Posts Tagged ‘International Monetary Fund’
Monday, May 4th, 2009
Up in the Press Gallery for Parliamentary Questions yesterday, someone was asking Finance Minister Bill English a patsy about the dreadful state of the Crown’s accounts. “Are you scared yet?” asked a colleague.
“Bill wants us to be very scared about the economy before the Budget.”
That hadn’t actually crossed my mind. The recent string of reports from the IMF, OECD, New Zealand Institute, Treasury, Reserve Bank and others all read pretty convincingly that the world’s in the poop and no one’s sure how long it’ll last or whether we’ve hit the bottom yet.
So, technically, I was already technically scared, and if anything, found English’s pre-Budget speech to CEO’s about 10 days ago almost a bit upbeat. His warnings on government spending, for example, weren’t exactly “shiver me timbers” territory.
All he was promising was not to increase government spending as quickly as it did in the good times.
There’s a political opportunity to use the credit crunch to make this a radical Budget. But that seems highly unlikely of this Finance Minister and the way New Zealand politics works now. Nicky Hager – prove me wrong.
The New Zealand Institute was ever worthy in trotting out everything we’ve heard before about what the country should but won’t do to grow faster and may have been trying to be helpful with last week’s report advising against the next two rounds of tax cuts. But they’ve looked shaky for months.
If you wanted real economic panic in the media, you need to be in Australia at the moment. You wouldn’t know there was a recession on over there. A chilly wind blowing through the empty boulevards of Melbourne’s new Docklands complex bespoke a development born in the boom and birthed in the crunch.
Other than that, though, Australians seemed to be carrying on pretty much as normal. It just feels richer there. But their Treasurer, Wayne Swan, is talking up Australia’s first timid steps into recession, banging on constantly about a A$50 billion federal Budget and getting maximum headlines for his efforts.
The recession is news over there. Here, we seem to be over it.
The National Bank business confidence survey makes interesting reading for signs of that. Sentiment improved markedly in April, albeit that businesspeople are still basically pessimistic, especially about hiring anyone.
The bank’s chief economist, Cameron Bagrie, is sticking his neck out and saying that after six quarters of recession, the New Zealand economy is “finding a floor” from which there is scope for recovery – long, slow, and unspectacular, but a recovery nonetheless.
However, he can only be right if the world economy has gone through the worst of its catharsis. To believe that yet is simply wishful thinking.
The world financial system came perilously close to a cataclysmic collapse in the last six months.
We may have escaped that, but it’s far too early to tell. Plenty of opinion says we are on a ledge that will break and we’ll all fall further before finding the bottom.
That calls for caution for the next 18 months at least. It also requires some luck, including not getting a global pandemic that stops all travel and local commerce dead in its tracks because no one wants to be in a crowd.
And it requires resolute policy-making that drives toward a more transparent and less highly leveraged world financial system.
If the past is a guide, transparency will be confused with yet more onerous disclosure requirements that don’t actually improve the sum of human knowledge.
For evidence of that, look no further than the absurd volatility created in companies’ accounts by the new International Financial Reporting Standards that are meant to leave investors better informed about corporate health. They don’t.
If those stars all align, then things will slowly return to something more stable and there will be growth although the rich world may never quite go shopping the way it did over the last 20 years.
So it won’t be spectacular and it will have to include some evening of the imbalance between global rich and poor which will see today’s poor spend and have more, while the gluttons cut back.
That, essentially, is the guts of the climate change deal that must be concluded this year, and which has been so overshadowed by the financial crisis.
It’s becoming a commonplace that the world is now stuck with a 2 degrees average warming over the next hundred years or so, meaning we are now into a huge process of adaptation, as well as mitigating climate change.
If those efforts don’t succeed, and 3 – 4 degrees global average temperature increases occur, then the global climate will start to become markedly volatile.
That is kind of scary.
Friday, April 17th, 2009
Of all the big numbers floating around these days, the one that worries Finance Minister Bill English most is government debt.
Actually, that’s not quite true. Government debt is the most worrying of all the available worrying numbers that English can actually do anything about.
