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Stats NZ’s final data release for the year revealed the economy has been shrinking at its fastest rate in three decades. While this may not be a very Merry Christmas, there is still hope for a Happy New Year.
Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile.
But while private New Zealanders open up their wallets, the Government will continue to tighten its belt. Core Crown expenses are predicted to fall from almost 34% of GDP in 2025 to 31.5% by the end of the decade.
This would be enough to balance the books—if you ignore annual losses at the supposedly self-funded Accident Compensation Corporation—and halt net core Crown debt at 45%.
But Finance Minister Nicola Willis told Interest.co.nz this wasn’t her top priority.
“Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,” she said in an interview.
“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense—not just in the short term for coloring the books and making them look pretty—but will actually generate a sustainable basis for growth in the medium term”.
Many left-leaning critics of the Finance Minster would like to see greater Government investment to support the growth forecasts next year. They worry a withdrawal in spending will hamstring the recovery and leave the economy less productive in the future.
It may surprise you to hear that Willis agrees with them. She says it is “factually incorrect” to accuse her of austerity, as the Coalition’s fiscal policies are still stimulating demand.
“We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy. And actually, the fiscal impulse will be positive.”
“But the point that we are making is this does need to unwind over time, and so we've set out a path of gradual fiscal consolidation, which we think is the responsible way to go”.
She says policies which deregulate the economy, open New Zealand up to more foreign investment, and crack down on uncompetitive industries will be more important to future growth than fiscal stimulus.
Banking is one of these uncompetitive sectors in which she wants reform. She's already told Kiwibank to raise $500 million and the Reserve Bank to put more weight on competition when setting regulation policies, and is more than willing to go further.
“When I read through the Commerce Commission report on our banking sector, it couldn't have been any clearer to me that we have a major problem,” she said.
“I have put the banks on notice and made it clear that if they want to do more of their nice talk about how they're going to be really good … that won't wash with us. They need to be acting or we will take further action, and there are a lot of options for what we can do there”.
She’s open to charging banks a special levy or tax, like in the United Kingdom and Australia, which recognises they benefit from an implied Crown guarantee and earn very high risk-adjusted returns as a result. Big banks beware!
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The Government could run a second retirement income scheme alongside NZ Superannuation as part of a transition to a new system, but according to Andrew Coleman, this couldn't be done without an increase in taxes on older people, or more general tax increases.
Fresh from his 13 part interest.co.nz series on NZ's government retirement income system and associated taxes, Coleman spoke to myself and Terry Baucher on a combined episode of the Of Interest podcast and the New Zealand Tax Podcast.
Coleman is currently a visiting professor at the Asia School of Business in Kuala Lumpur while on extended leave from the Reserve Bank. He has also worked for Treasury and the Productivity Commission. The views expressed are his own.
Coleman says the urgency for making change isn't just down to an ageing population and the increasing taxes he says young people will have to pay. It's also because those under 45 are inheriting a very costly system, which might not be what they like or want.
He uses an analogy of a 22 year-old who recruits help from their father or uncle to buy a car.
"And he says, 'oh, cars, I'm good at cars. You know, when I was a kid we had these great Holdens and you could put six people in them, everyone in the whole family would fit in them. And they had a big six litre engine'... And you say, 'oh, well that's maybe not what I wanted.' But he says 'oh look, I'll go and get you the car, just give me the money and I'll get you the car.' And so you give him ten grand and [he] comes back [with an] old Holden, which is a gas guzzler and not particularly safe."
"And you've only got a girlfriend or a boyfriend and no kids and it's nothing like the car that you want and yet you've paid for it. And it's got these high ongoing costs because it's chewing down the petrol," Coleman says.
"You wanted a little hybrid or electric car or maybe just a Toyota Corolla, which was quite small and fits in your little parking place. And it's a bit like that. Young people today are inheriting a [retirement income] system designed in the seventies when Holdens ruled. And it may not be what they want and it's very costly."
In his series Coleman suggests a new pension system, which he calls KiwiSaver 2.1, which would be a shift from pay-as-you-go funded pensions to save-as-you-go funded pensions. I asked him whether a transition could be made to the new system for those under 45, with the current system kept in place for older people, without higher taxes on older people which he suggested in his series would be required to change to a new system.
"There's no reason why you can't have two systems going. And one of the reasons is that your entitlement would depend on your birth date...that's very straightforward. We would just at some point introduce the second system for people under 45 and build it up and keep old people on the current system," says Coleman.
"Can we do it without an increase in taxes on older people, or more generally? No."
"There is a transition issue. It's like digging a hole. Once you've dug the hole, if you want to get out of the hole, you have to do some work to fill it in again. And so when we adopted a pay as you go system or expanded it significantly back in the 1970s, it meant that to reverse it, some future generations are going to have to be worse off than they otherwise would have been. And that's the political difficulty here. It's like there's this beautiful thing that you want over there, a beautiful island that you can go to, but you can't get there for free."
"But there's goodwill out there. I think a lot of people my age... recognise that young people are paying a disproportionate amount of the costs and that if we can find a way of increasing taxes on ourselves in order to make the system better for younger people, that's something that a lot of people would be prepared to do now. It won't have to be a permanent increase in taxes. It's a transitory phenomenon," Coleman says.
"Once we've got the new system up and running, taxes would come down and we would have a much better tax system. There should be, if we do this, a statue to the unknown 75 year-old who paid a few more taxes so that all the young New Zealanders of the future could be better off and have a better system."
In terms of what tax(es) are used, Coleman says a transitional social security tax on older people is an option. Social security taxes, such as Accident Compensation Corporation levies, are paid on labour income.
There's much more detailed discussion in the podcast audio including on taxes.
*You can find all episodes of the Of Interest podcast here.
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New Zealanders should be grateful insurance companies remain committed to New Zealand given the country's risk exposure, John Lyon of Ando Insurance says.
In the latest episode of the Of Interest podcast I asked Lyon how well general insurers are serving New Zealanders, how competitive the market is, and how the public should judge strong financial results from their insurers. As well as being CEO of Ando, an underwriting agency, he's also the former CEO of Lumley Insurance.
Statistics NZ's Consumers Price Index shows insurance costs rose 14% in the June year, making them a key contributor to households' cost of living pressures and the stubbornly high non-tradable inflation that meant the Reserve Bank held the Official Cash Rate at 5.50% for as long as it did.
"I think we should be grateful that there are insurance companies who are still committed to the New Zealand market, because what we need is a healthy, strong insurance market because the risks are so great in New Zealand," Lyon says.
"When you think about the risks we're exposed to from volcanoes that are overdue, to the well known earthquake exposures, the evolving cyclone and climate change issues, [and] we don't really fully understand tsunami risk. There's lots of evidence that there have been major tsunamis along the coast of New Zealand. At what frequency would we expect something like that to happen? We don't know. That's not been particularly well modelled. That's a major risk to the country."
"There's a whole bunch of factors in there that we can talk about in terms of what New Zealand Inc needs to do to protect itself from the environment we live in. And climate change is a big part of that. But it's also all of the other generic risks that are there in front of us. So we have to think about how we manage them as well," says Lyon.
With the likes of IAG, Suncorp and Tower having recently reported strong financial results, how should we judge how well they're doing financially?
"One of the things that the reinsurers did [last year], as well as putting prices up, was they went to the insurance companies and they said, 'you now need to hold more of the risk to your own account'."
"The Suncorps and IAGs, and indeed our business, was faced with a situation where if we had been holding, say, $100 million of the risk to our own account before reinsurance comes in, the reinsurers might have put that up to $500 million. So if you think about that, then if you've got an exposure of $500 million for any one event, you're not going to get $500 million every year."
"So typically what insurance companies will do is they say, 'well, maybe over five years, we'd expect to have $100 million on average. So it'll be one big event every five years. That's $500 million. We'd spread that cost over five years.' So in every year you'd put a cat allowance [catastrophic event allowance] in of $100 million. If you don't have a cat event, you've got $100 million profit and then the next year you might have no event and you got another $100 million profit. But in year five you've got a $500 million event and you lose $500 million."
