Looking For True North

In fact, economists describe the per-
formance of corporate New Zealand in 2000 as the tale of two economies: Companies that were export-based should have been “in-the-money”, while companies with their horizons hitched to the domestic economy were more likely to have struggled.
Total turnover for this year’s Top 200 group is up by 11.9 percent at $84,775,750, while tax paid profit is down 3.1 percent on last year, at $3.8 billion. But, considering the bounce in commodity prices, the speed of Asia’s recovery, strong global economy, modest interest rates, mild labour costs and our currency in free fall, the scorecard given to the export (by economists) sector is showing improvement but must do better.
Economists seldom agree on much. But their prevailing view argues that the notable upswing in primary exports has more to do with improved counter-cyclical conditions (recovery from drought, good growing conditions, better commodity prices) than any fundamental improvements.
Buoyant agriculture and forestry exports, forecast to grow to $3.6 billion in the next few years, are expected to shake New Zealand’s economy out of the doldrums. Government reports expect meat exports to increase from $3.19 billion to $3.52 billion, wool exports to rise from $760 million to $850 million, and dairy exports are forecast to increase from $4.53 billion to $6.08 billion. Exports of other pastoral products (such as hides and skins) are forecast to increase from $900 million to $1.09 billion, forestry exports are expected to increase from $2.93 billion to $4.22 billion, and horticulture exports are expected to jump from $1.75 billion to $1.92 billion by 2004.
Nevertheless, Mark Benseman, head of research with Merrill Lynch, says despite having the most favourable conditions for some time, corporate New Zealand has failed to improve its competitiveness. In other words, the country’s businesses are failing to live up to global report that ranks New Zealand as the seventh most attractive investment market (based on capital supply, people, technology, government, social structure and risks).
Adding insult to injury, says Benseman, is the consensus view that economic conditions will deteriorate next year. He suspects the full impact of the expectant US economy slowdown, (from five percent to three percent GDP growth) will be felt globally. And without significant productivity improvements, Benseman like other economists, concludes that last year’s somewhat misleading 4.8 percent GDP growth (year to June 2000) is unsustainable.
“Asia has admittedly recovered, but much of this has been off low base. And there are lingering concerns over the sustainability of that recovery especially in Japan if the US slowdown is more severe than expected.”
And with so much of New Zealand’s exports still wired to primary produce, he says there’s real risk of global slowdown negatively impacting commodity prices. The single biggest short-term hurdle, says Benseman, is the Northern Hemisphere winter. And while oil prices are expected to bounce back to US$25 barrel, Benseman says it could take up to six months to get back down to this level.
He suspects the Reserve Bank will be forced to cool inflationary pressure with another 25 basis point increase in the official cash rate once retailers raise prices to absorb additional costs. Assuming this accelerates wage pressure, the Reserve Bank could be forced to temper inflation through new round of rate hikes.
Based on the Bank of New Zealand’s forecasts, growth in GDP will slow to just over one percent in the June quarter 2001 then rise above three percent throughout 2002.
The bank’s chief economist, Tony Alexander, believes 20 percent fall in the NZ$/US$ exchange rate this year, higher migration flows, tripling in oil prices from 20 months ago, pullback in housing construction after 24 percent rise in the year to March, plus the Government’s notable “lurch to the left” will help to stunt short-term growth. Especially as consumers and businesses cut spending, investment, and hiring in the face of uncertainty over costs, interest rates and what further policy changes may bring.

Sliding currency
Last August saw the New Zealand dollar fall to new record low on trade-weighted basis to US$39.25. It also fell to new record low against the yen and an eight-year low against the pound sterling. The former negative attitude towards monetary unity with Australia has changed. But the arguments that it would eliminate exchange-rate uncertainty and boost trade with Australia remain unsubstantiated.
The current account deficit ($3.09 billion for the year to August) is expected to keep downward pressure on the dollar for some time. Based on Reserve Bank figures, rising oil prices have hurt the trade balance by as much as $1 billion this year. And with less robust outlook globally, the current account is expected to remain over six percent of GDP throughout next year.

Index shrink
Last year also saw the continued relocation of big cap stocks closer to global markets. Notable heavyweights to leave the NZSE register included: Fay Richwhite to Europe, Nufarm, formerly Fernz Corp, to Australia, St Lukes buyout by major shareholder Westfield (Australia) and BIL’s relocation to Singapore.
In fact, the transfer of Lion Nathan’s primary listing (capitalised at $2.4 billion) onto the ASX means the NZSE has lost third of its market capitalisation in just six years. Meantime, other companies, including Telecom, Michael Hill and Tourism Holdings have hinted that future relocation to Australia is possible option.

Domestic earners
Companies closely wired to the fortunes of the domestic economy but with an offshore cost-base have started to experience earnings and margin pressure. Next year is not expected to get any easier. Especially as many companies come off long-term currency hedging contracts set at more attractive exchange rates.
Sky TV, one of the worst casualties of the currency drop, recorded losses of $26.9 million (after recording post-tax profit of $4.4 million year ago). Robust subscriber growth in the year to June saw Sky TV achieve 27 percent terminal penetration with 377,000 total subscribers. What offset nine percent increase in revenue (which moved Sky TV from 84th to 78th spot on the Top 200 ladder) to $262 million was the exchange rate. It continued to move south at time when much of Sky’s hedging is coming to an end.
Nevertheless, the company still managed to improve its earnings before interest, tax, depreciation and amortisation to $74.1 million, up slightly on last year’s $73.7 million.
Consumer confidence fell over the last quarter. Nevertheless, the latest WestpacTrust McDermott Miller survey shows that more people expect to be personally better off in the next 12 months. And ironically, predicted price rises have spurred pre-emptive upswing in furniture and appliance sales. In fact, Harvey Norman has seen sales up 30-40 percent in the last month (on last year). And while price rises will continue into the new year, economists believe wool and meat payouts to sheep farmers will keep the retail sector stable.
Meantime, Pacific Retailing executive director Stefan Preston says the company’s Noel Leeming and Bond and Bond stores were busier than usual. It was Pacific Retail’s reported $7.7 million after-tax profit at full year to 31 March 2000 on sales of $353 million (compared with loss of $0.81 million for full year ’99) that saw it take top honours as the publicly listed company with the most improved profits.

Corporate activity
The $5 billion sale of the Fletcher Challenge letter stock, Fletcher Paper early April (to Norway-based Norske Skog) momentarily put New Zealand back on the radar of some offshore buyers. But if bonds are any proxy, offshore buyers remain scarce.
In fact, in August the proportion of government

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