The Government is offering to underwrite larger bank loans to businesses via its under-subscribed ‘Business Finance Guarantee Scheme’ (BFGS).
It’s increasing the cap on loans offered under the scheme 10-fold, from $500,000 to $5 million.
It’s also broadening the BFGS to enable businesses to use the loans for purposes beyond cashflow. They can now use the loans for "capital assets and projects related to responding to, or recovering from, the impacts of Covid-19". They can also re-finance up to 20% of their existing debt.
Larger businesses, with annual revenue of up to $200 million, are also eligible. This cap previously sat at $80 million.
And the Government is increasing the maximum term of loans from three years to five years.
If a business defaults on a loan under the BFGS, their bank will follow its normal process to recover the debt. If the debt can’t be recovered, the bank can claim 80% of any shortfall from the Crown.
By shifting the bulk of risk from the bank to the Crown, the purpose of the BFGS is to encourage the bank to lend more freely.
It’s ultimately a bank’s decision whether they lend to a business or not.
While the Government doesn't require the bank to take security, or for the borrower to provide a personal guarantee, the bank can still chose to do so.
RBNZ changes term lending facility
The Reserve Bank has been backing the BFGS by offering to lend banks money at the Official Cash Rate provided they on-lend these funds under the scheme.
Because the Government is increasing loan terms under the scheme, the Reserve Bank is likewise increasing the maximum term of its Term Lending Facility to five years.
Participating banks - ANZ, ASB, BNZ, Heartland Bank, Kiwibank, SBS Bank, TSB, Bank of China and Westpac - have only drawn down $27 million from this facility to date.
$150m lent under $6.25b scheme
Banks have only lent $150 million to 780 customers via the BFGS.
When Finance Minister Grant Robertson launched the scheme in March, when share markets were crashing, he expected businesses to borrow up to $6.25 billion.
The scheme faced issues, as it was announced on the fly before banks were ready to receive applications.
The eligibility criteria was also narrow, so had to be broadened in May to include agricultural businesses and smaller businesses. Robertson also did away with a requirement for banks to take security in some instances.
While Kiwibank Chief Customer Officer for Business, Quentin Quin, said "a whole lot" more customers would now qualify for the scheme, NZ Bankers' Association CEO Roger Beaumont said "uptake will ultimately be driven by demand from businesses".
Reserve Bank Deputy Governor Geoff Bascand last month noted there had been a "material decline in businesses’ demand for credit" (across the board, beyond the Business Finance Guarantee Scheme) over the first half of 2020.
"While demand for loans for working capital from small to medium businesses, corporates and sheep and beef farmers has increased, demand for credit for capital expenditure has fallen significantly," he said.
He casted doubt on the prospect on an immediate uptick, saying: "Businesses’ investment intentions have also fallen sharply, with increased uncertainty around the strength of future demand.
"Some apparent weakening of demand for credit may also reflect perceptions by businesses that credit would not be available or that terms have tightened."
Bascand has repeatedly urged banks to lend, to avoid adding a credit crunch to the economic crisis caused by Covid-19.
Small businesses most in need
Coming back to the BFGS, Treasury in March advised Robertson small businesses, not covered by the scheme, needed support more urgently.
“The pressures will generally emerge first in smaller firms, which have fewer pre-approved precautionary loan facilities. Larger corporates have more options and deeper banking relationships,” Treasury said.
“The banks still have capacity to provide support to their clients, notably large corporates that represent a good credit risk.”
Indeed, the uptake of the subsequently announced, Inland Revenue-run Small Business Cashflow Loan Scheme, which offers unsecured interest-free loans of up to $100,000 to small businesses, has been huge.
The BFGS is available until December 31.
Tibshraeny, J. (2020, August 20). Robertson increases cap on Business Finance Guarantee Scheme 10-fold, extends terms of loans and enables businesses to use loans for capital investment and re-financing. https://www.interest.co.nz/business/106648/robertson-increases-cap-business-finance-guarantee-scheme-10-fold-extends-terms
The Reserve Bank (RBNZ) has agreed to help banks extend the mortgage repayment deferrals they’ve been offering their customers since the end of March.
RBNZ Governor Adrian Orr confirmed this on Wednesday, further to his deputy, Geoff Bascand, a couple of weeks ago saying he didn’t want to see an abrupt end to the offering.
Orr hoped to finalise details with banks next week.
He urged people not to flood banks with inquiries, as the details of what will be offered are still being ironed out.
“As always, an extension is not permanent,” Orr said.