"That's the market that we have moved to. The insurance companies need to be very profitable in the good years because the cost of managing the bad years is a lot higher. So it's not just reinsurers that suffer when there is a big event. The insurance companies hold more to their bottom line and that's a challenge for all the businesses in that respect," Lyon says.
"So it's hard to judge insurance on a year on year basis."
Lyon suggests the most significant barrier to enter the general insurance market is New Zealand's risk profile, noting a number of international insurers look at NZ and see the economy is relatively small.
"It'll never be a major strategic value add to a global company in terms of incremental growth. So all you're going to have is a problem when a big thing happens like an earthquake."
In the podcast audio Lyon also talks about what he believes should be done that would be more beneficial to customers' insurance costs than a market study, how the insurance industry is lagging from a transparency perspective, the perception of choice created by the big companies being behind numerous brands, how competitive the market is, the level of market power the big players have, climate adaptation, managed retreat and uninsurable areas, whether the general insurance market is a duopoly, insurance policies being used as a taxation device, risk-based pricing, parametric insurance, what the insurance equivalent of open banking could mean, and more.
*You can find all episodes of the Of Interest podcast here.
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Milford Asset Management’s head of KiwiSaver says KiwiSaver – the country’s voluntary retirement savings scheme which is in its 17th year – is a teenager that’s about to head into adulthood.
“I think it's the right time to have the discussions we were having at the [Financial Services Council] Conference. By and large, providers are pretty well aligned around how we can improve KiwiSaver and make it better for New Zealanders retirements,” Milford's Murray Harris says on a new episode of the Of Interest podcast.
KiwiSaver has become a bigger topic of financial conversation this year and the discussion around potential tweaks and changes to the savings scheme has become more of a ‘when they happen’ and less of an ‘if’ scenario.
At the Financial Services Council Conference in early September, KiwiSaver was a hot debate, with KiwiSaver providers discussing how New Zealanders are simply not saving enough for their retirement and the Retirement Commissioner pointing out that Kiwisaver governance lacks clarity.
Harris tells interest.co.nz that KiwiSaver has been “very successful” in attracting members and the savings scheme doesn’t have a participation problem.
The latest KiwiSaver statistics out of Inland Revenue shows over 3.36 million people are now enrolled in KiwiSaver as of July 2024 and Harris says the participation rates are highest amongst those between the age brackets of 25–34 and 35–44.
“The participation's really good, but we have an issue around the contribution rate or the amount that people are contributing,” he says.
“Most people are doing 3%, and ... 90% of employers only do 3%. So together, those contributions are not going to be enough to get people to where they need to be for a really comfortable retirement. And I think that's the key issue. That's the real nub of it being very successful in terms of getting people interested and involved, but we're just not contributing enough.”
The Financial Markets Authority released its 2024 KiwiSaver report on Tuesday which showed total KiwiSaver contributions – this includes employee, employer and government contributions – came to $11.2 billion in the March 2024 year. This is up 6.5% from the prior year.
Harris says the KiwiSaver industry has a job to do in terms of educating its members that the current default contribution rate in KiwiSaver, which is 3%, is a good start – but not enough to get people to where they likely think they're going to be savings wise by retirement.
“Most people think it's 3%, and that's the problem with the settings as they are. You tell people to do 3%, that's what they'll do, and they'll think that's all they need to do. But in reality, it's a lot more,” he says.
The Retirement Commission has called for a higher default contribution rate of at least 4% and says employers should be matching at this level or more.
Harris says there are also things New Zealand can learn from “the lucky country” – Australia – when it comes to saving for retirement.
The minimum contribution rate for Australia’s superannuation scheme – the equivalent to NZ’s KiwiSaver scheme – is currently 11.5% for employees and employers. This is being raised to 12% in 2025.
“They've amassed a lot of assets and they've been able to reinvest those assets into the local economy. So you go to Australia, you cross some wonderful bridges, the motorway systems, the tunnels through central Sydney. Now they've been built with superannuation money and it's been a win-win because the economy moves better, industry can move their goods and services at a better pace and they've provided some great investment returns for investors, for super investors. So that's a win win. I think that's something that we could definitely learn from,” he says.
*You can find all episodes of the Of Interest podcast here.
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The integrity of bond markets on both sides of the Tasman is at stake as regulators probe issues of potential market manipulation, Australian Financial Review senior reporter Jonathan Shapiro says.
Shapiro is covering the Australian Securities and Investments Commission (ASIC) probe of the ANZ Group's role in a A$14 billion 2023 Australian government bond sale, and taking an interest in the Financial Markets Authority's probe into possible manipulation in New Zealand's wholesale interest rate and government bond markets.
Speaking in the latest episode of the Of Interest podcastShapiro says the ASIC probe of ANZ boils down to allegations of interest rate rigging, allegations of providing false information to the Australian Office of Financial Management (AOFM), which manages the Australian government's debt portfolio and hired ANZ as risk manager for government bond issues, and workplace culture issues.
"What is alleged is in that role they [ANZ] might have moved the market in their favour and made trading profits. And those trading profits came at the expense of the [Australian] government because ultimately their alleged actions forced up the government bond [borrowing] rate. We calculated about five basis points extra ... and that's for $14 billion of debt over 11 years," Shapiro says.
ANZ Group CEO Shayne Elliott says the bank itself has found no evidence misconduct or market manipulation by ANZ in connection with the bond issues cost the government financially. Elliott also says whilst some information provided to AOFM may have been incorrect, this was a mistake, rather than a deliberate act. Meanwhile, three traders have left the bank and a fourth has been warned.
Shapiro says what's being alleged is very serious and everyone in Australia has an interest in the outcome because the government was ANZ's client.
In New Zealand the Financial Markets Authority (FMA) says it's investigating two complaints about possible market manipulation in NZ's wholesale interest rate and government bond markets.
Shapiro says market integrity is absolutely critical, with pension funds, sovereign wealth funds, central banks and other investors trading government bonds.
"They don't want to be on the other side of of any funny business...it's extremely important that these markets are trustworthy."
Because they're viewed as the risk-free rate of return, government bond rates underpin the whole market, Shapiro notes.
"So regulators should absolutely be looking at any issues in these markets and making sure that they're transparent, that they're clean, and that there's nothing untoward going on. And one would think that participants in that market, especially the big banks of countries like New Zealand and Australia, would have an interest in making sure that, firstly, they're doing everything they can for their client, the government, but also making sure the bond market works as efficiently as it can."
The ANZ Group has been left out of the last three Australian government bond issues, Shapiro says.
In the podcast Shapiro also talks about why he refers to the ASIC probe as the biggest scandal in the ANZ Group's 182-year history, goes into detail on the three key issues at stake and the ANZ Group's responses, what's at stake for the bank potentially financially and reputationally, as well as for Elliott, possible similarities with what's at issue in the FMA investigations and more.
*You can find all episodes of the Of Interest podcast here.
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Grocery Commissioner Pierre van Heerden wants a third supermarket competitor to set up shop in New Zealand in order to tackle the country’s supermarket duopoly, but reducing the barriers to entry won’t happen overnight.
“What we've been told by these players is when they come and they want to open up a large store in New Zealand, the cost to get a spade in the ground is double that of Australia,” he says in a new episode of the Of Interest podcast.
“Now that is significant. And when they look at 'do we open up a store in Wagga Wagga or Tamworth or wherever in Australia' versus coming to open up in Auckland where there is massive demand or any of the other centres, really, the cost is double that of Australia. And the timeframe often is more than double as well. So when they do their business cases, they look at that and say, 'well, we're going to be better off by going elsewhere rather than here.' Now the government is saying that they're going to change things to make New Zealand more competitive for international players. And that's really what we're looking at.”
