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Local stock market delivers cheaper capital to wider economy's benefit: NZIER report

Monday 12th February 2018

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NZX's role in keeping the cost of capital relatively low gives a $2.4 billion kicker to the broader economy, the New Zealand Institute of Economic Research says. 

In research commissioned by the stock market operator, NZIER found NZX makes it easier for firms, particularly small and medium-sized companies, to raise cheap capital, and estimates if it wasn't there, SMEs would have to pay 300 basis points more for their cost of capital, while the big end of town would face a 25 basis point increase. That added cost would be estimated to cut capital investment by 1.8 percent, which NZIER predicts would hit the real economy by $2.4 billion. 

"We wanted to do the work to determine what is the metric here? When you think about the much broader flow through of the ecosystem, what is that metric, how substantial is that, how important is that to New Zealand," NZX chief executive Mark Peterson said in an interview. "It's really important for the broader market and the public and officials and government to really get a sense of the size of what we're talking about." 

The report shows the country's top 50 listed companies generate $24.6 billion of gross domestic product, about 10 percent of the national economy, and pay $2.5 billion of tax annually, or 20 percent of the corporate tax take, and employed about 96,300 staff, an average of almost 2,000 each. 

Of the top 50 companies, dual-listed Australia & New Zealand Banking Group is thought to make the biggest contribution to GDP with gross added value of $3.21 billion, followed by national carrier Air New Zealand at $2.53 billion, Fonterra Shareholders Fund at $2.2 billion, Westpac Banking Corp at $1.71 billion and Spark New Zealand at $1.57 billion. 

"NZX plays a critical role in making the New Zealand economy function efficiently and effectively," the NZIER report said. "It also supports wide participation in financial markets by thousands of individual investors who would otherwise not be able to do so." 

Peterson said the report lined up nicely with NZX's plans to refocus on its core capital markets business, with a view to support current and prospective issuers, drive secondary market activity and grow existing data revenue.

"The spillover of growth in those core markets is very very broad," he said. "If there's ever a business case to want to focus on that, well there it is. We're thrilled with the work - it's great to have a baseline there."

NZIER's counterfactual was based on interviews with participants in the broader financial services sector on their view of what would happen if NZX didn't exist in its current form. All participants thought companies would be forced to raise money offshore, increasing the cost of capital, and that without it investors might be encouraged to concentrate even further on residential property. 


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