It is ultimately a bank’s decision whether it enables a customer to defer the principle and interest repayments on their mortgage.
What the RBNZ can do is treat the loan as performing, rather than impaired. Impaired loans require banks to hold more capital against them.
Bascand on July 31 said there were $20.6 billion of residential mortgages that had principal and interest payments deferred, and a further $18.3 billion of mortgages that had moved to ‘interest only’ since the onset of Covid-19. This represented 14% of the banking sector’s mortgage book.
Tibshraeny, J. (2020). RBNZ to help banks enable their customers to defer mortgage repayments beyond 6 months; Details expected next week. Retrieved 12 August 2020, from https://www.interest.co.nz/property/106499/rbnz-help-banks-enable-their-customers-defer-mortgage-repayments-beyond-6-months
The Government is extending the deadline for Small Business Cashflow Loan Scheme applications until the end of the year.
The deadline had already been extended to July 24, and will now be pushed out to December 31.
Inland Revenue has administered the distribution of 90,485 loans valued at $1.51 billion.
Under the scheme, small businesses can get unsecured loans of up to $100,000 depending on their size. The loans are interest free if repaid within a year.
To date, more then 1,500 borrowers have repaid almost $4.9 million.
Here is a press release from Revenue Minister Stuart Nash:
" Small businesses are getting greater certainty about access to finance with an extension to the interest-free cashflow loan scheme to the end of the year.
The Small Business Cashflow Loan Scheme has already been extended once, to 24 July. Revenue and Small Business Minister Stuart Nash says it will be further extended to 31 December, to give assurance that business support remains available over coming months.
“The decision to extend the interest-free loan scheme is designed to give confidence to our smallest businesses and keep up the momentum of recovery. It shows the Government is continuing to back them in the post-lockdown environment,” Stuart Nash said.
“It will ensure businesses aren’t under pressure to decide quickly whether the loan scheme is right for them. Extending the scheme will give businesses owners more time to carefully evaluate their situation as our economy keeps opening up.
“The interest-free loans came at just the right time. Businesses with temporary cashflow issues during the lockdown are now taking advantage of one of the most open economies in the world. More than 1,500 borrowers have already repaid almost $4.9 million.
“We want to protect jobs and keep as many businesses afloat as possible. The loans are a useful complement to the wage subsidy. They provide businesses with cashflow support for non-wage costs, while the wage subsidy ensures they keep staff on the books.
“I’m particularly pleased that micro businesses, with between one and five staff, have made good use of the scheme. Around 80 per cent of firms who applied have one to five employees, and just over 90 percent have 10 or fewer staff.
“As at Friday 3 July, 90,485 small businesses had applied for more than $1.51 billion of loans since 12 May. The average value of each loan is modest, around $16,700. But it is much needed working capital to help in a tight spot.
“The loans are a backstop for small and medium businesses who are not able to get the cashflow support they need from banks. Many don’t have a well-established relationship with their bank, or the bank might ask them to put up their house as collateral. That just doesn’t work for these firms.
“The firms are diverse, and most applications are from industries in construction, accommodation, restaurants and cafes, retail trade, transport and manufacturing.
“The loan conditions remain the same. I urge business owners to talk to their bookkeeper, tax agent or accountant, or log onto the MyIR portal, to ensure they take advantage of this government support,” Stuart Nash said.
Terms and conditions – overview
Loans are interest free if repaid within a year.
After one year the interest rate is 3%, from the date of draw-down, for a maximum term of five years.
Repayments are not required for the first two years.
SMEs employing 50 or fewer staff, who were eligible for the original wage subsidy, are eligible to apply for the one-off loan.
The loan amount is $10,000 plus $1,800 per equivalent full-time employee, up to a maximum amount of $100,000. "
Tibshraeny, J., 2020. Small Businesses Have Another Six Months To Apply For An Interest Free, Government-Backed Loan As The Small Business Cashflow Loan Scheme Is Extended. [online] interest.co.nz. Available at: <https://www.interest.co.nz/business/105892/small-businesses-have-another-six-months-apply-interest-free-government-backed-loan> [Accessed 5 July 2020].
Grant Robertson. Getty Images.
Finance Minister Grant Robertson is extending the wage subsidy, committing to investing more in infrastructure and state housing, offering free trades training and throwing the tourism sector a lifeline through Budget 2020.
Robertson has stuck to his word and provided another phase of COVID-19 relief via the Budget, rather than going all out with a huge package - in the context of what is “huge” in the environment we’re in.