The Commerce Commission released its first annual grocery report on Wednesday which revealed ComCom’s efforts to boost grocery competition over the past year hasn’t had much impact.
The report found between 2019 and 2023, price-cost margins on non-fresh products across the New World, Pak’nSave, and Woolworths brands increased by 3.1 percentage points on average, while fresh food margins rose a lesser 0.4% on average.
The Commission defines price-cost margins as a measure of the difference between the price a firm receives for the sale of an item and the direct supply costs incurred.
Broken down, the price-cost margins for non-fresh products in that period rose the most at Foodstuffs North Island’s New World stores which reported a 3.9 percentage point increase in that period.
In second and third, Woolworths NZ’s Countdown stores, now renamed back to Woolworths, reported a 3.6 percentage point increase, and Foodstuffs South Island reported a 2.9% percentage point increase during 2019 and 2023.
The consumer watchdog said the report provided “clear evidence for stronger action” in NZ’s $25 billion grocery sector.
Speaking on the Of Interest podcast, van Heerden says the Commission wants to make sure the barriers to entry are reduced enough to make NZ’s supermarket sector more competitive.
Barriers to entry for potential new supermarket hopefuls also include things outside the Commission's control like planning regulations including zoning requirements within the local council’s District Plan, and the resource consent process in some cases.
The Overseas Investment Act 2005 can also create additional costs, delays and uncertainty in relation to site acquisition by overseas entities looking to enter or expand in the New Zealand grocery industry, van Heerden says.
Asked if a giant entity would be needed to enter NZ’s supermarket sector – which is currently controlled by Woolworths NZ and Foodstuffs – as a third entrant or if a smaller grocery player could work as well, van Heerden says it can be a combination.
“We would like to see someone who can come in and has the scale to do it nationally, because that's the way they're going to get the best prices from suppliers. You know, they can get good trade spend or discounts in their stores as well. Because when I look at Auckland as an example, in Auckland, the concentration or the market share of the major supermarkets has come down by 4% from 74 to, I think it's 70%. What has caused that – Costco coming into the market. A lot of the Asian supermarkets are growing and we've just seen Foodies open and they sold out from what I've seen, you know, four weeks' stock in three days,” he says.
“So consumers are anxious and they want to get better deals and they will support these players. But I want to see that same level of competition out in the smaller areas. And if a big player comes in and as in Australia, a hard discounter where they really give very good prices, I think that will shake up the industry and it will ensure that the big players are more competitive.”
Van Heerden says the supermarkets have “said all the right things” when contributing to the Commission’s work on the grocery sector
“If you look at the comments that both the major supermarkets have brought out since the report came out, they all say they work, they work with us, they support the objectives. But I want those words to change into actions. I want to actually see it happening. I look at, for instance, the refund policies and the pricing issues. We've raised that now with them since I started. And quite honestly, the response has been, 'yes, we're getting it done,' but the actual actions have been slow. So I'd like to see them ramping up those actions and letting their actions be the same as what they're telling us, that they're happy to work with us to get things done,” he says.
The Commerce Commission's grocery report can be found here.
*You can find all episodes of the Of Interest podcast here.
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With US Federal Reserve Chairman Jerome Powell signalling interest rate cuts ahead, the US dollar's likely to weaken with the Kiwi dollar rising against it, Imre Speizer, Head of NZ Markets Strategy at Westpac Institutional Bank, says.
Speaking in a new episode of the Of Interest podcast, Speizer says although the expected central bank interest rate trajectory is very similar in NZ and the US over the next 12 months, financial markets will focus much more on the US.
"If the two racehorses go neck and neck, that should probably be neutral for the Kiwi dollar. [But] I don't think it will be, because the market will put a lot more importance on the US side of things. So even though the yield spread between New Zealand rates and US rates might not move too much, just the fact that the Fed is cutting aggressively will actually weigh on the broader US dollar," Speizer says.
"So you'll get the market selling the US dollar against all of the major G10 currencies and that will have a ripple effect into the Kiwi-US exchange rate... And therefore, if we see that US dollar weakening, which is our view over the next few quarters, you should see the Kiwi-US, all things equal, rising a bit."
Speizer also expects local swap rates, already down significantly over the last couple of months, to continue falling.
"The swap rates are going to fall a bit further over the next few quarters, and that's simply mechanical. So even if views around the economy don't change, the markets have already priced in this whole easing cycle. So think of it as they're priced in, they know the Official Cash Rate is 5.25% today. They believe it'll be below 5% by the end of the year. And in a year's time, into the threes [3% range], that's already priced in," Speizer says.
"So as you move forward in time, those high OCRs drop out of the calculation of a swap rate and you just mechanically end up with a lower rate. So even if nothing in the world changed, you would see, for example, that two year swap rate moving from its current rate of about 3.85% down towards somewhere in the lower threes over time. So that's just time and the mathematics doing its work. It's not really the market moving as such."
"Swap rates are very important in the New Zealand financial markets. They're arguably the most important interest rate instrument. Whatever swap rates do, other interest rates will follow. So, for example, if your two year swap rate went up by 100 basis points, you would find mortgage rates following suit, other business lending rates, bond yields, pretty much anything. They are the foundation of all interest rates in New Zealand. And the swap rates themselves are constructed by expectations of the OCR mostly," says Speizer.
In the podcast audio he also talks about what in Powell's Jackson Hole comments surprised financial markets, what to watch ahead of September's Federal Open Markets Committee meeting, OCR market expectations, what the yield curve is telling us at the moment, how commodities might start to exert more influence on exchange rates, the NZ government bond market following the issuing last week of a $6 billion bond that attracted record interest of $22.7 billion, the yen carry trade, Australia, China, geopolitical risk, and where he sees the NZ dollar at year's end.
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The process of growth will be the main benefit from a scaled up Kiwibank, while public acclaim will be a key measure of open banking's success, Commerce Commission Chairman John Small says.
Small spoke to interest.co.nz for the latest episode of the Of Interest podcast, which will be published later on Wednesday. The interview came after the Commission released the final report from its market study into personal banking services. The Government says it'll act on all 14 recommendations from the report.
Speaking in a previous Of Interest podcast episode, after the Commission's interim report was issued in March, Small said the most important of that report's 16 recommendations was; "The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete."
So why is that recommendation gone from the final report?
"We still feel that there's aspects of the regulatory regime that could be improved to promote competition. We've just, I suppose, got a bit more refined about how we're suggesting that that happens. And we've keyed in, particularly to a number of programmes of work that the Reserve Bank already has underway. So we've made a fairly broad overall suggestion about how the bank thinks about competition, which is essentially that we would like them to put a bit more focus on barriers to entry and expansion, so that it's more easily able for small players to get into the market, particularly the kind of players that we expect to be able to disrupt this industry who don't look like the traditional banks," Small says.
"Another one that applies more to the traditional banks is to think about the way that risk weights are calculated for reasonably standardised loans and make that more granular...so there's less averaging involved. It's a better, it's a more accurate, representation of risk and it gives them the ability to price loans differently depending on just how risky they are."
A helping hand for community housing
The Commission's also calling for the Reserve Bank to reduce the risk rating of lending to housing co-operatives and community housing providers to lower, and more accurate, levels. This is currently treated as commercial lending rather than housing lending.
Risk weightings are used to link the minimum amount of capital banks must hold, with the risk profile of the bank's lending activities.
"The work around mortgage advisors is also more nuanced, I should say, [is] probably the way to put it. We found out quite a bit about the mortgage advisor sector after the draft report and we had some of them around at our consultation conference... We [also] took some soundings in Australia about how their mortgage advisor sector works," Small says.
'The process of growth'
On the recommendation to scale up Kiwibank by getting it access to more capital, Small says the main competitive benefit "is about the process of growth rather than what happens once they're big."
"So we want them to be taking chunks of market share out of the big four on their way up, and for that to provoke a competitive reaction from the larger banks."
"What will really matter will be them [ANZ, ASB, BNZ and Westpac] perceiving a real threat of losing share, because that is what will stimulate them to fight back," Small says.
