Boston, MA -- (ReleaseWire) -- 05/05/2014 -- Indicators suggest that the performance of the New Zealand economy remains on a stable trend. However, the combination of uncertainties stemming from a slowdown in the Australian economy as well as a potential for policy vacuum to occur as parliamentary elections draw nearer in November lead us to maintain that growth is likely to moderate in 2014 to 2.7% versus an estimated 3.5% for 2013.
We believe that the Reserve Bank of New Zealand (RBNZ) will hike its policy rate once by 25 basis points at the end of Q114, and subsequently hold its rates at 2.75% for the rest of the year. We believe the rate hike will be largely pre-emptive in nature, in response to cool domestic price pressures that have been on the rise. That said, the subdued, though growing, growth contribution from business credit suggests to us that the central bank will avoid hiking interest rates further, and instead re-focus on cooling the housing market through its macro-prudential rules. Indeed, we note growing signs that the macro-prudential rules are beginning to have their intended effect on housing market.
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V olatile weather and a trend of increasing compliance/regulations will continue to pose risks to New Zealand exports, given the changing composition of its trade with the external world. While dairy exports have surged of late, we believe this is unsustainable, driven mainly by Chinese importers fearing a possible lack of supply as new regulations are set to be implemented in March. Taking a longer term view of things, we believe that the trade balance will record a surplus and continue to head in the right direction as the interest rate hike by the RBNZ to help rein in import consumption, and reduce external liabilities in the banking sector as housing-related lending cools the banking sectors. This will help narrow the current account deficit over the coming years will allow the country to gradually pay back its huge external liabilities and reduce its vulnerability to external shocks.
The National Party remains determined on achieving its goal of returning the fiscal budget to surplus in fiscal year 2014/15. While the issues of housing affordability, drought assistance for farmers and controversial decisions on the country's pull-out from the second commitment period of the Kyoto Protocol remain contentious topics that could affect the ruling party's popularity as it approaches parliamentary elections in 2014. Moreover, rising popularity of the opposition Labour Party suggests that the government will be increasingly pressured to lean towards a more populist platform. That said, we do not see any immediate threat to its ability to formulate policy. We maintain our short-term political risk rating at 84.0 (out of 100), and expect the issue of affordable housing to be one of the key issues in the 2014 elections.
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