The COVID-19 relief schemes announced in the Budget are worth less than the $26 billion of support announced before the Budget (the wage subsidy, business tax changes, loan schemes, benefit increase, etc).
The new schemes are worth $15.9 billion. Robertson has also ring-fenced an additional $20.2 billion in the Budget for yet-to-determined COVID-19 support.
So altogether, he’s put a $62.1 billion price tag on the COVID-19 relief effort.
Treasury forecasts this spend will result in a $28.3 billion deficit in the year to June 2020. In December, it forecast a deficit of only $900 million for 2020.
It forecasts deficits across its entire forecast period, peaking at $29.6 billion in 2021 and falling to $4.9 billion by 2024.
Net core Crown debt is expected to increase from 19% of Gross Domestic Product (GDP) in 2019 to 30.2% in 2020, rising to 53.6% by 2023.
$60 billion of bonds to be issued in year to June 2021
To pay for all this spending, Treasury will have to issue a lot more bonds.
It has hiked its forecast issuance for the year to June 2021 to a whopping $60 billion - six times more than what it forecast in December.
Bond issuance is expected to be $40 billion in 2022, $35 billion in 2023 and $30 billion in 2024.
The Reserve Bank has committed to buying up to $57 billion of New Zealand Governments Bonds over the next year as a part of its QE programme.
In terms of repaying this debt, Robertson said there wouldn’t be major tax changes in this term of government.
Robertson hasn’t committed to directly supporting households with cash payments or further welfare increases through the Budget - as some might’ve hoped. A media package isn’t included either.
Here’s a list of the big-ticket new schemes that make up the $15.9 billion of new COVID-19-related expenditure:
Wage subsidy extension
The 12-week wage subsidy will be extended by eight weeks for businesses that are really struggling.
To date, businesses that have suffered a 30% decline in revenue in a 30-day period between January and June, compared to the same period in 2019, have been eligible.
To get an extension, businesses have to prove they’ve suffered a 50% decline for a 30-day period, compared to last year.
The subsidy will once again be paid in a lump sum and its value will remain the same - $585.80 a week for full-time employees and $350.00 for part-timers.
Some high-growth new firms will also be eligible. Applications will open on June 10.
The extended subsidy is expected to cost $3.2 billion. About $11 billion has already been paid out in wage subsidies.
While this will buy employers and employees more time, Treasury expects the number of people to go on Jobseeker Support and receive Emergency Benefits to more than double, or increase by 158,000 people, between 2019 and 2021.
$3 billion has been allocated towards infrastructure.
This comes on top of the $12 billion announced at the end of last year as a part of the New Zealand Upgrade Programme.
An Infrastructure Industry Reference Group, set up in response to COVID-19 and headed by Crown Infrastructure Partners chair Mark Binns, will in coming weeks advise government ministers on which water, transport, housing, environment and health projects to spend the funding on.
To date, the group has received 1924 applications worth a combined value of $136 billion.
It will be able to draw on the $3 billion announced in the Budget, some of the $4 billion of unallocated funding as a part of the $12 billion Upgrade Programme, and possibly some regular funding allocated towards capital expenditure.
The government is committing to building and buying an additional 6000 public houses and 2000 transitional houses over the next four to five years.
This comes in addition to its existing commitments, and according to Housing Minister Megan Woods, “takes the number of public and transitional houses funded by this Government to approximately 17,000 and represents the largest public housing building programme in recent decades”.
$400 million has been set aside for a Tourism Recovery Fund.
This will largely help businesses pivot towards the domestic and Australian markets. It will also help protect some of the country’s “strategic tourism assets”.
A raft of programmes has been announced to help train people who might’ve lost their jobs.
Included is this is $320 million towards supporting free trades training in “critical industries”.
While the existing first year fees free tertiary education programme is only available to people who haven’t done higher education, this funding will be available to anyone who wants to retrain in a critical trades industry.
Tibshraeny, J., 2020. Budget 2020 Sees Another $16 Billion Allocated Towards COVID Relief Packages, Including An Extended Wage Subsidy; Treasury Forecasts A $28 Billion Budget Deficit In 2020 And A $60 Billion Bond Issuance Programme For 2021. [online] interest.co.nz. Available at: <https://www.interest.co.nz/news/105014/budget-2020-sees-another-16-billion-allocated-towards-covid-relief-packages-including> [Accessed 14 May 2020].
Yesterday we all have heard the news that the Reserve Bank has decided to remove mortgage loan-to value ratio (LVR) restrictions for 12 months, effective from 1st of May. According to the reserve bank the decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the Covid-19 pandemic.
