FACTBOX-Key political risks to watch in New Zealand

WELLINGTON, Sept 4 (BestGrowthStock) – New Zealand’s economy is
picking up pace as it puts behind it the longest recession in
more than 30 years, but the recovery is patchy with consumers
still wary in the face of low wage growth, high unemployment,
and the global uncertainty posed by the euro zone’s fiscal woes
and concerns about the strength of the United States’ recovery.

Following is a summary of key New Zealand political risks:

PUBLIC DEBT AND POLICY CONSTRAINTS

New Zealand’s public finances remain pressured as revenue
continues to feel the pinch from the global crisis, forcing
hefty government borrowing to finance the shortfall. The
government needs to maintain a tight hold on its fiscal
position with ratings agencies hovering in the background. New
Zealand’s economic fortunes have improved and there is no
imminent risk of a downgrade, but the country’s debt level and
the constraints it places on policy remain a key theme.

What to watch:

— National debt (NZTFRY=ECI: ) and government finances
(NZTFR=ECI: ) data. The National Party-led government’s May 20
budget offered continued restraint in official finances but did
not bring forward its return to budget surpluses as some
analysts had expected, although forecast borrowing was scaled
back.

— The budget did deliver wide ranging personal tax cuts
which are calculated to offset a rise in the indirect goods and
services tax, but they are forecast to be a net cost to the
government.

— The budget was not enough to tempt ratings agency Fitch
to remove the negative outlook on New Zealand. [ID:nWLF004657]

— The New Zealand dollar (NZD=D4: ) and debt prices
(0#NZBMK=: ) (NZDIRS: ), remain vulnerable to any hint the New
Zealand government’s fiscal position is weaker than forecast.

TAX REFORM

The budget unveiled long awaited changes to the tax system,
and the government delivered the expected wide-ranging income
tax cuts, lower company tax, closing of loopholes favouring
property investment, and a rise in the value-added goods and
services tax (GST). [ID:nSGE64I07B]

It was the most comprehensive reform of the tax system in
more than 20 years, but still steered away from the politically
difficult capital gains and land taxes.

The main tax changes come into effect on Oct. 1, and it
will likely take some time for the full impact to show through.
Any signs that low income families are getting little or no
benefit from the tax cuts, and indeed are being hurt by the
rise in GST may crimp National’s high political ratings and
lead to infighting among its minor support parties.

What to watch:

— National’s poll ratings. An election is not due until
late 2011 but National has shown itself to be sensitive to
public opinion.

— Any policy changes or reversals as National seeks to
placate the minor support parties and their political
constituencies.

GOVERNMENT EFFECTIVENESS

The centre-right National Party has been at pains to hold
the political centre ground and offend as few voters as
possible. It has maintained remarkably high poll ratings
(NZPOLL: ). However, recently it has reversed or diluted several
policies in the face of public discontent.

A plan to allow more exploration and mining of metals in
national parks and reserves has been scrapped; plans to revamp
foreign land ownership rules to encourage overseas investment
are set to be sent for further study with the prospect that
restrictions will not be loosened as suggested; and plans to
tighten drink drive laws by reducing the alcohol-blood level
have been sent for further study over the next two years —
beyond the date of the next election.

The government also has to balance the varying demands of
the three smaller coalition parties. The three have pledged to
support National on key matters of supply and confidence,
ensuring its political survival, but much of the rest of
National’s political programme comes down to negotiation on
specific policies. This leads at times to compromise and
delays.

What to watch:

— The government is expected to last its three-year term
but at times may struggle to push through pieces of policy, or
be forced to make concessions which are unpopular with its
support base in order to get laws passed.

— The outcome of negotiations with the indigenous Maori
people over control of the foreshore and seabed may be
difficult and test relations with one of its support parties,
the Maori Party.

— Any extension of the emissions trading scheme which is
seen as out of kilter with what is happening internationally.

FOREIGN INVESTMENT RULES

Hong Kong-based Natural Dairy Holdings Ltd (0462.HK: ) has
announced plans to enter the New Zealand dairy sector by buying
a group of farms currently up for sale. It says it wants to
spend as much as NZ$1.5 billion to buy more farms and set up
its own processing plants.

China’s Bright Dairy and Food (600597.SS: ) last month said
it would take a 51 percent stake in small scale milk producer
Synlait Ltd, prompting concerns about foreign ownership of such
a vital economic sector.

The dairy sector provides more than a quarter of New
Zealand’s exports and more than 7 percent of gross domestic
product, and the prospect of anything other than token foreign
ownership of dairy farms and processing plants will excite
strong passions and debate and ultimately political pressure
about the “national interest”. The government may be forced to
make sensitive decisions that will test its free-market
credentials and bilateral trade agreements.

What to watch:

— The Overseas Investment Office has authority to approve
small-scale applications but will likely seek government
approval on any application seen as sensitive. Look for any
turning down of applications.

— The government has ordered a review of overseas
investment rules to look at making them more streamlined and
practical and to encourage foreign investment, but recent
signals suggest there may not be too much liberalisation.

STATE ASSET SALES

The National-led government is politically inclined towards
the sale of state assets such as coal mines, power companies
and railway operations, but is pragmatically inclined not to
propose this because of a likely strong negative public
reaction.

The party’s policy is that there will be no state asset
sales in the first term of government and that any policy
change will be put to voters at the next election.

But Prime Minister John Key ruled out any privatisation of
the small state-owned Kiwibank, a low cost retail bank catering
for consumer and small businesses, after a strong public
reaction to a suggestion that it might be sold at some stage in
the future.

What to watch:

— Any overt policy change and announcement of assets to be
privatised. Conversely, any more moves to rule out the
privatisation of some assets, as happened with Kiwibank.

EMISSIONS TRADING SCHEME

New Zealand’s emissions trading scheme expanded on July 1
with the inclusion of the energy, transport and industrial
sectors, which account for just over half of carbon emissions.

The government has been lukewarm on the ETS, accepting that
it must fulfill its Kyoto Protocol obligations, but unwilling
to make any far reaching promises not matched by its main
trading partners and competitors. Nonetheless, fuel and energy
prices are rising. Added to October’s increase in the goods and
services tax, and rising interest rates as the central bank
tightens policy, New Zealanders face a rising cost of living.

One of the government’s minor support parties, ACT, is
campaigning against the scheme, and many farmers as well as
some big business backers of the National Party also want it
scrapped.

For a detailed look at the ETS click [ID:nCARBONAU]

What to watch:

— The Government will review the scheme in 2011 and has
said it will delay full implementation if there is no
international progress on similar schemes.

— Any watering down or undermining of the scheme will
motivate the well-organised and vocal environmental movement
and likely erode National’s ratings. Conversely any tightening
and expansion of the scheme will anger National supporters.
(Editing by Andrew Marshall)

FACTBOX-Key political risks to watch in New Zealand