Of Interest

Following the spate of extreme, damaging and costly weather events in the North Island this year we shouldn't let a big disaster go to waste, Tower Insurance CEO Blair Turnbull argues.

Speaking in the latest episode of the Of Interest podcast, Turnbull says the realisation from frequent and extreme weather such as the Auckland anniversary floods and Cyclone Gabrielle is that we are seeing climate change, and we need to understand it better and adapt.

"We're starting to rethink how to respond to some of these flood events. One thing's very clear, Mother Nature always wins. So we can't just sit there and try and pipe away this excess water, we have to think differently," Turnbull says.

Auckland Council's Making Space for Water programme to help manage floods is "quite innovative," he adds.

Turnbull says the spate of extreme weather events is changing the way reinsurers, who provide insurance for insurers, look at New Zealand, which will lead to further price rises.

"This has been a bit of a surprise to some of them [reinsurers]," Turnbull says.

Parametric insurance and risk based pricing are two ways Tower's responding to potentially higher reinsurance costs.

Parametric insurance is a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.

Turnbull says a parametric insurance pilot in Fiji has gone well, with Tower set to also start offering it in Samoa and Tonga and likely NZ to.

"We do think it [parametric insurance] has application for here in New Zealand in areas that could have higher propensity for flooding and cyclones and where traditional comprehensive insurance may become too expensive for some households and communities. We would like to explore the option for offering parametric cover," says Turnbull.

"We're talking to a couple of iwi groups, which is quite exciting and they're giving us feedback."

Tower's risk-based pricing, linked to the risks of individual homes, already includes earthquakes and floods, and is being extended to cover coastal inundation and slips. Turnbull says risk-based insurance for drivers, using telematics, could also follow.

Meanwhile, Turnbull suggests NZ is moving closer to having areas regarded as uninsurable by private sector insurers after the recent run of extreme weather events.

"I think we are [closer than a year ago] ... I think it's really important that as a country, as insurers, as communities, that we do acknowledge them [the weather events], [and] don't let that big disaster go to waste. It's time to adapt and get out of the way of where there are flood prone areas," Turnbull says.

In the podcast he talks about other issues, including Tower's recent interim financial results, how the insurer has responded to high inflation, the future for insurance, and the response to Cyclone Gabrielle and North Island flooding.

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

New Zealand's record current account deficit is significant in both a NZ and global context, and there are interesting comparisons to draw between 2023 and 2011 when S&P Global Ratings last downgraded NZ's sovereign credit rating, S&P's Martin Foo says.

The current account deficit, reflecting we're spending more than we're earning overseas, swelled to its highest dollar value of $33.8 billion last year.  As a percentage of Gross Domestic Product (GDP), showing its significance in the context of NZ's overall economy, it weighed in at 8.9%, the highest it has been since the 1970s.

Foo, director and analyst at credit ratings agency S&P Global Ratings, spoke to interest.co.nz in the latest episode of the Of Interest podcast about this and more.

Foo talks about why NZ's current account deficit is so big, why it could get worse before it gets better, what a country can do to try and reduce a current account deficit, explains S&P's existing NZ sovereign credit ratings, why NZ scores lowly in S&P's external assessment, NZ's international investment position, how S&P would signal a potential downgrade, whether an upgrade's possible, and S&P's assessment of last week's budget.

*PLEASE INSERT AUDIO HERE*

 "We [S&P] are raising our collective eyebrows and raising some serious questions. The current account deficit is an indicator of underlying economic conditions, or underlying fiscal conditions, and we have to think about what's causing these record imports," Foo says.

"New Zealand's external metrics do look quite weak compared to other comparable countries right now. As a simple example, last month the International Monetary Fund released its world economic outlook and the current account deficit at 8.9% of GDP was actually the largest of any advanced economy with the possible exception of Greece. Perhaps what's more interesting is the IMF is projecting that the deficit will stay quite elevated at about 8.6% of GDP in 2023, which would make New Zealand the worst performer on this particular metric."

S&P upgraded NZ's sovereign credit ratings in February 2021. They're now an AA+ foreign currency rating and a AAA local currency rating, both with stable outlooks. They're the highest and second highest credit ratings S&P issues. (In the podcast Foo explains what foreign and local currency ratings are).

S&P last downgraded NZ in September 2011, lowering the foreign currency rating one notch to AA, and the local currency rating a notch to AA+. Foo says there are some interesting comparisons between then and now.

That was a long time ago and the world was a very different place but there are some striking similarities to what's happening today. 

"New Zealand was facing a rising current account deficit and that was occurring in conjunction with earthquake related spending pressures, as well as fiscal stimulus to support growth. And if you look at today's situation, if you substitute the word 'earthquake' with the word 'cyclone,' then you have a situation that's airily familiar."