'Interesting stuff' from Westpac NZ's CEO
The Commission also calls for the acceleration and co-ordination of progress on open banking. In the podcast Small talks about lessons from the United Kingdom and hearing "some real interesting stuff" from Westpac NZ CEO Catherine McGrath. Prior to taking the Westpac job McGrath worked for Barclays and was involved in a Competition and Markets Authority open banking committee in the UK.
"We're just copying what we can, ruthlessly copying what we can," Small says. "So, you know, I absolutely grant you that in terms of overall open banking as distinct from payments, it hasn't been a roaring success in either of those places [Australia or the UK]. I think we can learn from both of them and do it a lot better."
Better bank switching desired
The Commission also says the bank switching service, operated through the bank-owned Payments NZ, needs investment and improvement.
"We were a bit surprised, to be honest, when we visited the headquarters of the big banks and asked them about this service and asked them in particular, 'if I was to come in off the street as a customer of someone else's bank and was interested in converting to you, would you recommend that I use this service?' And generally speaking no, they wouldn't."
"And they don't ask their staff to recommend that. So that tells me that it's obviously not being promoted. I think it could be improved, the actual functionality could be improved, it needs to be more visible and known and also they need to report on its usage, its success rates, what people think about it, and just that sort of basic transparency hygiene system would be very helpful indeed," says Small.
In terms of how open banking's success could be measured, Small suggests public acclaim is one way.
"I think if ordinary people on the street see it as being useful and working for them, then that's a great indicator...I would like to see it taking market share off the banks. Definitely. I'd like to see more variety of services out there and definitely like to see government agencies using it, because I think that's an important driver of success."
A message for consumers
And what's Small's message for bank customers?
"My message is you really should shop around. I don't like to just put everything back onto the consumers, but consumers can get better deals than I was aware of before I started this market study. For example, mortgages. You can usually drive a better bargain than you see on the headline [interest rate]. So shop around and be a savvy consumer."
"Also stand by and keep your eyes open for the innovation that we think is going to come. Some of this, by the way, is going to require change by consumers. There are a bunch of people out there, quite a large number of people in New Zealand, that are using somewhat dangerous banking technology that involves handing over their login details to a third party provider. We think that's something that has to be phased out. It's just dangerous. It's putting people at risk. So we think that what's coming up is going to be faster, safer, cheaper. Yeah. It won't happen tomorrow, but it will be here within 18 months or two years, I think."
What about splitting up the big banks?
Speaking earlier Wednesday Small said the Commission had considered recommending splitting big banks up.
"We did think about that, but we came to the view that the structure can be changed, the market structure can be changed through the two main levers that we're suggesting. One is a growing Kiwibank, and the main point about growing Kiwibank is that it will destabilise the big four as it grows. And then secondly, with open banking coming in, behind these are new business models that are not the same as the existing [ones]. And I think our view is that that's more disruptive and more enduring disruption, and more competitive innovation."
The Commission's final report is here.
*You can find all episodes of the Of Interest podcast here.
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Deputy Governor Christian Hawkesby says the Reserve Bank's (RBNZ) Monetary Policy Committee might have taken a different stance in May if the economic activity forecasts had been more accurate.
In May, forecasts had anticipated 1% GDP growth for the calendar year. But by August, that had been revised to a 0.4% contraction, with a deep decline in the June quarter.
The RBNZ chose to cut the Official Cash Rate from 5.50% to 5.25% last Wednesday partly in response to these lower economic activity forecasts.
Another key factor was that businesses have been adjusting their wage and price-setting behaviour more quickly than anticipated in response to the low inflation environment.
Speaking in the latest episode of interest.co.nz's Of Interest podcast, Hawkesby said the committee would not have adopted such a hawkish stance if these data points had been available during the May meeting.
“The uncertainty was around the speed and intensity that [tight policy] would be felt in the economy … Since then we've had a whole heap of evidence on the downside playing out”.
Uncertain
He said the OCR projection, published in that Monetary Policy Statement, was “flat with a slight upward bias” but with “big uncertainties” that were outlined in the record of meeting.
Weaker than forecast GDP was not cited as a risk in the May meeting record, and uncertainty about price-setting behaviour was described as an upside risk. The committee agreed that interest rates need to “remain at a restrictive level for a sustained period.”
The chapter on economic projections included a disclaimer that said there was “significant uncertainty” about the assumptions used in the baseline forecasts. But the possibility of easing rates in the near future was not mentioned in the 60-page document.
This shift led some economists to describe the August decision as a 'U-turn.' However, there was consensus that it was the correct move, given the clear signs of a weakening economy.
Stay off the track
Hawkesby also said there had been a “misconception” that the central bank was going to keep the OCR at 5.50% until it saw inflation below 3%.
“You need to work on the basis that monetary policy is going to work. You don’t have to wait until the number is within the band, you just have to have confidence it will settle there.”
However, the May monetary policy statement projected the OCR would remain above 5.50% until September 2025, by which time inflation would have been below 3% for a full year.
This was true in the February 2024 and November 2023 monetary policy statements as well.
Hawkesby said the OCR track that published in each statement often gets overanalyzed, without enough recognition that it is based on a set of assumptions.
“There's something quite peculiar that happens when someone sees a line on a chart, or they see a number in a table, it has this sense of being real and factual,” he said.
“My advice to people would be to focus more on the record of the meeting than the OCR projection."
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The balance of power in the labour market sits firmly with employers, with a big rise in job applicants over the past year chasing a significantly diminished number of jobs, says Frog Recruitment Managing Director Shannon Barlow.
"For our recruitment agency, we're probably experiencing around three to four times the volume of applications compared with last year. And that's across the board, across different industries and job types," Barlow says in the latest episode of interest.co.nz's Of Interest podcast.
"At the extremes, it can be even more than that. So for some business support [roles], other industries like supply chain or operational roles where we were happy to get, say, 30 applications, we'd be celebrating last year. Now those can reach up to nearly 300 applications and that's within a week. So you have to pull the ad so that you've got the time to get through all those applications."
"I'd say with the higher volumes of applications as well, I think the biggest factor isn't actually about there being more people looking for work...the big factor is there are less jobs available. So there's less than half the number of job postings in the market today compared with 2022," says Barlow.
Her comments come ahead of the June quarter labour market data from Statistics NZ, due out of Wednesday, August 7 and expected to show an increase in unemployment.
Barlow previously appeared on the Of Interest podcast in August 2022 at a time when the border had just fully reopened following its closure due to Covid-19, and the balance of power in the labour market was firmly in favour of job seekers, or workers.
Since then there has been a massive surge of inward migration, which hit a record high for a calendar year of 126,000 in 2023, according to Statistics NZ. Despite this Barlow says it hasn't solved skill shortages.
"The problem is that quantity doesn't always equal quality. There've been problems with the new accredited employer programme and the new government is still working through changes to those immigration settings. So we haven't got it quite right yet. So although we've refilled the talent pool, we haven't necessarily attracted the right people to be able to cover our areas of skill shortages;" says Barlow.
"Plus we might have had record migration, but we've also had record numbers of Kiwis leaving New Zealand this year."
Statistics NZ's latest figures show a net loss of 2,000 people due to migration during May.
In the podcast audio Barlow also talks about the regions were job seekers are really feeling the pinch, and regions where job listings are actually increasing, how and why some workers are having to take pay cuts, how the labour market has got harder for graduate or entry level roles, what the biggest challenge is for employers now, lingering effects of Covid-19 including attitudes and expectations for working from home, whether she thinks the jobs market has bottomed out yet, and more.
*You can find all episodes of the Of Interest podcast here.
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The Government's push to have more apartments, including shoebox apartments, built should be welcomed over time by a range of buyers including first home buyers, property investors and retirees, suggests John Bolton, founder of mortgage broker, lender and savings product provider Squirrel.