And it’s clear from two recent statements – responding to regular IMF and OECD reviews of the New Zealand economy – that this will be a key theme for his first Budget on May 28.
This week’s report from the OECD makes all too familiar reading. Much as various wishful thinkers would love New Zealand to pay its way in the world without earning it, the OECD points out that the options are narrowing sharply again, especially if its unusually pessimistic view of a 3% economic contraction this year proves true.
As well as getting the books in order, some things need to happen to get the wealth we have to work better for us. Both the Bolger and Clark governments largely dodged this unpleasantness, preferring to reap and then spend on taxpayers’ behalf the benefits of a sustained upturn in world wealth that made us think we were pretty clever for a while there.
Global debt crisis notwithstanding, the local outlook is constrained for all the reasons the OECD and IMF would habitually cite – the balance of payments deficit with the rest of the world remains dangerously high at a time when any creditor is looking askance at lending to inveterate spend-thrifts such as ourselves. After all, New Zealand has never in its post-colonial history earned its own way in the world for any length of time. This country’s wealth has always been based on our ability to convince foreign savers that we will pay them back eventually. We’ve clearly got a trusting face: possibly one of our greatest national assets.
As tax revenues plummet and unemployment rises, New Zealand heads into several years of large Budget deficits. These will push net government debt to GDP from below 20% in recent times to more than 50% – way above levels that Roger Douglas and Ruth Richardson struggled to reduce in their roles as Minister of Finance.
That struggle and the world upturn delivered their successors: Winston Peters, Bill Birch, and Michael Cullen, an increasingly comfortable fiscal environment which last year forced Scrooge McCullen to dole out the biggest personal tax cuts since at least the 1987 tax reductions that offset the imposition of GST.
Now it is English’s turn and he’s been handed a lemon that till last August was a ripely sweetened mandarin. He supports the tax cuts, but things have turned bad so fast that he mightn’t be able to keep them going through to the 2011 election, as Cullen promised in last year’s Budget, delivered three months before the world went phut.
The international creditors that we’ve relied on for so long will insist, especially in current world economic circumstances, on seeing a plan for net Crown debt to fall swiftly once the world economy – presumably accompanied by New Zealand – starts recovering.
Without such a plan, we’ll get a credit rating downgrade, we will face higher interest rates and perhaps a weaker currency, both of which will make our public and much larger private international debts that much harder to service.
“The private sector’s reliance on the external funding and government financial sector guarantees have increased the importance of a strong public sector balance sheet,” English said this week.
“Falling revenue has created a period of projected government deficits and rising Crown debt to levels that are unacceptable to the Government.”
On April 3, English said: “As we prepare for our first Budget on May 28, the new government is performing a delicate balancing act. Our first priority is to ensure that we help New Zealanders get through the worst effects of the recession by preserving entitlements, providing more than $1 billion of tax cuts from April 1 and bringing forward productive infrastructure investment.
“Our other priority is to set out a credible plan for economic recovery over the medium term. That means investing to increase New Zealand’s productivity and growth, while at the same time getting the government’s finances in order.”
As the Budget approaches, start looking for signs that the public health system is targeted for both financial order and productivity gains.
For the so many extra billions pumped into the public health system in the last decade, you’d think there’d be more results to applaud.
The bottomless pit and high cost of new healthcare demands, driven by a rising tide of voting dodderers and the constantly improving treatability of just about everything, leave the health system still underperforming while soaking up huge national resources.
English was a reforming Health Minister in the Bolger Cabinet and won much admiration from such unlikely, normally Labour strongholds as nurses and other professional carers.
“If Labour did this, it would be called radical communitarianism,” English said to me at that time. “But because it’s National doing it, it’s called ‘reform’.”
There have been whispers around the health system for weeks now, including the appointment of an advisory board-style body, similar to those being used in resource management and energy policy reviews.
These involve a panel of sector thinkers, advisors and participants in a process that runs parallel to the normal flows of public service advice, albeit that public servants “hold the pen” on any advice to Ministers.
Health Minister Tony Ryall and English go back a long way, and Ryall is a long student of the health sector too.