Nonetheless Foo says S&P still sees NZ as having "very, very strong credit metrics."

"We currently have New Zealand on a stable outlook. If we were to move we would typically signal that with a change of outlook, perhaps to negative. Right now we're still comfortable with the stable outlook," Foo says.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Economists Eric Crampton of the New Zealand Initiative and Craig Renney of the Council of Trade Unions share their views on what Budget 2023 got right and what it got wrong.

Crampton explains why giving subsidies to the game development industry is a sort of mutually assured waste of taxpayer money, and how tobacco tax could mean the government books take an extra year to return to surplus. 

Renney tells us how S&P Global Ratings said NZ government debt was not unlike a designer Hermès handbag and makes the case that Budget 2023 is not as inflationary as some have claimed. 

But neither think that it matched up to its 'No-Frills' moniker.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Another round of political brinkmanship is playing out in Washington DC over the United States government's debt ceiling.

There are predictions of global financial chaos if Democrats and Republicans can't agree on a deal to raise or suspend the debt ceiling, currently at US$31.4 trillion, soon. Treasury Secretary Janet Yellen says if something's not done the US government won't be able to meet its financial obligations as soon as June 1. That includes salaries for government employees and the military, pensions and making interest payments on government debt.

President Joe Biden says if the US defaults on its debt "the whole world is in trouble."

There is, however, a silly sounding yet simple and constitutional solution available. It involves minting a very high value platinum coin. 

In the latest episode of interest.co.nz's Of Interest podcast I spoke with Rohan Grey, Assistant Professor of Law at Willamette University's College of Law in Oregon, about the debt ceiling, the platinum coin and more.

Grey explains how and why the US federal government came to have a debt ceiling, when the debt ceiling become a political football, what the idea of minting a US$1 trillion platinum coin is all about, and where it comes from.

"It sounds ridiculous, it almost shocks the conscious, but it is legal," Grey says, adding that the US government actually minting the coin would be "a public education moment."

"If there's one thing that the president and the Treasury Secretary are not allowed to do it's default. There's no constitutional authority to default. The 14th Amendment says you cannot do it, the existing laws say you cannot do it, Congress did not give them an option to default. They gave them multiple pathways to finance spending and they told them they had to spend. So at the end of the day even if Biden really hates it, even if it really makes him feel stupid and silly, the coin isn't a choice. It is the last option before an unthinkable, prohibited option," says Grey.

"What a coin represents in my opinion, is the bringing back of the budget to a level that the public can understand. No complicated bond markets, no complicated debt instruments, it's something that you can talk to your seven year-old about. And to me it's only silly to people who think sounding very serious is being very serious."

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

The cost of the Reserve Bank's buy-up of government bonds during its 2020-2021 quantitative easing (QE) programme has come into focus as interest rates have risen.

Notably the balances of exchange settlement accounts held by banks and others with the Reserve Bank soared as the central bank bought government and local government bonds off banks in the secondary market, peaking at $56.4 billion last December after averaging about $7.5 billion in the decade up to 2020.

Holders of the settlement accounts receive interest on their deposits at the Official Cash Rate (OCR), which has risen to 5.25% since the 0.25% Covid low.

Treasury says its best estimate of the expected direct fiscal loss from the Reserve Bank's QE, its so-called Large Scale Asset Purchase (LSAP) programme, is about $10.5 billion. It notes this has been partially offset by the fiscal benefits of the LSAP through stabilising the NZ government bond market and providing economic stimulus at a time of heightened uncertainty in 2020.

From a whole-of-government perspective Treasury says the LSAP withdrew fixed-rate government bonds from the market and replaced them with floating-rate settlement cash balances. This means the Crown has more floating rate liabilities, becoming more exposed than it would have been to rising interest costs.

In the latest episode of interest.co.nz's Of Interest podcast Paul Tucker, former deputy governor of the Bank of England and now a research fellow at the Harvard Kennedy School, speaks about the impact of QE on the public finances. Tucker's also the author of a recent paper called Quantitative easing, monetary policy implementation and the public finances.

"This has turned out to be a bad thing in many countries specifically because of how low world interest rates were during 2020 and 2021. Although it was essential for governments to protect families and protect small firms from the ravages of Covid and economic lockdown during 2020 and 2021, they would actually have done better to finance that by borrowing in the markets because long-term interest rates were remarkably low for states with a good credit rating, which includes my own and includes yours," says Tucker.

"Instead they exposed themselves to the path of short-term central banking interest rates."