Speaking in a new episode of interest.co.nz's Of Interest podcast, Bolton, also a former banker who has dabbled in property development, says apartments, including small ones, offer people who otherwise couldn't afford to buy in Auckland the opportunity to do so. He gives the example of a recent client who wanted an Auckland CBD shoebox apartment.
"He was actually just over 50 and a first home buyer. He had about $150,000 in savings and an income of about 120,000 and he was just keen to get something. Now, the interesting thing for him is that we worked it out and he could pay it off before retirement and that was his goal. So he was looking to pay it off in about 15 years and the only way he was gonna be able to do that was with a shoebox apartment. He was really happy with that...He'd be a classic example, I guess, of the target market for someone that otherwise couldn't buy."
Investors will always look at it on a yield basis, Bolton notes.
"The numbers have to stack up. The attraction for investors historically with the shoebox apartments has been purely yield, straight yield play. They [can] get much better yields on them than a standard apartment."
Bolton also says there's a growing number of retirees struggling to find places to live.
"When we talk about shoebox apartments or just small living spaces, it could be some single level brick and tile units in the suburbs. It doesn't have to be a traditional high rise apartment with shoeboxes in it, you know, just little living spaces out in the suburbs, all on one level, which gives them easy access."
"It's a really important market, and I think it's a market that is going to come with a whole lot of issues in the future because rents are so high. Retirees on the pension simply cannot afford to rent houses or even townhouses. And multi level townhouses are not the right product for them. And so I think getting affordable solutions that cater to our growing retiree market, of whom an increasing proportion of them don't own property, or if they do, they need to downsize because they're taking mortgage debt into retirement. I think there's a real market there, and I think it's not the inner city shoebox that we're talking about. What we're starting to talk about is how do you cater to those communities, and then how do you build a property that's appropriate for them, that's affordable? And I can see that being out in the suburbs, I can see that being in the provinces. So I think there's an opportunity here to reshape the way that parts of our market are operating," says Bolton.
Last month Housing Minister Chris Bishop gave a speech outlining the Government’s plans for housing.
Included in Bishop’s speech was a pledge to remove the ability for councils to set rules or guidelines requiring balconies, or floor areas of apartments to be of a minimum size. This, Bishop says, will increase housing supply by enabling more homes to be built at cheaper prices.
Auckland Council's rules currently set the minimum net floor size for an apartments at 30 square metres, or 35 in the city centre. The latter can be reduced by five square metres if there's outdoor living space, a balcony, ground floor terrace or roof terrace. The smallest apartment allowed by Wellington City Council is 35 metres squared, and the city centre also has requirements for outdoor living space area with the smallest a minimum area of five metres squared and a minimum dimension of 1.8 metres.
In the podcast audio Bolton also talks about the size of deposits needed to get bank loans to buy different sorts of apartments, banks' apartment lending appetites and why they can be reluctant to lend for smaller apartments, apartment developers and pre-sales, construction costs for apartments and financing of new builds, locations for apartments and more.
*You can find all episodes of the Of Interest podcast here.
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Mainstream economics courses teach students money is a scarce resource and nature has boundless capacity to be exploited when in fact it's the other way around, argues Modern Monetary Theory (MMT) economist Steven Hail.
Advocates say you don't do MMT, rather it's a description of how the monetary system works. And countries like New Zealand, where the Government - via the Reserve Bank - is the monopoly issuer of a fiat currency, are monetary sovereigns and thus can't run out of money.
"We think the monetary system is central to the way modern economies work. And so it's really important to base a discussion of macroeconomics and public finance on having a proper description of the monetary system," Hail says in the latest episode of interest.co.nz's Of Interest podcast.
"When the Government has plans to invest in healthcare, transportation, climate change, housing, anything else that they're going to be spending on, when people say where are you going to get the money, that's the wrong question to ask. The question that we need to ask about national government spending is always where are the productive resources coming from? Where are the people? Where are the materials where's the technology? Where's the institutional capacity, which businesses have spare capacity to meet the Government's demand for what it wants to do? And that transforms your discussion about government economic policy," Hail says.
I first interviewed Hail in 2020 as Covid-19 swept the globe as one of a series of interviews trying to make sense of what was going on and what it all meant. A recurring theme in these interviews, as governments spent lots more money than they had in decades, was MMT. Hail was then a lecturer at the University of Adelaide School of Economics. He now runs Modern Money Lab, a not-for-profit, in partnership with Torrens University.
Looking back now, to what extent does he think the massive government spending contributed to the subsequent global inflation surge?
"Well, the first thing to say is that we've just been through about three of the four horses of the apocalypse. So if the worst problem we're going to have in terms of reacting to that is a temporary increase in the inflation rate in New Zealand to just over 7% per annum, we've done pretty well...The second thing to say is what was the alternative to supporting businesses and supporting people during the pandemic and during lockdowns?" Hail asks.
"Did the spending contribute to inflation? Well, to an extent. But every major central bank in the world that's researched the drivers of inflation following the pandemic said that most of it was to do with the supply side. That's not surprising, is it? A, we built a global economy with very fragile, incredibly complex supply chains, and they just collapsed during the pandemic. And subsequently, of course, once we got over the worst of that, we then had the Russia-Ukraine war driving energy prices up and food prices, too."
"You can argue that some of the government spending was not as effective or efficient as it might otherwise have been. But we're talking about what immediately before would have seemed almost an unimaginable catastrophe that governments were having to react to overnight," says Hail.
And what about the role of quantitative easing (QE), through which the Reserve Bank spent $53 billion buying government and local government bonds on the secondary market from banks during 2020-21? Used for the first time in NZ during the pandemic, QE had been used by central banks in other countries such as Japan, the United States, Europe and Britain for years before that.
"Now, in all those other countries where quantitative easing was used to a very large extent over many years prior to the pandemic, it caused a significant increase in inflation, or it caused an uncontroversial so that everybody accepts it significant increase in total spending in the economy, on precisely no occasions. And there's a good reason for this, which is that quantitative easing is not really the creation of new money," says Hail.
"It's certainly not giving money away. It's an asset swap, and it's actually an asset swap of two very similar assets these days. Because, after all, central banks pay interest on the reserves private banks hold at central banks, and most central banks are part of the broadly defined government sector. So those reserves are an interest bearing financial liability of the government, really. And when central banks buy treasury bonds from private banks, what are they buying? While, those treasury bonds. What are they? Interest bearing liabilities of the government sector."
"So when you practise quantitative easing, you're really swapping apples for very similar apples. You are not adding to the net financial assets of the private sector. What you are doing is putting a little bit of downward pressure on long-term interest rates."
Still Adelaide-based, Hail is visiting New Zealand during August to run an interactive seminar in Auckland, and show the documentary Finding the Money- featuring Hail's friend and high profile US MMT economist Stephanie Kelton - in both Auckland and Wellington. As well as an introduction to MMT, the seminar will look at the economy as a subsystem of the natural environment and probe human behaviour, inequality and global trade. It'll also cover planetary boundaries and climate change.
Listen to more on these topics and others, including economic growth, sustainability and reducing our impact on the environment, in the podcast audio.
*You can find all episodes of the Of Interest podcast here.
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New Zealand's nascent private credit industry could account for up to 5% of business lending to operating companies over time, suggests Aotea Asset Management (AAM) executive director Will Carnachan.
AAM, which launched three years ago, is a corporate debt fund manager organising wholesale investorsto contribute to direct secured loans to businesses. Private credit, a form of shadow banking, has made headlines in the US, Europe and Australia over the past couple of years. The International Monetary Fund estimates the fast growing "opaque" and " highly interconnected" private credit market topped US$2.1 trillion globally last year, and over time "could become a systemic risk for the broader financial system."
In a new episode of interest.co.nz's Of Interest podcast, Carnachan says in NZ the largely unregulated private credit industry's probably a decade behind where it's at in larger economies, including Australia's.
