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FM AMEMBASSY WELLINGTON
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INFO RUEHBY/AMEMBASSY CANBERRA PRIORITY 4571
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C O N F I D E N T I A L WELLINGTON 000820 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS TO USTR, STATE FOR EAP/ANP, EB TREASURY FOR 
LESLIE HULL 
 
E.O. 12958: DECL: 10/18/2016 
TAGS: ECON EFIN ETRD PGOV PREL NZ
SUBJECT: VISIT OF U.S. TREASURY UNDER SECRETARY FOR 
INTERNATIONAL AFFAIRS, TIMOTHY ADAMS 
 
 
¶1.  Summary: U.S. Treasury Under Secretary, Timothy Adams 
consulted with New Zealand (NZ) government officials, private 
bank economists, academics and business people in Wellington 
on October 16 to ascertain the current state of the NZ 
economy. Consensus among experts was that NZ is relatively 
stabile and in the midst of a standard business cycle 
downturn. Economic growth slowed to around 1.5 per cent last 
year and is projected to remain at this level for the near 
future. The Reserve Bank of New Zealand (RBNA - Central Bank) 
is attempting to ensure the economy has a "soft landing" and 
in order to ease inflationary pressure is expected to raise 
the official interest rate in the next few weeks. The Kiwi 
dollar (NZD) is considered relatively overvalued -estimated 
to have appreciated by ten percent- but attempts by RBNZ to 
curb inflation will also act to keep the currency 
"overvalued." (Note: NZ has one of the highest interest rates 
in the world. Endnote). NZ's household savings rate is 
sharply negative and consumer debt at record highs. Consumers 
will become more cautious as the housing market stalls due to 
massive refinancing of mortgages (forty-eight billion NZD) at 
higher interest rates. This phenomena is brought about by the 
2-3 year length of the typical mortgage. To address low 
household savings rate, officials alluded to a new 
"compulsory" savings plan to be introduced next year. Export 
sector's importance to economic recovery is also being 
hampered by the high NZD. Experts stressed the need for the 
WTO agenda to succeed. Trade within Asian markets, especially 
China, has taken on far greater significance. China has moved 
into third position as a destination for New Zealand exports. 
Efforts to conclude a timely free trade agreement with the 
Chinese are proving difficult. 
 
--------------------------- 
Minister Cullen's Forecast 
--------------------------- 
 
¶2.    Under Secretary Adams' called on the Minister of 
Finance and Deputy Prime Minister, Dr. Michael Cullen who 
opined that New Zealand's economy was slowing after a period 
of expansion but believed it would have a soft landing while 
he expected overall demand to remain relatively strong. He 
forecast economic growth to slow to 1.5 percent both this 
year and next, before recovering to 3.7 percent in 2007-08. 
Per budget predictions released in May, GNZ estimated a 7 
billion NZD budget surplus for 2005-06 dropping to 5.8 
billion NZD in 2006-07 and bottoming at 3.6 billion in 
2008-09. His most significant concerns for the NZ economy 
were low household savings rates/high consumer debt and weak 
export performance. Cullen proffered that the GNZ planned to 
introduce a new savings scheme next year with an op-out 
mechanism to help improve savings rates. He was also worried 
that a failure in Doha round would have a long-term negative 
impact especially for NZ exports to the Asia-Pacific markets. 
He admitted that China was playing an increasingly important 
role and moving into third place after Australia and the U.S. 
as a destination for NZ exports. 
 
¶3.  Cullen believed the NZD to be currently overvalued by ten 
percent (currently trading in the .66 to .68 range to the 
USD) which is having a negative effect on export performance. 
 He believes the housing market will remain stable because 
net gains in immigration will help support demand. Inflation 
worries have eased a bit as gas prices dropped as much as 15 
percent in the past few months. More long range energy 
concerns continue to focus on finding alternate sources for 
natural gas after depletion of domestic reserves anticipated 
in 2009. 
 