We have summarised few points of what we’ve learned about this decision:
Deputy Governor and GM of Financial Stability Geoff Bascand says the decision was made in line with its financial stability mandate. The Bank reached its conclusion after reviewing a Regulatory Impact Assessment and robust feedback received from submitters over the consultation period.
Views on the proposals were mixed, reflecting both the costs and benefits of borrowing restrictions. Some submitters recognised that removing the restrictions might allow more first home buyers to purchase a home. On the other hand, all locally incorporated banks who responded were in favour of removing LVR restrictions, noting this will allow them to support customers through the impact of Covid-19.
We are yet to hear from the banks about their actual policies. While we think this decision may lead us towards a tighter lending standard, there is no indicating of this until the banks’ next move (which we are also dying to know!). No doubt the removal of the LVRs is great news to anyone who wish to enter housing market at this stage. Despite the changes, it certainly creates opportunities for both buyers and sellers in this tough period, as well as helping to soften the downturn. Has it open up opportunities for existing property owners to release equity? Yes indeed!
Don’t hesitate to give us a call or online chat if you wish to discuss further, our experienced team will be more than delighted to analyse the situation and recommends upon your request.
We will update as soon as we hear from the banks so watch this space!
From left: Iain Lees-Galloway, Grant Robertson, David Clark
The Government is pledging to inject $12.1 billion into the economy in what it called its “most significant peace-time economic plan in New Zealand history”.
This is equivalent to 4% of gross domestic product (GDP), which is greater than the response to the 2008 Global Financial Crisis, and greater than Covid-19 relief packages announced in Australia, the UK and the US.
The bulk of funding - $5.1 billion - is expected to go to wage subsidies for businesses that can show a 30% decline in revenue for any month between January and June 2020.
Eligible employers will be paid $585.80 a week for full-time employees and $350 per week for part-timers. The subsidy will only be available for 12 weeks at this stage and support will be capped at $150,000 per business.
Robertson said the $5.1 billion figure was predicated on the assumption half of businesses will use the subsidy.
The second largest bundle of funding, worth $2.8 billion, will go towards an income support package.
This includes a permanent $25 per week increase in all main benefits from April 1.
The third largest amount of money, $2.1 billion, will go towards reinstating depreciation and deductions for commercial and industrial buildings.
Other support measures include waiving interest on some late tax payments and a $600 million support package for the aviation sector.
Finance Minister Grant Robertson said there are "ongoing discussions" underway between Air New Zealand and the Government, which is a majority shareholder.
Furthermore, $500 million is being put towards boosting health resourcing.
This is only the first phase of support that will be provided.
The Government is still working on how larger or more complex businesses that fall out of the scope of this package will be assisted.
Officials are also meeting with banks to discuss the potential for future working capital support, including in the form of loan guarantees for businesses that face temporary credit constraints.
Robertson said preliminary forecasts indicate GDP growth for the year to March 2021 is expected to be -1% with the package. Without the package, it would’ve been -3%.
Robertson said New Zealand’s net core Crown debt is expected to breach the 15% to 25% of GDP target range in the near-term. Debt to GDP was 19.5% at the latest reading. Robertson noted his Budget Responsibility Rules have a caveat for a "major economic shock or crisis".
He warned New Zealand should prepare for a number of budget deficits, with Budget 2020 being recast as a "recovery budget".
“This is the rainy day that we have been planning for,” Robertson said.
“Any measures the Government takes must be timely, fiscally sustainable, targeted to those who need it, and proportionate to the level of economic shock…
“Today’s economic package is all about cashflow and confidence.”
The forecast 2019/20 New Zealand Government Bond (NZGB) programme is now set $3 billion higher than forecast at the Half Year Economic and Fiscal Update, at $13 billion.
$7.5 billion of bonds have already been issued in the fiscal year to date. The forecast borrowing programmes for subsequent years are currently unchanged.
However, Treasury expects increases to programmes for future years will be necessary. It will provide updated forecasts alongside Budget 2020, to be released on May 14.
BusinessNZ CEO Kirk Hope said the package will "substantially help businesses keep operating through the period of the coronavirus outbreak".
He said the wage support and tax measures were well-focused on key areas of need.
The Council of Trade Unions president Richard Wagstaff said: "This package provides an immediate boost to get through these challenging times.
"Ensuring that working kiwis, including those working as contractors or casuals, are financially supported so that they can self-isolate and take sick leave, is tremendously important. Employers have a pivotal role to play in responding to the impacts of COVID-19 and slowing down the spread. The government is doing its bit - now business and employers must do theirs."