"I don't necessarily think this industry will, or should, become heavily regulated over time because a big part of the driver here is to move risk away from deposit taking institutions which carry systemic risk. But it is really important, I think, for the longevity of the industry that managers are being really transparent around how they're conducting themselves, how they're valuing their assets," Carnachan says.
"There is huge potential for this industry to grow...If you look at that business lending segment in New Zealand, it's roughly $120 billion, a lot of that's property linked. If you say half of that relates to operating companies, $60 billion, I think realistically where private credit investors like ourselves could come in to help manage some of the risk it's really between 2% to 5% of that over time. A relatively small chunk of the market, but will create options for those great kiwi businesses that are looking to grow, looking to expand, looking to acquire."
In the podcast Carnachan talks about who the private credit investors and borrowers are, the interest rates they earn and pay, how the floating rate loans are priced, loan covenants and syndications involved, the fees AAM charges, the impact of high interest rates and falling interest rates on private credit, where the sub-investment grade borrowers rank in S&P Global Ratings' methodology, how AAM's portfolio currently has no credit loss issues or impairment issues, and more.
"In terms of the return profile that we offer, we're a floating rate product, so we provide a spread or a margin above. We use the Official Cash Rate as the benchmark because it's well understood. So what that means is we are an inflation hedge because as inflation rises or falls, typically market rates move commensurately. But we can always lock in an attractive margin over that benchmark rate," says Carnachan.
"And I think it's important to understand in terms of that marginal credit spread, we do a lot of work around ensuring that that is driving really good risk adjusted returns for our investors, and also taking into account the fact that these underlying investments are relatively illiquid. So it's not a product that you can trade in and out of. It's a hold to maturity product."
"We are effectively a fixed income product that provides, we think, a really attractive diversifier away from bonds and yield stocks."
*You can find all episodes of the Of Interest podcast here.
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The Reserve Bank surprised the market on Wednesday by dropping hints it was open to cutting rates sooner than planned, due to signs the economy was getting too weak.
While the tone shift was unexpected, the central bank was reacting to the same data which had caused ASB’s economics team to change their own interest rate forecast the week prior.
Nick Tuffley, the retail bank’s chief economist, said economic data was sending very different signals in July than it had been prior to the RBNZ’s meeting in May.
Monetary policymakers had then been facing consecutive inflation data releases which showed domestic pressure tracking well above forecasts, he said.
“When we roll forward to where we are now, it's just clear that the economy is performing weaker than what they had been anticipating [in May]. We are now forecasting another mild double dip recession; that may not occur but it just highlights how weak things look”.
The RBNZ had been forecasting slight economic growth from here, picking up momentum in each subsequent quarter, but fresh forecasts look like there will be further contractions.
Tuffley told the Of Interest podcast that the Monetary Policy Committee would have been looking at new forecasts, even though they don’t get released to the public.
“When the Reserve Bank does these monetary policy reviews, it will have re-cranked its forecasts again and will be working on an updated view,” he said.
“Undoubtedly, what that view is showing is that GDP is going to be much weaker over the course of this year than they anticipated”.
This would likely mean higher unemployment, slower wage growth, and disinflation happening faster than forecast as well. Tuffley expects annual inflation was 3.3% in June.
“The other thing we are mindful of is that [monetary policy] is like an oil tanker going at full speed, when you put it in reverse you don’t see much impact on momentum for a while”.
For a long time, the Reserve Bank has been most worried about cutting rates too soon and leaving the embers of inflation smoldering, ready to bust back into flames.
Now the central bank was becoming very confident inflation was coming under control and was shifting focus to the risk that interest rates are damaging the economy unnecessarily.
Since the Coalition Government removed RBNZ’s employment mandate, the policymakers are nominally not required to consider economic damage in their decisions.
However, inflation may drop below 2% if they allow the economy to become too weak and the committee is tasked with avoiding “unnecessary volatility” in output and employment.
Tuffley expects the Official Cash Rate to be cut in November, while the RBNZ most recently suggested it was planning to hold off until next August — although that is likely to change.
Bond traders and other financial market participants have priced in a decent change of a rate cut at the RBNZ’s next meeting this August, and possibly a 50 basis point cut in November.
Tuffley said this sort of gap between the central bank and the market was fairly common.
“Markets tend to forecast rate cuts tomorrow, whilst the Reserve Bank might be looking at next year, and often you end up meeting a bit in the middle,” he said.
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New Zealand exporters to the United States might be at greater risk of being disrupted than those exporting to China, according to one trade expert.
Despite talk about the need to diversify away from China due to geopolitical differences, it may be the United States that hits Kiwi businesses with tariffs intended to shut them out.
Stephen Jacobi, the executive director of the NZ International Business Forum, said a second Trump presidency was a “sword of Damocles hanging over the global economy”.
Speaking on the Of Interest podcast, Jacobi said the 45th president had imposed “enormous tariffs” during his first term and plans to go further if elected for a second time in November.
“This time, the big thing is the 10% tariff he keeps talking about. If a 10% tariff was imposed on New Zealand exports to the United States across the board, a lot of trade would be killed off,” he said.
As part of his election campaign, Donald Trump has proposed a 10% tariff on all imports and a 60% tariff on imports from China. This would go much further than what he did after 2016.
Earlier tariffs of between 10% and 15% were applied to a specific list of goods, which were largely targeted at China but also included various other countries.
New Zealand was subjected to a 15% tariff on steel and aluminium, for example. This was bad enough, but a blanket tariff would hit much more important exports such as beef and dairy.
Jacobi said these sectors already faced strong competition from local US producers and there was also a risk that some international competitors might be able to dodge the tariff.
For example, Australia was exempted from the steel and aluminium tariffs because it had a free trade agreement with the United States — which NZ does not have.
“Go figure. This is the country that won't give us a trade agreement,” Jacobi said.
“I spent 10 years of my life trying to argue for an FTA with the United States and thought we had it in TPP, only to see them leave when President Trump got elected”.
It was this lack of guaranteed market access that makes the United States look like a riskier bet than China, where NZ does have a free trade agreement.
“Look, it's not always easy doing business with China, let's face it. But they have opened the market to us and it has transformed our economy”.
Chinese consumers were often the only ones who wanted to buy Kiwi products at the volumes and prices businesses require, he said.
Jacobi said he was not supportive of efforts to shift trade away from China, or join the AUKUS security agreement — which was clearly directed at China.
“Well, the risk [of disruption] is greater from the United States, potentially with a change of government”.
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The first New Zealand and international wave of electric vehicle (EV) uptake is probably over, with cheaper cars and better public charging infrastructure required for further major growth in the uptake of these "batteries on wheels," says James Foster.
In a new episode of interest.co.nz's Of Interest podcast, Foster, who runs the EVDB website, says EVs reaching price parity with internal combustion engine (petrol) vehicles, will be a very significant development. The rise of Chinese EVs should help with this.
"At the beginning of 2022 we didn't really have any Chinese brand vehicles [in NZ] and now 20% of those on the road are [Chinese]. It's happened in two years. And that kind of shows you, I guess, why maybe the US have freaked out and implemented protectionist policies to try and protect their own car market. The amount of momentum coming out of China is extraordinary. And the build quality, I wouldn't say is taking people by surprise. But I know historically in New Zealand when we have new brands come to market...way back with the Japanese brands or Korean brands, at first you're kind of like, 'I don't know about this.' And then eventually they become normalised. They just become another brand that's part of the story," Foster says.
"I keep a running tally all the time of the 10 cheapest EVs in New Zealand, and then I get an average from that and that gives me an indication of where we're at. Those are all Chinese vehicles."
From a personal perspective Foster enjoys his EV being a part of energy self sufficiency, or sovereignty.
"That's something that I find quite profound. Since I got the solar panels on the roof I feel like I'm in science fiction...I've actually got the sun's rays going into my house's power and then into a battery in my car and I drive it. Compared to drilling oil, refining it, putting it on a ship, sending it over, driving it down..."
