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ZNR UUUUU ZZH
R 200221Z JAN 09
FM AMEMBASSY WELLINGTON
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RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 WELLINGTON 000018 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR 
J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV PREL NZ
SUBJECT: PM JOHN KEY OFFERS ECONOMIC ASSURANCES AND GENERALITIES 
 
WELLINGTON 00000018  001.2 OF 002 
 
 
¶1. (U) Summary:  On January 15, Prime Minister John Key held his 
first high-level meeting of the New Year to address growing negative 
economic news.  Major financial research firms recently forecast 
significant contraction in the New Zealand economy resulting in a 
projected fifth quarter of no growth, weakening demand for exports 
and growing unemployment.  Key offered only generalities and set 
February 4 as the date to release details of his economic stimulus 
package along with kickoff of "Summit on Employment."  The 
opposition Labour Party claimed the lack of specifics pointed to a 
Government without any coherent plan to save jobs and turn the 
economy around.  End summary. 
 
How to Staunch the Red Ink 
-------------------------- 
 
¶2. (U)  On January 15, Prime Minister John Key returned from his 
two-week holiday in Hawaii.  Along with five senior ministers, the 
State Services Commission, and the Department of Prime Minister and 
Cabinet, he received his first economic brief for 2009 from senior 
Treasury officials on the state of the New Zealand economy.  Just 
before the meeting convened the New Zealand Institute of Economic 
Research (NZIER), Dunn and Bradstreet (D&B) and Standard and Poor's 
(S&P) released a series of gloomy economic forecasts. 
 
¶3. (U)  The New Zealand Institute of Economic Research quarterly 
survey of business opinion for the December quarter offered a 
resoundingly bleak outlook, with a net 44 percent of firms reporting 
a drop in business activity, the worst result since at least 1970. 
Many economists reacted negatively to the news, with ANZ Bank 
picking the likelihood of a significantly negative gross domestic 
product (GDP) figure for the quarter resulting in a fifth successive 
quarterly contraction.  Analysts widely agreed the figures from the 
survey showed a worse 2009 than previously expected, with an 
intensifying recession more likely than an abating one. 
 
¶4. (U)  Dunn & Bradstreet in its "Economic and Risk Outlook Report" 
released January 14 reported, "With world economic growth falling 1 
percent in 2009 before rebounding 2.1 percent in 2010, New Zealand's 
growth will 'slow sharply' during the year."  The report predicted 
that global trade conditions were expected to deteriorate further 
and bankruptcies and late payments by businesses and consumers would 
rise.  The outlook in New Zealand was "pessimistic" because 
consumers overall are carrying high debt levels, housing prices were 
falling, and the export and tourism sectors face negative conditions 
in the months ahead.  "Demand from Asia is critical to New Zealand's 
economic prosperity but export demand is expected to decrease 
markedly and default risks likely to rise with New Zealand's 
exporters  hit hard in 2009," according to D&B corporate affairs 
director Damian Karmelich.  He further said that regardless of GNZ's 
fiscal and monetary policy changes, the year ahead would be tough 
for local businesses. 
 
¶5. (U)  Standard & Poor's has also revised its outlook on New 
Zealand's foreign currency rating from stable to negative, and is 
warning of a possible downgrade in the country's currency ratings if 
the next budget does not contain a credible medium-term fiscal 
(stimulus) plan.  "The outlook revision on the foreign currency 
rating is driven by S&P's view of New Zealand's narrowing economic 
policy flexibility in light of the country's widening external 
imbalances, as evidenced by the sizeable current account deficit," 
said S&P primary credit analyst Kyran Curry.  New Zealand's current 
account deficit was NZ$15.5 billion, or 8.6 percent of GDP for the 
year to September 2008.  At the same time, S&P affirmed its 'AA+' 
foreign currency and 'AAA' local currency long-term ratings for New 
Zealand, as well as its 'A-1+' short-term ratings and the ratings on 
New Zealand's debt issues. 
 
¶6. (U)  The NZ Treasury's forecasts reiterated the negative 
prognosis of the private financial research firms and predicted that 
there will be no economic growth this year. Treasury estimated that 
unemployment could reach 7 percent in 2009, rising to 7.5 percent by 
¶2011.  It also forecast that the number of unemployed could double, 
from 94,000 today to 170,000 by 2011, and that Government debt would 
expand to almost 40 percent of GDP by 2013. 
 
PM Key Offers Lots of Assurance but Few Details 
--------------------------------------------- -- 
 
¶7. (U)  PM Key did try to allay fears at his press conference 
 
WELLINGTON 00000018  002.2 OF 002 
 
 
following the Jan 15th meeting and promised strong measures to 
stimulate the economy in the face of Treasury's forecasts.  He said 
that measures already announced, including tax cuts starting on 
April 1, would put at least NZ$7 billion into the economy and there 
was more to come.  Mr. Key also tried to further reassure the NZ 
public saying New Zealand was in a much better position than many 
other countries to ride out the international crisis and he expected 
the economy to rebound in the near-term.  "We see 2010 as a moderate 
year and 2011 as quite a strong year," he said.  Key outlined the 
broad themes of his economic stimulus program to be announced in 
February which included: 
 
-- Reminding investors that the NZ banking system was continuing to 
function and the deposit guarantee schemes put in place before the 
election were working; 
 
-- The NZ Government was going to choose road (highway construction 
and upgrades) and other infrastructure projects for its stimulus 
package that could be started quickly; 
 
-- There would be important changes to simplify the Resource 
Management Act and red tape would be cut to help businesses; 
 
-- The May 2009 budget would detail programs which were going to be 
scrapped so that the money could be better used elsewhere; and 
 
-- Reserve Bank Governor Alan Bollard "obviously has room to move" 
and announce further interest rate cuts that would help the economy. 
 (Note: Next rate announcement scheduled for January 29. End note.) 
 
-- The "Summit on Employment" (to be held in February) will be 
chaired by the New Zealand Stock Exchange (NZX) chief executive 
officer Mark Weldon to address the growing unemployment problem. 
 
¶8. (U)  Following the meeting with his ministers, PM Key said he 
would make a speech next month (February 4) outlining his 
government's specific stimulus measures to boost business confidence 
and help small to medium businesses through the downturn. 
 
¶9. (SBU)  Comment: The PM's reticence to deliver details opened the 
door to the opposition Labour party to claim the lack of specifics 
pointed to a Government still lacking any coherent plan to save jobs 
despite layoffs being predicted to escalate dramatically over coming 
months.  The National Party, however, seems prepared to weather the 
criticism from Labour now when the recession has yet to bite hard so 
it can keep the introduction of more substantial relief measures up 
its sleeve for when things get really become difficult.  Moreover, 
the media are not giving credence to Labour's nattering, noting that 
the answers to New Zealand's economic woes cannot be found overnight 
and are, in part, tied to external influences beyond the 
government's control.  End comment. 
 
KEEGAN