Tibshraeny, J., 2020. First Phase Of Govt's Covid-19 Support Package Worth 4% Of GDP; Includes Wage Subsidies, Benefit Increases And Depreciation Deductions For Commercial And Industrial Buildings. [online] interest.co.nz. Available at: <https://www.interest.co.nz/news/104095/first-phase-govts-covid-19-support-package-worth-4-gdp-includes-wage-subsidies-benefit> [Accessed 18 August 2020].
The Reserve Bank of New Zealand (RBNZ) appears to be hosing down speculation of an Official Cash Rate (OCR) cut coming before its next scheduled review on March 25.
This comes in a statement from the central bank on Wednesday, and is despite rate cuts from the Reserve Bank of Australia and US Federal Reserve this week in response to the mounting negative economic impact of the coronavirus crisis.
The statement says Governor Adrian Orr will make a short speech, to be released on March 10, on high level principles around how the RBNZ would assess and use unconventional monetary policy tools if it felt they were ever needed.
"The principles and speech will not discuss current economic conditions or the Reserve Bank’s outlook for the Official Cash Rate (OCR). The Reserve Bank’s next OCR decision is scheduled for March 25," the Reserve Bank said in bold in its statement, linking to the OCR page on its website.
"The Bank remains prepared in its business continuity role to ensure a well-functioning financial system, including ongoing consumer and business access to credit and cash, liquidity to the banking system and a stable payments and settlements system," the Reserve Bank says.
On Tuesday the Reserve Bank of Australia (RBA) cut its cash rate by 25 basis points to just 0.50% to "support the economy as it responds to the global coronavirus outbreak." And overnight the Federal Reserve cut its benchmark rate, the federal funds rate, by 50 basis points to between 1% and 1.25% in an emergency, out of cycle move.
The OCR currently sits at 1%, where it was left when most recently reviewed by the RBNZ on February 12.
New Zealand bank economists are aligning in predicting OCR cuts, with Kiwibank's economists on Wednesday joining the chorus, suggesting a 50 basis points cut this month, adding financial markets are now pricing in the move, and a 0.25% OCR end point.
However, Kiwibank's economists note monetary policy is a blunt tool.
"Cutting the cash rate is like a surgeon taking a broadsword, when a scalpel is required. [Government] fiscal policy is the most effective, targeted, response. The Government is targeting the industries most at risk, and will be judged on the size and effectiveness of the response. It’s essential to backstop business when faced with recession. And no Government will be criticised for supporting industries devastated by seizures in trade," Kiwibank's economists say.
The last time the RBNZ made an emergency out of cycle OCR cut was on September 19, 2001, when the OCR was reduced by 50 basis points to 5.25%.
The RBNZ detailing its thinking on unconventional monetary policy will fulfil a long standing commitment from the central bank. In 2018 the RBNZ detailed five options available to it should future economic conditions require the OCR be reduced to zero. They are moving the OCR into negative territory, buying domestic and foreign government bonds, purchasing interest rate swaps, and providing long-term lending facilities for banks.
US Fed's rate cut 'unjustified'
Meanwhile BNZ head of research Stephen Toplis has labelled the Fed's rate cut "unjustified."
"There are only two reasons why one should deliver an 'emergency' cut: when the financial system is in immediate threat and needs rescuing from failure; and when there is a one-off shock that requires a central bank to deliver some form of confidence boost. A pandemic is neither. At this stage there is no indication that the financial system is in imminent danger. And Covid-19 is not one off in nature nor can its impact on confidence be offset by lowering interest rates," Toplis said.
"The only other rationale for lowering rates is for cyclical reasons. What we are witnessing now is not a standard cyclical event. And, with the possible exception of instantaneous confidence impacts, monetary policy tends to operate with a 12 to 18 month lag. That will most likely be the very time that economies will be recovering from this shock anyway."
"If anything the Fed’s response will simply add to the panic that is brewing around the world. Moreover, it brings the Fed that much closer to a state where it has no options long before the virus has taken hold in the US. The Bank of Japan and European Central Bank already find themselves in this position with the Bank of England not far behind," Toplis said.
The role for central banks at a time like this is to respond if the banking sector freezes and, if it is to provide stimulus, do it when that stimulus has a chance of being effective such as when the peak in the virus’ impact is reached and the economy requires help to nudge it in the right direction, Toplis suggests.