In the podcast Foster also talks about the reasons for the dramatic drop in EV uptake in NZ this year, the popular models and brands, prices including in the secondhand market, battery range, home and public charging, insurance and repairs, other EVs beyond cars such as utes, vans and heavy transport, hybrids and hydrogen vehicles, his expectations for NZ's future vehicle fleet and how electricity supply will cope.
*You can find all episodes of the Of Interest podcast here.
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Ask Cameron Bagrie how to improve business and rural banking and some words reoccur in his answers. Three of them are "risk", "productivity", and "bankability."
With two parliamentary select committees set to hold an inquiry into banking competition, the business and rural banking markets will feature, unlike in the Commerce Commission probe into competition in the personal banking market. In the latest episode of interest.co.nz's Of Interest podcast, Bagrie, now of Bagrie Economics and Chaperon and formerly ANZ NZ's chief economist, speaks about why banks favour housing lending over lending to the business and rural sectors, and whether it would be good to entice them to change this and how it could be done.
At the top of the select committee inquiry's terms of reference ought to be balance between the pricing of risk versus the taking of risk by banks, and how that's impacting productivity, Bagrie says.
"I think we need to have a really good, hard debate about where the money is actually going, the composition of bank lending, whether it's short-term behaviour versus a long-term growth maximising strategy. Let's have a serious conversation about risk going forward, because risk is a big enabler. It's not open season on risk, but risk is an enabler of innovation, driving productivity. It just seems like we've screwed things far too far towards a low risk approach, and ultimately we pay the price for that over time," Bagrie says.
"I go back to the fundamentals of banking. The fundamentals of banking is pricing for risk and taking risk. And what we're seeing out there at the moment is that SMEs and farmers are certainly being priced for risk... Let's have a look at return on equities out of the banks by segment, not the aggregate top down number. Let's break it down into personal lending, including home lending. Let's have a look at business lending. Let's have a look at farm lending and the institutional [loan] book, and have a look at where those ROEs [returns on equity] actually sit. And I think we're going to be surprised how high those ROEs are for certain segments."
"The key here is to go through each segment and look at the risk adjusted returns," he says.
Figures from the International Monetary Fund show housing lending at 35% to 40% of total bank lending in some countries, whereas in NZ it's nearer 65%, having risen significantly over the past five years.
Bagrie also argues that banks' regulatory capital settings encourage them towards housing lending instead of business and rural lending, when there's "more productivity bang for your buck" when you're lending into the business sector.
"We need to have a look at this through the eyes of economic efficiency, economic growth, productivity, innovation. Because when you make banks a lot more safer, there's a price that you pay on the other side."
"The whole process of credit intermediation is a pretty critical part of economic development. And I don't think we've got financial system settings right on a whole lot of areas," he says.
Financial system settings and banking don't tend to be areas thought of when people think about what to do to make NZ a better place economically in regard to taking risk and driving productivity growth, Bagrie says.
"We sort of overlook what's a fundamentally essential one and that's that flow, that process of credit intermediation, [it] is absolutely essential. The Prime Minister has been talking a lot about encouraging the taking of risk...Well, yeah, in order for firms to take risk, you need the financial system to be prepared to take risk."
In the podcast Bagrie also talks about NZ businesses having a bankability problem and how to rectify this, the role of the Reserve Bank's regulatory capital settings, banks' becoming more vanilla, the rise and rise of bank profits over the past 30 years or so, the low level of banks' non-performing loans, the need for better competition policy across the economy, how housing lending has grown as a percentage of total NZ bank lending over the past 20-odd years, and especially over the past five years, Australian influence at the big four banks, open banking, his thoughts on the idea of a Business Growth Fund, and more.
*You can find all episodes of the Of Interest podcast here.
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By Gareth Vaughan
How seriously is the public sector taking the fight against money laundering and terrorism financing?
This question comes up in a new episode of interest.co.nz's Of Interest podcast, featuring barrister and solicitor Fiona Hall and anti-money laundering auditor and consultant Martin Dilly.
In a recent article the two raised concerns about impending job cuts to the team at the Department of Internal Affairs (DIA) tasked with supervising compliance with the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act).
Dilly says the DIA proposal to cut 40% of AML/CFT staff "gives us concern that that's going to affect their ability to enforce and supervise this act." There's concern whether the next evaluation of New Zealand by the Financial Action Task Force (FATF), an inter-governmental body that sets international standards and is considered the global money laundering and terrorist financing watchdog, will show NZ technically compliant with FATF's recommendations, and whether we're effective in supervising the reporting entities who must comply with the law.
"I have heard some reporting entities clapping their hands with joy if they're supervised by the DIA, but it's not the good reporting entities. And I like to think that most businesses are good businesses that want to comply with the law. And the risk you have is, yes, sure, if there are far fewer DIA investigators, you're less likely to get a knock on your door. But the problem is, if you do get a knock on your door, you now might be being investigated by someone who really doesn't have a good handle on the legislation, let alone a good understanding of your business. And you are going to be in a much worse position," Hall says.
Dilly made an Official Information Act (OIA) request to DIA in an attempt to get more information, which he says "shows a pattern of under resourcing of the AML team within the DIA."
"They were essentially budgeted to have 55 staff members. That's what they had determined was necessary...The information provided shows at no point did they ever hit 55 staff. They've been consistently below that. In 2022, they only had 37 staff instead of 55... So the question becomes, why is that?"
"One of the other questions I specifically asked was, has any of the budget been reallocated from the AML team to other areas of the Department of Internal Affairs? And we get some government speak here. So one of the things they talk about is they don't talk about reallocation. They use the terminology 'a permanent reprioritisation of constant underspend.' And my question is, well, what does constant underspend mean? Why would you be underspending your budget in an area where you are tasked with implementing AML and educating and supervising these new entities [lawyers, accountants and real estate agents]?" Dilly asks.
Other issues Hall and Dilly cite include different agendas and lack of consistency to AML/CFT Act supervision between the DIA, and NZ's two other AML/CFT Act supervisors, the Reserve Bank and Financial Markets Authority.
The two are hopeful that Associate Minister of Justice Nicole McKee's proclamation that reforming the AML/CFT Act is "one of my priorities this parliamentary term," could lead to improvement. They would both like to see a shift to a single standalone supervisor.
"I think the results from the [DIA] OIA show that if it's within other ministries that you cannot trust them to not reallocate budget, whatever language they want to put on that. The other point I would really like to see is a move back to a more risk based approach. The act itself is risk based, which essentially means that we accept that people have limited resources and you are supposed to direct those resources towards the areas of highest risk in your business," says Dilly.
Hall would like to see better supervision of the supervisors.
The two also have many tales of frustration and contradiction. Hall gives the example of a client that collects school donations, arranges school lunches, the uniform shop, and sells tickets to school shows, and has been deemed high risk of money laundering.
"I sat with the Minister and said, 'look, how does buying two pairs of grey shorts from a school uniform shop ever get anywhere near, I mean, this is where I'm going to launder my money?' It is ridiculous."
On the flip side she points out the likes of Ticketmaster, selling tickets to shows, aren't considered reporting entities None of those are considered reporting entities, and neither are travel agents who have trust accounts and manage funds.
"So we have this real disconnect, in my view, even about who is and isn't a reporting entity," Hall says.
Meanwhile in the real estate sector, they have to do customer due diligence.
"Their customer is the vendor, it's not the buyer, which I always find so interesting because that's where the money is. And often a property's been bought years and years before, and suddenly, you know, the vendor's been asked to prove how they purchased this and how they funded it, and there is resistance."
There are also personal anecdotes. Dilly says the bank he has been a customer of for more than 40 years asked him about an account he has had for 25 years.
"They have full visibility of every one of my financial transactions. And I was interrogated as to what my plans were for that account. And my thinking was why? Why would you rely on anything I tell you when you've got 25 years of data on my behaviour? If I was an actual money launderer, why would I give you a straight story?"