Speaking to interest.co.nz on Thursday, BNZ Chief Financial Officer (CFO) Peter MacGillivray said BNZ currently has about $10 billion in its settlement account. And on Friday ANZ NZ CFO Amanda Owen said her bank's settlement account balance would be bigger than BNZ's.

Asked whether receiving interest at the OCR would now be lucrative for settlement account holders Tucker says; "Broadly yes. It depends on whether they pass it on to their customers. The banks are sitting on this large pile of cash with the central banks and suddenly that's paying a healthier rate of interest."

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

New Zealand's $33.8 billion record current account deficit was a shock to overseas investors in NZ government bonds, but is ultimately probably not something people will lose a lot of sleep over, says Sydney-based interest rate strategist Martin Whetton.

Statistics NZ last month reported the annual current account deficit reached $33.8 billion last year, equivalent to 8.9% of gross domestic product, the worst ratio since measurement began in 1988. 

In response credit rating agency S&P Global Ratings told Bloomberg the deficit was; "catching our attention, the persistently weak and worsening current account position of the New Zealand sovereign, particularly given that it has been quite weak the last year or two and our forecasts are for it to narrow.” This led to fears of a potential downgrade to NZ's S&P sovereign credit rating.

In terms of overseas investors who buy NZ's government bonds, Whetton says the current account deficit is something they'll look at.

"And obviously when that number came out recently there was a bit of a shock to the market because there was the immediate response from S&P that suggested that the rating could be under threat as a result," Whetton said in the latest episode of interest.co.nz's Of Interest podcast.

"A decision on that can take some time, And I think if we just cool down for a moment and say 'New Zealand is in a very solid position, it has got a strong economy, and it does have very low debt-to-GDP at the government level,' then it's not something that people will lose a lot of sleep over."

"There are investors who simply have hard mandates around credit rating, but when you're starting at the top of the tree in ratings, very few people would not be able to buy New Zealand [government debt] so that's not an issue if there was a downgrade," said Whetton.

S&P has an 'AAA' sovereign domestic currency rating with a stable outlook on NZ. This rating assesses the country's capacity to meet obligations denominated in the NZ dollar, which almost all government debt is issued and repaid in. (See more on NZ sovereign credit ratings here, and credit ratings explained here).

In the podcast Whetton also talks about the attraction to overseas investors of NZ government bonds, the NZ yield premium over other similarly rated bonds, the big issues in sovereign bond markets at the moment, why he thinks NZ government debt is at a sustainable level, and finally how countries get into trouble with their sovereign debt.

"Typically it's borrow in a foreign currency. The benefit of countries like Australia, New Zealand, the UK, Japan, Italy, [is we] borrow in our own currency. So we pay it back in our own currency and you can always print more of that currency. Now the purists would recoil at that comment and I understand why because it can be inflationary. But if you need to solve it that way you can," Whetton said.

"You also, as we in Australia and New Zealand have found in the last couple of years, can get your central bank to buy [government] debt. I would not say that is the way you do things. Having a fiscal programme that is credible over the medium to long-term is probably your best starting point."

*This episode follows a recent one with Kim Martin, Director of New Zealand Debt Management which is the Treasury unit responsible for managing the Government's debt. And you can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

To boost New Zealand's ability to fight inflation Auckland University's Tim Hazledine suggests broadening the Commerce Commission's powers, looking at extending the Pharmac concept, and cutting Goods & Services Tax (GST) to 10%.

Hazledine, Emeritus Professor of Economics at the University of Auckland, discusses this and more in the latest episode of interest.co.nz's Of Interest podcast.

Following Thursday's Consumers Price Index (CPI) release from Statistics NZ, Hazledine's assessment is the inflation tide is going out.

"It's receding, which is good. The question is whether it would've gone out anyway or whether King Canute in the Reserve Bank had anything to do with it," says Hazledine.

His key evidence for improvement is the 1.2% March quarter CPI figure, down from 1.8% in the March quarter last year.

"That's the indicator that you really should be interested in and that's encouraging."

Nonetheless Hazledine says there are signs a recession is going to happen, and suggests we ought to be looking at policy instruments to support the Reserve Bank, which has "a monopoly on inflation fighting almost by statute."

This includes expanding the Commerce Commission's mandate so it becomes a price watch commission, potentially even with a mandate to roll back price increases if they think they're not justified.

"They really have to be finding out about prices everywhere and investigating costs, investigating pricing practices," says Hazledine.

He also promotes the concept of tripartite pay talks, seen in parts of Europe, between the Government, unions and employer groups, exploring an extension of the Pharmac model to source other products and services at lower prices from international suppliers, and reducing GST to 10% from 15%.

"That [a GST cut] would immediately cut consumer prices...The biggest single beneficiary from inflation in New Zealand is the Government."