"Emergency intervention by central banks should have the same basic premise as currency intervention - only do it if there is a very real chance that it will succeed."
"Much of the rational for the Fed’s move seems to have been to support the equity market and avoid the implicit tightening that a fall in equity prices is alleged to have. But the equity market has been exceptionally strong for a protracted period of time and had only corrected to the still elevated levels of a year earlier anyway. More importantly, future equity prices should be determined by an earnings outlook that is clearly deteriorating. No amount of rate cutting will change that earnings outlook in the current environment. The only thing that the rate cuts might achieve is to encourage people to take heightened risks investing in assets that are, arguably, already being unsustainably propped up by record low interest rates," Toplis said.
In contrast to the Fed, Toplis said the RBA acted at its normal scheduled meeting time, cut rates by only 25 basis points, and offered further stimulus if needed but didn’t seem in any hurry to do so.
"Most importantly, there was probably adequate economic rationale for the RBA to cut anyway given inflation vulnerabilities to target and that Australia’s unemployment rate had ticked up to 5.3% and looked to persist in the wrong direction," he said.
The RBNZ's options
In terms of the RBNZ, Toplis said it has four options. They are:
·Cut rates immediately
·Wait until March 25 and cut 25 basis points
·Wait and cut 50 basis points
·Wait and do nothing.
"We think the RBNZ’s starting point needs to be considered here. The unemployment rate is at 4.0%. Even a relatively sharp shock to the economy could leave the rate within the 4.1% to 4.7% band that the RBNZ considers to be its possible NAIRU [non-accelerating inflation rate of unemployment] range. Inflation is near its target."
"Additionally, the NZ dollar is already acting as an automatic stabiliser in these uncertain times. Were the RBNZ to take a different stance to the Fed and RBA, it could probably cope with a modest appreciation in the NZ dollar from current levels," said Toplis.
He added that RBNZ Deputy Governor, Christian Hawkesby, last week said cutting interest rates was the wrong response to coronavirus.
"It was for these reasons that we had the view the RBNZ would not cut rates at its next meeting. But clearly things have changed - at least in the world of global central banking. Given market pricing, and the frenzied activity elsewhere, it is going to be very difficult for the RBNZ to sit on its hands, so we are formally shifting to the view of the Bank cutting its cash rate to 0.75% on March 25 with the possibility of a further cut in May," Toplis said.
"The other options should not, however, be ruled out in such emotionally heated times. We do, nonetheless, believe the rationale for a more aggressive stance than our assumption is not warranted. To start with, there is no need to panic and do something now. It won’t make a blind bit of difference if the RBNZ reacts in three weeks’ time rather than today. A knee-jerk reaction now risks generating more angst than it would fix."
Could the RBNZ be a 'voice of reason in an increasingly panic-driven world?'
Given the RBNZ has expressed reluctance to cut rates then a 50 point move would be a major over-reaction, Toplis added, noting the RBA only cut 25 basis points with greater justification for going further. He went on to say the RBNZ could be the voice of reason in a panic-driven world.
"There is a very real opportunity here for the RBNZ to be the voice of reason in an increasingly panic-driven world. How the Bank behaves through this crisis will define it in history. We are only forecasting a rate cut because we feel the RBNZ will think it has no choice. Perhaps we are underestimating the combined gravitas of the new RBNZ committee and they might just surprise us all by buying the central bank here more time. Were they to do this, we would be the first to commend their actions despite it messing up our revised interest rate expectation," said Toplis.
"We want to be clear, here, that we are not underestimating the impact that Covid-19 will have on the economy. Very early on in the piece we stated that a technical recession was a distinct possibility. The probability of such is increasing by the day. But, more importantly, it is becoming even more apparent that the Gross Domestic Product growth path will not, as we had warned, follow a V-shape but rather a protracted and deep U. The RBNZ will know this too. Its Monetary Policy Statement forecasts were being put together when the Coronavirus impacts were very contained and its V-shaped forecast could never be anything more than a quick and nasty assumption."
"So, when the RBNZ does publish its next set of forecasts it is inevitable that its growth profile will be weaker and its unemployment profile higher. Both of which would argue for lower interest rates, in a standard modelling sense. But, how would lower interest rates help? In this environment: people won’t go out and spend more; and heightened business uncertainty will mean that investment activity will not respond positively either," Toplis said.
"This begs the question as to what central banks and governments should do in this sort of scenario. The truth is there is very little that they can do except be the proverbial ambulance at the bottom of the cliff."