And here's Hall; "I was at the supermarket checkout and I'd been having a particularly trying day for poor entities [clients] that I didn't think should be captured [by the AML/CFT Act] at all. And I was standing in line and I looked up and I was behind a whole lot of gang members...They were buying lots of meat, lots of alcohol, and out came the wads of cash. And I thought, 'my poor clients who are spending all their money trying to comply, and really there's the money that we probably are looking for right in front of me."
Much more is discussed in the podcast including why the public should care about the fight against money laundering and terrorist financing and the impact of it, the purpose of it, concerns NZ could end up on a grey list, concerns over whether the Police Financial Intelligence Unit is reactive and doesn't have the capacity to deal with all the suspicious activity reports they receive, quick wins with asset seizure where there's a lower threshold from a legal perspective, and more.
*You can find all episodes of the Of Interest podcast here.
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The Australian Government's a Future Made in Australiainitiative could attract skilled migrants and potentially investment and entrepreneurs from New Zealand, and ultimately be a catalyst for a much more sustainable future, says Kylie Walker, the CEO of the Australian Academy of Technological Sciences & Engineering.
In last month's budget, Prime Minister Anthony Albanese's government unveiled a Future Made in Australia, saying this would invest A$22.7 billion over a decade to "build a stronger, more diversified and more resilient economy powered by clean energy, in a way that creates secure, well paid jobs and delivers benefits to communities across the country."
Speaking in the latest episode of interest.co.nz's Of Interest podcast, Walker says a key aim of the initiative is to boost Australia's economy complexity, a measure of the knowledge in a society as expressed in the products it produces, by upskilling and moving up the value chain.
"Obviously, we can't do everything, but we can absolutely do more than just digging up [natural resources such as minerals] and selling them off and then buying them back again in more technologically sophisticated forms. We know that those critical minerals are absolutely necessary for the ongoing electronics revolution, as well as for the clean energy future globally. So we can, for example, process our iron ore, or it can be used in or [turned] into green iron, at least, so that it can be used in green steel. And we have the minerals to make batteries for electric vehicles, for example. We have extraordinary batteries technology. Some of our researchers and developers in that space are amongst the best in the world. And so it seems to me, putting these two kind of natural assets at either end of that development spectrum together, that there ought to be a way to move us a little bit further along the value chain," Walker says.
To this end there'll be a need for skilled workers, especially in STEM (science, technology, engineering, and maths).
"Around 48% of professional occupations were in shortage across Australia last year, and that's up from 39% the year before. There's a similar shortage in the technical and trades occupations in Australia. So we are both going to have to train new people domestically as a matter of priority, and in addition to that, rely on skilled migration. And, you know, I think traditionally it's probably reasonable to assume some of that skilled migration might come from New Zealand," she says.
There should also be a role for private sector investment, research, development and ideas. Much of the earmarked government investment takes the form of tax incentives, but also includes a range of funding mechanisms.
"One of the other focus areas that we've got simultaneously with this Future Made in Australia push is, of course, building capacity in the global region. And there is a huge place, a huge part to play for New Zealand, for Pacific island nations and other near neighbours like Indonesia, in collaborating to research and commercialise those developments, particularly in the technology and engineering spaces, and to do that for mutual benefit, so that we build the capacity for the entire region," says Walker.
Ultimately, Walker hopes in 20 or 30 years, a Future Made in Australia can be looked back on as a catalyst for a more sustainable future.
"And I mean that both in terms of economically sustainable and societal wellbeing, and in terms of environmentally sustainable. I think if we do this really well, we can build a more circular economy, we can reduce our waste as well as our emissions. We can see small scale manufacturing and pop up factories all over the place. There are some really, really interesting and pretty great technologies coming up where, for example, a micro-factory the size of a shipping container can take glass and fabric being recycled from a building site and turn it into a new material to use in a new building on the same site. I'd like to see huge and widespread adoption of renewables [energy]. And I'm hoping that when we look back, we see not only that resilient infrastructure within Australia, but a booming export market for those products as well, ranging right through from the energy and the fuels, through to those slightly value added up the chain minerals exports, green agricultural exports as well, and a range of other stuff which, frankly, you and I haven't heard of because it probably hasn't been invented yet."
In the podcast Walker also talks about where a Future Made in Australia comes from, what's behind it, what needs to happen for Australia to become a renewable energy superpower, green hydrogen, mining, critical minerals, concerns about a Future Made in Australia picking winners and benefiting billionaires, its national interest framework, research and development, and how Australia can get along in a world of rising geopolitical tensions between the United States and China.
*You can find all episodes of the Of Interest podcast here.
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The fund backing New Zealand's incoming depositor compensation scheme is going to be small, it's going to take a long time to reach its target level, and the lack of depositor preference in the scheme is a mistake, according to a deposit insurance expert.
Geof Mortlock, an international financial regulatory consultant who does work for the International Monetary Fund and World Bank specialising in financial system stability, resolution of bank failures and deposit insurance, spoke about the depositor compensation scheme in a new episode of interest.co.nz's Of Interest podcast.
The scheme, expected to be launched in mid-2025, will provide protection of up to $100,000 per eligible depositor, per licensed bank, building society, credit union and deposit taking finance company, in the event of deposit taker failure.
Finance Minister Nicola Willis has decided the fund backing the scheme, to be funded through levies paid by deposit takers, will be built up over 20 years to a size equivalent to 0.8% of protected deposits, or about $1 billion.
Mortlock says other countries typically have a fund size equivalent to between about 1% and 4% of protected deposits, and he recommends taking about 10 years to build the fund up to its target level.
He says the NZ scheme would likely be used for the failure of a non-bank deposit taker or small bank, but wouldn't be sufficient for the failure of a medium-sized or big bank, the failure of which would require "alternative mechanisms." Nonetheless Mortlock says it is worth having the scheme.
"I think it's definitely worth having because there are quite a sizable number of small deposit takers out there. And at some stage, one of them is going to fail. Hopefully not for a long time. But statistically, if you look around the world, there are occasional bank failures, and most of them tend to be small."
"For a small deposit taker or a medium sized one, I think having a deposit insurance scheme is really important, and I think it helps in two ways. It reduces the risk of what we call interbank contagion, where one failure can trigger multiple runs across the banking system. And secondly, it helps to reduce the risk for the taxpayer, because it means that there is a dedicated fund paid in by deposit takers and therefore [this] reduces the need for government funding," says Mortlock.
"But for a large bank failure, it is not going to be sufficient. And if you look around the world for a large bank failure, deposit insurance funds are not typically used anyway."
An option for a larger bank failure is the Reserve Bank's Open Bank Resolution (OBR) Policy. In the podcast Mortlock explains why he thinks it would be "potentially catastrophic" for the Reserve Bank to use OBR, and he doesn't think a Finance Minister would allow them to.
In the podcast he also talks about what other resolution options could be for a large bank failure, what products the scheme will cover, the impact deposit takers paying a levy may have on deposit rates, how the Reserve Bank should administer the scheme, bail-in, depositor preference and more.
Under depositor preference, depositors rank ahead of other secured creditors in a liquidation. Mortlock says it helps reduce the risk of runs on banks, and facilitates bail-in whereby unsecured liabilities such as bonds may be written down or converted into equity in the event of a bank failure.
At the moment, with OBR, NZ is "about the only jurisdiction I can think of outside of some dubious ones, which would apply a haircut to deposit liabilities and no depositor preference," Mortlock says.
"So if you're a wholesale depositor in a bank and the banking system is looking shaky, and you know that the OBR is out there and could be triggered, what are you going to do? I think you're going to do a preemptive run. And what would that do? That would almost certainly mean that the [Reserve Bank] Governor, joined by the Minister of Finance, would have to say, a, we're not doing OBR, and b, we are putting in place a temporary guarantee of all wholesale deposits. Just the opposite of what you would want to have to do. So I think it is a foolish policy, OBR, and made even more foolish by the absence of depositor preference."
*You can find all episodes of the Of Interest podcast here.
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