That, presumably, is why English ended this week’s statement on the OECD report with these carefully chosen words: The OECD also sets out some options for meeting future challenges in the health system, including the smarter purchasing and delivery of health care services.
“We note the challenges the OECD has described in the health sector. We’re already implementing some of the ideas and we will consider others,” English said.
Watch this space.
Monday, April 6th, 2009
If the G-20 was going to create another trillion dollars, I wanted to know how.
With the aid only of an Internet, I decided to find out.
Here, in simplistic terms, is how the world comes up with the dosh for these sorts of deals. Bear in mind that much of the money you are about to read about does not yet and may never really exist.
The process of debt de-leveraging, which is passing through the global economic intestine like a dose of the squits, involves populations assuming the pain created by private sector failure. It’s part of the bargain for benefiting when the private sector succeeds.
The rescue du jour is for governments to create money, which many have been doing for some months now, often because there is nowhere else to go when your interest rates reach zero.
When global leaders are placing these latest huge sums in the hands of the International Monetary Fund and World Bank, we must be getting to the end of the available credit lines.
Who would we borrow from next? The Moon perhaps.
The way I think about it, the indigestion of the Greedy Years is now being farted out through the IMF, which will collect US$500 billion extra from a bunch of countries that can “afford” it, as well as creating another US$250 billion in Special Drawing Rights, another highly specific creature of geo-political financial wizardry.
The money is arriving just in time. The IMF was down to its last US$250 billion, and had recently pledged US$64.4 billion in loans to Iceland, Ukraine, Latvia, Hungary and Pakistan. Mexico was looking for a further US$47 billion under the IMF’s new Flexible Credit Line, a facility that allows some countries to borrow without conditions.
There is a slew of similar applicants building up from across the emerging world for these funds, which will not always be linked to the IMF’s infamous Structural Adjustment Plans, which require countries to stamp out corruption and start living within their means if they are to continue to be helped.
The $250 billion in SDR’s can be allocated without requiring economic change from the recipient country.
Unlike the trading banks’ over-leveraged debt instruments, this new money is all backed by states, which in the case of many G-20 countries means governments elected by democracies. As a result, what a society can do versus what a market can do is about to be tested.
The socialisation of private debt and failure is at some level a vote of confidence in our collective ability as a species to get ourselves back on track.
But economic rationalist types like me fear that the constructive power of markets may be denied everywhere because of financial market excesses. That would be a terrible outcome. Markets, competition and, by extension, innovation and wealth creation are all getting a bad name at the moment. But they remain vital to realising our human potential.
For those of us who like markets that have good rules, and so are never truly free, and think they are the key to sustainability, this is scary stuff. For example, we’re about to try to impose a market system on carbon emissions, also under discussion at global talks in Bonn that are virtually a non-event compared to all the other summits.
Most intriguingly, the IMF, bogey of the left, applier of Rogernomics-style structural adjustment packages, finds itself the steward of what is being described as “the end of the Anglo Saxon model of free markets”.
“This is a historic moment when the world came together and said we were wrong to push deregulation,” said Nobel Laureate economist and Columbia University professor Joseph Stiglitz, according to Bloomberg.
Perhaps more importantly, this is also a breakpoint in the American dream.
The deals being done in London will weaken the U.S. internationally, reflecting its emerging economic weakness.
Hence the linking of the bail-out to greater power at the IMF for China, India and Brazil, all of whom will be expected to kick the can when the bill is drawn up for the big trillion – an event not anticipated before January next year. Portents of a behind-the-scenes bunfight there.
Japan, the US, and the European Union are already in for US$100 billion each, the Chinese are being coy and may only chip in US$40 billion to US$50 billion. Others are contributing as their means allow. We can only be thankful that NZ is too insignificant to even be at the G-20 or maybe we’d have to heed such a call too.
Monday, March 30th, 2009
Remember where you read it first: “New Zealand is in a better position than most advanced countries to face the global storm, given its sound macroeconomic policies, including a flexible exchange rate, low level of public debt, flexible labour markets, and healthy banking sector”.
So says the International Monetary Fund, reporting back on one of their regular jaunts through Wellington to take the pulse of that plucky, reliable, champagne-taste-on-a-beer-budget economy, New Zealand.