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

New Zealand Debt Management, the Treasury unit responsible for managing the Government's debt, isn't seeing any notable increase in demand for its inflation-indexed bonds despite high inflation both in New Zealand and overseas.

Speaking in interest.co.nz's Of Interest podcast, Kim Martin, Director of New Zealand Debt Management (NZDM), says you might expect more interest in inflation-indexed bonds when inflation is high. Statistics NZ releases its Consumers Price Index for the March quarter on Thursday, which is expected to show inflation above 7% for the fourth consecutive quarter, at a time when there has also been high inflation overseas.

"Inflation indexed bonds have a coupon that is indexed to inflation so the value of your regular coupon is protected against that high inflation period...We have seen our inflation indexed bonds outperform their generic equivalents over the past couple of years, but we haven't seen any significant change in demand," Martin says.

"We've heard a few rumours about retail demand for inflation protection products, but we really haven't seen anything that's of particular note, which is quite interesting when you think about how topical inflation has become in recent times."

In the podcast Martin also talks about the impact of the Reserve Bank's quantitative easing, through which it bought around $50 billion worth of NZ government bonds, on the bond market and what might've happened without it.

She also talks about how NZDM borrows and repays money, what options it offers for retail investors, how borrowing decisions are made, whether you can trace proceeds from individual bond issues to government expenditure, what currencies NZDM borrows in, who it competes with for investor interest, the importance of registered tender counterparties, the value of strong sovereign credit ratings, and the key risks for NZDM.

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

Excess profits are unlikely to be a significant driver of inflation as business profitability has been declining as inflation has risen, an economist says. 

Speaking on the Of Interest podcast, principal economist at the New Zealand Institute of Economic Research, Christina Leung, said businesses have reported cost pressure becoming more intense as inflation has surged.  

Earlier, the unprecedented amount of economic stimulus propped up demand and allowed some businesses to pass on higher costs to customers. But as the Reserve Bank has withdrawn that support, it has become much more difficult to pass on costs. 

“The fact that with that softening in demand, businesses are at reduced pricing power, but with cost pressures still not moderating enough for them to recoup margin, you are in this environment where operating margins are still quite crunched in.”

According to Reuters, data presented to policymakers at an European Central Bank's (ECB) retreat in Finland showed that companies in the euro zone were increasing profit margins in the face of sharp input cost increases. 

The Reserve Bank has said increases in both real profits and wages have contributed to inflation, although the data on wages was much more comprehensive than on profits. 

Leung said there may be examples of businesses that have been able to “take advantage, increase prices and bolster their margins”. However, NZIER’s quarterly survey showed profitability has been declining in aggregate. 

Most industries are fairly competitive and businesses in those sectors have been eating their margins, rather than risk losing customers. 

“If there was a lack of healthy competition within certain industries, then you would tend to see probably more opportunistic pricing behavior take place.”

You can find all episodes of the Of Interest podcast here.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI

If things go well in four key areas where work is underway to tackle methane emissions from farm animals they could "make a big hole" in New Zealand's agricultural greenhouse gas emissions, according to Mark Aspin, consortium manager at the Pastoral Greenhouse Gas Consortium.

The Pastoral Greenhouse Gas Consortium is a public-private partnership that has been working for 20 years to reduce agriculture greenhouse gas emissions. Speaking in interest.co.nz's Of Interest podcast, Aspin discusses the lessons and progress along the way.

With the agriculture sector contributing half NZ's emissions, according to the Ministry for the Environment's greenhouse gas inventory, and methane 44% largely due to the digestive process of ruminant animals such as cows and sheep, Aspin talks in detail about the four key methane mitigation tools being worked on.

These are methane inhibitors, genetic selection to breed low-emission cows and sheep, low-emission feed and forage, and a vaccine that could stimulate the animal's immune system to generate antibodies in saliva that target proteins on methane-producing microbes, or methanogens, in the rumen area of the stomach restricting their growth and ability to produce methane.

The Government has a target of reducing biogenic methane emissions from 2017 levels by between 24% and 47% by 2050. Aspin says the four key areas of work have the potential to make a big dent in NZ agriculture's methane emissions.

"In a perfect world yes, we could probably make a big hole in the agricultural emissions if we could get them all to work," says Aspin.

He acknowledges that the vaccine is "proving very tough," but continues to believe it could work.

In the podcast he also talks about the challenges of being a livestock grazing nation, intellectual property related to this technology, regulatory requirements, what's going on overseas, NZ's international climate change commitments, and the position of NZ and its agriculture sector in the context of global greenhouse gas emissions.

Audio soundtrack opening is licensed from Shutterstock, Track 1219389 Monetization ID TFGEPGEI0LHEIJAI