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DE RUEHWL #0832/01 2980207
ZNY CCCCC ZZH
P 250207Z OCT 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC PRIORITY 3411
INFO RUEHBY/AMEMBASSY CANBERRA PRIORITY 4576
RHHMUNA/CDR USPACOM HONOLULU HI PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY 0083

C O N F I D E N T I A L WELLINGTON 000832 
 
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 
 
 
Classified by DCM David J. Keegan. Reasons 1.4 (b) and (d). 
 
¶1.  (C) Summary: On his recent trip to New Zealand, U.S. Treasury 
Under Secretary, Timothy Adams consulted with officials, private 
economists, academics and business people to ascertain the current 
state of the NZ economy. Consensus among experts was that NZ is 
relatively stable and in the midst of a standard business cycle 
downturn. Last year growth slowed to around 1.5 percent and is 
projected to remain at this level for the near future.  To ease 
inflationary pressure, the Reserve Bank of New Zealand (Central Bank) 
is expected to raise the official interest rate soon which will also 
serve to keep the currency "overvalued."  Consumer confidence will be 
tested by fears of a burst in the housing bubble and dealing with 
record personal debt. Officials plan to introduce a new "compulsory" 
savings plan next year to help improve savings rate.  Despite exports 
growth being hampered by the high NZD, China has moved into third 
position as a destination for Kiwi products. Even so, efforts to 
conclude a timely free trade agreement with the Chinese are proving 
difficult. 
 
----------------------------------------- 
Minister Cullen Predicts a Soft Landing 
----------------------------------------- 
 
¶2.  (C) 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 make a soft landing while overall demand would 
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 estimated a 7 billion 
NZD budget surplus for 2005-06 dropping to 5.8 billion NZD in 2006-07 
and bottoming out at 3.6 billion in 2008-09. Cullen said 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 of the Doha round would have a long-term 
negative impact especially for NZ exports to the Asia-Pacific 
markets. This was especially important since China was moving into 
third place after Australia and the U.S. as a destination for NZ 
exports. 
 
¶3.  (C) Cullen said that the NZD is currently overvalued by ten 
percent (currently trading in the .66 to .68 range to the USD) which 
is hurting 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. In the longer term, NZ 
needs to find alternate sources for natural gas after depletion of 
domestic reserves anticipated in 2009. 
 
--------------------------------------- 
Mortgage Policy hinders Inflation Fight 
--------------------------------------- 
 
¶4.  (C) Governor of the Reserve Bank of New Zealand (RBNZ), Dr. Alan 
Bollard, offered a similar assessment of the NZ economy. He said that 
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.  (C) Treasury Secretary, John Whitehead took a more technical cut 
at the issue of soft landing noting that government efforts to 
increase interest rates (currently at 7.25 percent) to correct 
inflation will only lag because most home mortgages are set at fixed 
rates, renegotiated every two to three years. 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 Cullen 
and Bollard. Whitehead further stressed that greater export access to 
the Asian markets and the viability of the WTO process was critical 
for the health of the NZ economy. He admitted that the free trade 
negotiations ongoing with China had 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.  (C) Economists representing some of the major banks in Wellington 
offered U/S Adams 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 predicted an announcement by the RBNZ, in a matter of 
weeks, of a rate increase necessary to address this refinancing wave. 
 
--------------------------------------------- 
Immigration helps Economy, but Politics hurts 
--------------------------------------------- 
 
¶7.  (C) A panel of academics challenged the conventional wisdom that 
New Zealand was suffering a brain drain. They maintained that current 
immigration policy which stresses skills through a 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, consecutive Labour governments have 
undertaken a creeping re-regulation with absorption of talent away 
from the private sector 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 adopted a 
mixed-member proportional (MMP) system in 1996 to elect parliament -- 
resulting in more power shared by "marginal groups" thus slowing 
further economic reforms -- because they were reacting negatively to 
the pain of the economic restructuring in the 1980's. 
 
---------------------------- 
Need to Improve Productivity 
---------------------------- 
 
¶8.  (C) Business people from the agriculture, oil and gas, 
financial/accounting, and business consulting sectors noted that, as 
a relatively small economy, NZ must realize substantial increases in 
labor productivity to sustain high rates of growth. This will require 
much greater levels of exports and foreign investment. They worry 
that only a small number of NZ companies are adequately engaged in 
international markets because of NZ's small size and remoteness. 
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. 
 
¶9.  (C) This cable has been cleared by U/S Adams' office. 
 
McCormick