In the past few weeks, coinciding miraculously with claims first made in Smellie Sniffs The Breeze in February, the IMF’s assessment has become the official line on how things are here.
The rate of bad news is tapering off. Fixed-term mortgage rates have turned back up, and superannuation funds are moving out of bonds and into cash, preparing for an equities up-tick.
Sharebroking websites, which have had a dreadful time since late last year, are seeing growing traffic as the savers start emerging, looking higher yields.
However, there is another part of the story, which we forget at our peril, the bit in the IMF report that falls under the general heading: “Downside risks in the outlook are high and linked to the unprecedented uncertainties surrounding the depth and duration of the global recession.”
In that context, this week’s GDP and balance of payments statistics were a bit of a gift, both coming in slightly less awful than pessimists had predicted.
If all goes well, this is the bottom of the cycle for both of these critical measures.
Likewise, the stunning slump in the US GDP reported this week was within the range of expectations and regarded as “the bottom of the cycle”.
If we just try to ignore the jumpy talk of replacing the US dollar as the world’s reserve currency – no matter how inevitable that looks over time – it was the second largely positive week in a row.
The US toxic assets plan, and the thrum of presses at the world’s mints printing more money, show some early signs of working.
At home, there are tax cuts kicking in from Wednesday next week and, compared with Australians and Americans, New Zealanders are almost recklessly optimistic. According to the latest Westpac McDermott-Miller confidence survey, we’re only mildly net-pessimistic.
Perhaps it just goes to show the power of a summer holiday. The depths of northern hemispheric gloom have occurred in the depths of an uncommonly icy European winter.
What remains to be seen, however, is whether this apparent upturn is merely respite, a brief period spent apparently safe on a precipice which is about to collapse.
We are far from out of the woods.
“I have to tell you, what we are seeing at the moment is the early part of the wave,” one of New Zealand’s most respected merchant bankers, Rob Cameron, told the Commerce select committee during hearings this week.
“It’s going to get a lot, lot, lot more difficult for companies,” he said, while arguing for much streamlined, lower cost rules for certain types of capital-raising to be implemented swiftly.
The IMF says something similar about where we sit at the moment, as a highly indebted country which is forecasting the government debt-to-GDP ratio will blow out to beyond 50% by 2013, almost twice what it was at the end of the good times last year.
“A key vulnerability for New Zealand is the high level of short-term external debt, mostly owed by banks,” the IMF report says. “A low probability but high impact event would be a loss of investor confidence in banks or the sovereign. This could lead to a further increase in the cost and/or reduced availability of external funding, which would require a more painful economic adjustment.”
Ouch – when the IMF talks about “a more painful economic adjustment,” you just know it’s a euphemism.
Dwell a moment on how carefully they’ve thought about what we’ll do if a really bad “global disruption” hits us now.
“The government’s wholesale funding guarantee and increased term funding from banks’ Australian parents have provided important cushions. If in the event of a large shock these prove insufficient, official foreign exchange reserves, the government’s offshore borrowing capacity, and some use of the swap facility with the U.S. Federal Reserve should limit the extent of a disruptive economic adjustment.”
Hopefully it never comes to that.
But it explains why the Key Government isn’t riding a fiscal wheelbarrow the size of Barack Obama’s.
As the IMF puts it: “There is very limited scope for additional fiscal stimulus beyond the sizable stimulus already in the pipeline.”
In fact, what the IMF says – and will get – is a plan in the May 28 Budget to “stabilize gross public debt in the medium term and bring it back to around the current level in the longer term”.
Interestingly, the IMF also suggests that the RBNZ consider how it might use quantitative easing – ie, money-printing – as well as conventional monetary policy which “by contrast with many advanced countries … remains effective in New Zealand”.
It is hardly unimaginable that there are further shocks in store for the global financial system. If that happens, we’ll get a massive version of the swaps rate pressure that had our banks scrambling this week to match the flood of mortgage-holders seeking to lock in recent historically low interest rates.
Read the IMF, and the tea-leaves carefully. There is cause for cautious optimism, but it’s still against a bleak and volatile global background.
The IMF report is here.
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