"The RBNZ can provide liquidity if need be and closely work with the banking sector to ensure that systemic risks do not develop. One option in this environment might be to slow down the speed at which the banking sector needs to meet its new capital requirements. In particular, perhaps, delay the starting time for banks to move closer to standard models. This might reduce the possibility that the banking sector feels pressured to reduce lending," Toplis said.
What the Government should do
In terms of the Government, Toplis suggested it needs to:
·Educate the public about the impending risks
·Focus aggressively on bolstering resources going to the health sector
·Provide short term assistance to businesses with cash flow difficulties by such means as ensuring government payments to suppliers are timely and offering selective tax holidays
·Ensure that folk who lose their jobs, or who can’t attend work for an extended period of time, have access to benefits they are entitled to in a timely fashion
·Ensure that the infrastructure of government is maintained.
"We are not epidemiologists or medical professionals so we can offer no insight as to the likely spread of Covid-19 in New Zealand. We can, however, say with certainty that its global impact will get much worse before it gets better and that there is a realistic chance of a significant domestic outbreak that will cause serious economic and social dislocation," said Toplis.
"That said, we cannot stress enough that whatever the impact it will pass. Covid-19 is unlikely to still be the world’s biggest fear in 2021. Consequently, it is imperative that everyone is prepared to deal with the stresses that this pestilence brings, accept what can be achieved but also be resigned to what can’t. All the while ensuring that knee-jerk actions will not prove detrimental when all of this is eventually behind us."
Vaughan, G., 2020. Finance Minister Grant Robertson Says New Zealand Is In A Strong Position To Respond To The Impacts Of Coronavirus. [online] interest.co.nz. Available at: <https://www.interest.co.nz/news/103820/finance-minister-grant-robertson-says-new-zealand-strong-position-respond-impacts> [Accessed 22 January 2020].
Finance Minister Grant Robertson says New Zealand's in a strong position to stand up to the economic and health impacts of coronavirus, and said in a worst case scenario "immediate fiscal stimulus to support the economy" may be considered.
In a speech on Thursday Robertson noted it was "welcome" that there has not yet been a case of coronavirus in NZ. Nonetheless he said health experts advise it remains a high probability that NZ will have a case at some point. The Government has the capacity and ability to "do what it takes," he said.
"Beyond the public health response, we are taking a whole-of-government approach to managing the outbreak and planning for further scenarios. A key part of this is our planning for the economic impacts of the virus," Robertson said.
"We go into this situation with the economy in good shape. We are in a strong position to stand up to the economic and health impacts of coronavirus. Looking across fiscal and monetary policy, our labour market, consumer and business confidence readings and our housing market, the economy showed solid signs of improvement in late 2019."
"We go into this with our official interest rate higher than many other advanced economies – our Reserve Bank’s OCR at 1% is above Australia and the UK at 0.75%, and there are negative rates across Europe, said Robertson.
"We go into this with very low Government debt compared to the rest of the world. Credit ratings agency Moody’s recently reported that New Zealand’s Government debt position is significantly lower than other countries with its top Aaa rating."
"And we go into this situation off the back of our Government’s announcement of additional infrastructure investment in roads, rail, schools and hospitals under the New Zealand Upgrade Programme. We are investing to support, grow and modernise our economy," Robertson added.
"New Zealand is in a strong position to respond to the impacts of coronavirus."
A high level of uncertainty
Nonetheless Robertson acknowledged there's a high level of uncertainty about what will unfold.
"It is not possible for anyone at this stage to give definitive answers to significant questions, such as: How long will it last? What will the global reach be? How deep will the impact be felt?"
"But while we look for answers for those questions, we can say some things with certainty. This will have a serious impact on the New Zealand economy in the short term," he said, highlighting the impact on tourism and the tertiary education sector with estimates of about 40% of foreign students not travelling to NZ.
"It is obvious that if the docks in China are shut down because workers are not able to get to work, then this will impact New Zealand’s log and food exports. Although I will add that we are starting to hear reports of some shipments getting through. Chinese authorities are also prioritising food shipments into China, which is positive for a country like New Zealand," Robertson said.
"We also know that the supply chain disruption in China is having some effects here in New Zealand, where domestic companies rely on imports from China that are not moving at this time. Very early, we began speaking to industry groups about how we could help them respond to the initial impacts of coronavirus."
Three potential scenarios outlined
Robertson said current international analysis of the economic impacts from coronavirus focuses on a scenario where the virus is contained and there is a short, sharp impact on the global economy in the first half of 2020, before activity returns to normal levels.
