.
What he means is that it hurts the very export sector we want to foster. High interest rates push up the currency as they attract foreign investors looking for high yields. A high currency cuts export returns.
Perhaps Dr Bollard will get tougher with regulating banks&.
He hinted at that in his speech this week&here is a quote from the speech notes.
The Reserve Bank appreciated that interest rates are a blunt instrument to curb excessive borrowing, Dr Bollard said. "We see prudential policy potentially playing a greater role in the future."
Is the greater use of prudential policy a signal that Dr Bollard will in the future make banks hold even more capital or cash reserves on their balance sheets?
Such a move would limit the amount of money they have to lend thereby curbing borrowing as Dr Bollard wishes...
In the end, one way or another, be it Dr Bollard or the credit rating agencies, New Zealand, it seems, is not going to be allowed to have a repeat of the housing boom of recent years.
To read more of Corin Dann's blogs, CLICK here.