--------------- 
Monetary Policy 
--------------- 
 
¶4.  In the meeting with the Governor of the Reserve Bank of 
New Zealand (RBNZ), Dr. Alan Bollard, a similar assessment of 
the NZ economy was offered. Per Bollard, current monetary 
policy is trying to bring the economy to a soft landing but 
with NZ having one of the highest interest rates in the world 
further adjustments are only expected to have a small 
marginal effect while continuing to keep the currency 
overvalued. One of his biggest concerns is finding ways to 
improve household savings rate. He felt that both corporate 
and government savings were good but noted the increased 
costs for government when an aging population begins drawing 
down social security/pensions. He felt that current private 
sector funding for pensions in NZ "doesn't look healthy." 
This comment tracks with Cullen's reference to the new 
 
savings scheme to address the low rate of household savings. 
 
¶5.  Treasury Secretary, John Whitehead also took up the issue 
of a soft landing for the economy. His concern however was 
that with current interest rates at 7.25 percent and average 
mortgages fixed at two to three year terms, the economy will 
experience a lag in the effects monetary policy will exert to 
correct inflation. On the issue of pension reform, Whitehead 
mentioned that the state system has moved the retirement age 
from 60 to 65 resulting in more people remaining in the 
workforce thereby easing some of the pressure on government's 
need to increase expenditures on pensions. Whitehead's 
assessment of savings rates among households, firms and 
government echoed the opinions of Cullen and Bollard. 
Whitehead further stressed the importance to the NZ economy 
for greater export access to the Asian markets and the 
viability of the WTO process. He admitted that the free trade 
negotiations ongoing with China proved difficult but 
reaffirmed the need to better integrate the NZ economy over 
the next 10 years with the Asian markets. 
 
------------------------------- 
Housing Bubble Waiting to Burst 
------------------------------- 
 
¶6.  Economists representing some of the major banks in 
Wellington offered a somewhat pessimistic assessment of the 
housing market and seemed certain that the bubble will burst 
but can't forecast exactly when the downturn is likely to 
occur. Because of the 2-3 year terms of the typical mortgages 
in NZ, banks will begin to experience a 48 billion NZD 
churning in the refinancing of these mortgages which will 
certainly be set higher than the rates last set in 2004. They 
predict an announcement by the RBNZ, in a matter of weeks, of 
a rate increase necessary to address this refinancing wave. 
 
--------------------------------------------- --------------- 
Immigration Policy's Effect on Economy and Reform Rollbacks 
--------------------------------------------- --------------- 
 
¶7.  A panel of academics dispelled the conventional wisdom 
that New Zealand was suffering a brain drain. They maintain 
that current immigration policy which stresses skills/point 
system has resulted in NZ being in the net plus range for 
population/talent gains. On the negative side they worried 
that despite the free market reforms of the 1980's they saw 
the effects of consecutive Labour governments resulting in 
creeping re-regulation with absorption of talent and 
increasing bureaucracy. They feared that NZ would slip on the 
international index of competitive economies if this trend 
continues. They theorized that the electorate may have 
reacted negatively to the pain of the economic restructuring 
in the 1980's by inaugurating in 1996 a mixed-member 
proportional (MMP) system to elect parliament resulting in 
more power shared by "marginal groups" thus slowing further 
economic reforms. 
 
----------------------------- 
Need to Improve Productivity 
----------------------------- 
 
¶8.   The business community group was represented by 
individuals from the agriculture, oil and gas, 
financial/accounting, and business consulting sectors. They 
noted that as a relatively small economy, in order for NZ to 
sustain high rates of growth, it will become increasingly 
important to realize substantial increase in labor 
productivity. This will require much greater levels of 
exporting and foreign investment. They worry that only a 
small number of NZ companies are adequately engaged in 
international markets which is partially caused by the small 
size and remoteness of the country. Increases in labor 
productivity could lead to higher wages which could go far in 
attracting and keeping talent in NZ. They remarked that it is 
far easier to secure capital than it is to secure talent in 
this market. Hope among this group is that political factions 
will move away from in-fighting and focus more on improving 
overall economic potential. 
McCormick