Within NZ an Economic Advisory Group led by the Treasury and including the Reserve Bank and the Ministry of Business, Innovation & Employment is assessing three scenarios:
Scenario one predicts a temporary global demand shock where there's a temporary but significant impact on the NZ economy across the first half of 2020, before growth rebounds in the second half as exports return to normal.
The second scenario is based on a longer lasting shock to the domestic economy, as the global impact feeds through for a period of time, and where there are cases of coronavirus in NZ.
And the third scenario is planning for how to respond to a global economic downturn if the worst case plays out around the world, and there's a global pandemic, Robertson said.
"We believe it is sensible and responsible to plan for these multiple scenarios. It does not mean we are predicting them. But it means we can continue to act swiftly and decisively as the impacts of coronavirus on the global and domestic economies become clearer, so that we can support Kiwis and New Zealand businesses," said Robertson.
"Our officials here are actively monitoring this situation, drawing on all data and analyses that they can to adjust our assumptions and forecasts. This includes administrative data that might provide more timely signals than traditional economic indicators which are reported with a lag."
"It also includes high-frequency data from China that economic analysts around the world are keeping tabs on – ranging from coal consumption to air pollution levels and traffic jams in Chinese cities to monitor activity there," said Robertson.
"We are in a good position to handle the situation, however it develops."
The second scenario would see the domestic economy experiencing a longer period of slower growth, throughout 2020, due to the global effects of coronavirus.
"Under this scenario, global uncertainty about the worldwide spread and containment of the virus causes deeper impacts on directly exposed sectors, as our trading partners feel the effects of coronavirus. We would expect to experience a decline in visitor arrivals from other markets outside of the temporary travel ban due to the economic impact that the virus has in other countries – like what we’re seeing now with South Korea," said Robertson.
"These external effects lead to broader indirect impacts across the domestic economy, with business and consumer confidence falling and the subsequent impact on investment and spending decisions."
Potential for fiscal stimulus
In scenario three, where the virus outbreak becomes a global pandemic leading to a global downturn or a global recession, "it may be necessary to consider immediate fiscal stimulus to support the economy as a whole and businesses and individuals through this period," said Robertson.
"I hasten to add that we are not predicting this scenario. But we are doing the planning for it. I also remind you that these scenarios are all temporary. The effects of this virus will pass. We are in a strong position to handle these scenarios."
"We have the capacity and ability to do what it takes," Robertson said.
'Talk to your bank'
Bank lobby group the New Zealand Bankers' Association says businesses and individuals financially affected by coronavirus should talk to their bank.
“We’re aware that some businesses, particularly small to medium sized ones, are being financially impacted by this unfolding global issue. The same may apply to individual customers working in sectors directly affected. Banks can offer affected customers support,” says New Zealand Bankers’ Association chief executive Roger Beaumont.
“The sooner you talk to your bank, the better placed they are to help you. Good two-way communication between customers and their banks is essential to helping get through financial stress. Depending on your circumstances, there are a number of ways in which banks can help.”
Beaumont said potential measures to assist bank customers include:
·Reducing or suspending principal payments on loans and temporarily moving to interest-only repayments
·Helping with restructuring business loans
·Consolidating loans to help make repayments more manageable
·Providing access to short-term funding
·Referring individual customers to budgeting services.
Vaughan, G., 2020. Finance Minister Grant Robertson Says New Zealand Is In A Strong Position To Respond To The Impacts Of Coronavirus. [online] interest.co.nz. Available at: <https://www.interest.co.nz/news/103820/finance-minister-grant-robertson-says-new-zealand-strong-position-respond-impacts> [Accessed 22 January 2020].
ANZ has just announced another cut on rates on some of their fixed-term mortgages.
From 15th October ANZ offers special rates on six-month, one-year and two-year terms. Rates starts as low as 3.45%.
"The current extreme low interest rate environment not only represents an opportunity for new home buyers to enter the market, but for existing home loan customers to pay off as much of their debt as possible." said by ANZ bank Acting Managing Director Ben Kelleher.
The official cash rate (OCR) is at 1% and economists predict it could drop to 0.5% before it increases again.
There is no update in mortgage rate and term deposit rate changes this week however, we can update couple of interesting facts we have came across.
- Yesterday, Westpac announced cuts to its KiwiSaver fees, cutting the monthly admin by more than half to $1 a month, and the management fees.
- Average rents declined in the third quarter of the year but remain up by +6.5% compared to a year ago. Auckland rents were up.
Watch closely for more updates and exciting news coming up :)