Bloomberg News

Key Boosts N.Z. Free-Market Drive After Winning Second Term

December 07, 2011

(Updates Currency in sixth paragraph.)

Nov. 28 (Bloomberg) -- New Zealand Prime Minister John Key’s re-election with his party’s biggest mandate in 60 years will strengthen the nation’s push for free-market policies as he pursues welfare cuts and asset sales to balance the budget.

Key’s National Party won 48 percent of the vote on Nov. 26, up from 45 percent three years ago, allowing him to form the next government with support from political allies in parliament. His administration will focus on selling state assets and returning the budget to surplus by 2014-15 or earlier, the leader, 50, said in Auckland after the election.

Securing a second term allows Key to expand policies aimed at reducing the economy’s reliance on government spending, an effort that was slowed in the past three years by the need to help the country recover from the global financial crisis and New Zealand’s deadliest earthquake in 80 years. The leader, whose popularity survived a credit-rating downgrade, will need to show progress in cutting the budget deficit as soaring borrowing costs imperil indebted European nations.

“The key issue for New Zealand is having expenditure restraint,” said Philip Borkin, an economist at Goldman Sachs New Zealand Ltd. in Auckland. “It is ensuring the economy has less handbrakes on it to continue to grow. If we can get the economy growing strongly then the accounts will naturally repair themselves.”

Alliances

Key has secured support from two smaller parties to ensure a majority in parliament. He met with senior ministers yesterday and plans talks today with the ACT and United Future parties, which backed him in the last parliament and have pledged to do so again.

Key’s ability to quickly form a government will quell investor concerns, Sharon Zollner, senior economist at ANZ National Bank. Ltd. said in an e-mailed note. The benchmark NZX 50 stock index gained 0.2 percent at 10:15 a.m. in Wellington. The New Zealand dollar rose as much as 1.4 percent to 75.12 U.S. cents. The currency paced gains in the euro and Australian dollars on reports the International Monetary Fund is preparing a loan for Italy.

New Zealand has benefited from falling borrowing costs this year as investors fleeing Europe’s debt turmoil find a haven in the developed world’s second-best-performing bond market. Government yields fell by an average 174 basis points this year to 3.55 percent on Nov. 16, an all-time low, Bloomberg/EFFAS indexes show. New Zealand debt maturing in a year or more returned 13.7 percent this year, second only to the 15.5 percent gain in U.K. securities.

Quake Damage

Rates dropped even as borrowings rose 28 percent to NZ$70.9 billion ($53.2 billion) as of October, partly to fund rebuilding after earthquakes devastated the South Island city of Christchurch. The government’s gross debt was 38.7 percent of gross domestic product last year compared with 25.3 percent in Australia, according to the Organization for Economic Cooperation and Development.

“National have been quite clear about trying to constrain the size of the government,” said Craig Ebert, a senior economist at Bank of New Zealand Ltd. in Wellington. “Their policies kept more pressure off the deficit and debt numbers.”

Still, New Zealand lost its top AAA credit grades for local-currency debt at Standard & Poor’s and Fitch Ratings in September, with both assessors citing concern that government and household debt was too high.

‘High’ Debt

“We have vulnerability as a country, which is our high level of private debt and external debt,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland and a former central bank and Treasury official. The National government has to ensure “New Zealand at some point doesn’t become another victim of the international financial crisis,” he said.

As the European debt crisis threatens global growth, New Zealand’s new government faces the challenge of shoring up confidence in an economy where unemployment exceeds 6 percent and employment rose 0.2 percent from the previous three months in the last quarter.

Key, who came to power three years ago pledging state support to help end the nation’s worst recession in three decades, has promised to create 150,000 jobs over the next term. To boost employment in the country of more than 4 million, he pledged to introduce a “starting-out” wage for young workers and will limit increases in the minimum wage.

Former Trader

The multimillionaire and former foreign-exchange head at Merrill Lynch & Co. plans to overhaul welfare to help erase a record NZ$18.4 billion deficit. He said after the election he was confident of pursuing his asset-sale policy, which was opposed by 68 percent of 1,006 voters in a One News Colmar Brunton poll in late October.

The sale of New Zealand’s state assets began in 1988 under a Labour Party-led government and progressed under National from 1990 to 1999, when companies such as Telecom Corp. and power company Contact Energy Ltd. were created and sold.

Labour, which remains the main opposition even as its support fell to 27 percent from 34 percent in 2008, slowed the free-market policy push during its 1999-2008 rule. In campaigning for this month’s election, it had offered the alternative of a capital gains tax and income tax increases for the highest earners as the means to cut the budget deficit.

Share Sales

In contrast, National intends to raise at least NZ$5 billion by selling shares in electricity generators Meridian Energy Ltd., Mighty River Power Ltd. and Genesis Power Ltd., coal miner Solid Energy New Zealand Ltd. and Air New Zealand Ltd., which is now 75 percent state-owned. The government will retain at least a 51 percent stake and prioritize sales to local investors and pension funds, while limiting the size of individual holdings in the companies, the party has said.

Key has pledged to use the money for capital projects including schools and irrigation. The so-called mixed ownership model will make the companies more efficient and will provide a boost to the stock market, he said before the election.

Part of Key’s challenge will be reviving business confidence, which fell to a seven-month low in October as the European crisis threatened to spill into a global slowdown. He also needs to bolster reconstruction after a February earthquake in the nation’s second-biggest city killed 181 people and wrecked more than 1,000 city buildings and about 6,500 homes. Rebuilding will cost at least NZ$20 billion over five years, according to government estimates.

Rebuilding Delays

Reconstruction delays have curbed earnings at companies such as Fletcher Building Ltd. The nation’s biggest supplier of cement and lumber said last month profit in the six months ending Dec. 31 is likely to fall 10 percent from a year earlier because of weak residential and commercial construction.

Key has said the government will help release land for new housing to accelerate construction that may require an estimated 30,000 more workers. That’s more than three times the 9,000 jobs the economy created since Key was elected in late-2008.

National will cap hiring by government departments and limit new spending to NZ$2.8 billion over its next three budgets, Key has said. He aims to cut welfare spending by NZ$1 billion over four years with a new program that will require two-thirds of current beneficiaries to train and be prepared to take work when it becomes available. Payment levels aren’t being reduced.

“It’s important that they continue to stick to the fiscal austerity script,” said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington. “People are very mindful of governments who don’t deliver on their austerity plans. Once you lose credibility the rug gets pulled out pretty quickly.”

For news and related information: Stories on John Key: NSE JOHN KEY ZEALAND <GO> Most-read New Zealand stories: MNI NZ BN <GO> Reports on New Zealand employment NZLFUNER <Index> CN <GO>

--Editors: Edward Johnson, Brendan Murray

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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