“The best way to predict the future
is to create it”

Abraham Lincoln

A year ago, we opened our newsletter with the following statements-

“At Global we try to be positive about this Country and its future. However, the recent budget and resulting state of this country’s finances makes it hard to be too positive. The Country under the control of Labour over the past 5 years has drifted into almost third world status, from a position of the Country and its financial position being the envy of the world to one of the also rans. Economically we are creating a hole that it will be hard to dig ourselves out of, and a burden our children will be lumbered with, should they stay around.“

This has proved to be very much the case, as the Coalition Government are now being attacked by a vocal minority for trying to right the ship. The press, who themselves are now seeing the reality hit home of a changing customer market who now access a number of different platforms, resulting in restructuring and the resulting redundancies, are having to go through what a large number of the employees have suffered over the past 20-30 years-such as the sharemarket crash, the GFC, and the rationalisation of the Pharmaceutical industry by the introduction of Pharmac, as just some examples. The press are looking to shift the blame to the new Government, as a large multi- national corporation divests it’s loss making news division, terming it an “assault on New Zealand’s Democracy”.

We also see them attacking the proposed trimming of the Public Service spending by 6.5%, which equates to around 5,000 employees. They forget to mention that under Labour, the Public Service grew by 28%, being 14,000 employees. Hipkins tried to justify this as an investment in Education and Health, and them moving away from contractors. However, we saw the likes of Oranga Tamariki increase staff numbers by 49%, Statistics NZ by 44% and MBIE by 53%, to name but a few, and between mid ’21 and mid ’23 the Public Service spend on external contractors went from $940m pa to $1.268b. The public service managed to increase staff levels by 4% over the last half of ’23, with the Public Service budget jumping 84% during Labours time in office, as the large salary and wage increases that the Public Service have enjoyed has helped fuel inflation.

The Reserve Bank is maintaining a conservative approach to interest rates, and in our view is risking the economy over contracting. Since the last negative GDP growth result, despite record levels of immigration, and the resurgence of this Countries tourism sector, the economy appears to have slumped further. The economic slowdown in China, means even our primary produce exporters are finding times tough, despite the lower NZ dollar. Our currency fell nearly 2 cents against the US dollar in the 6 weeks to the end of April, though we experienced a bounce in early May, however a weakening dollar also has an inflationary effect, due to the cost of imports increasing.

The issue for the Reserve Bank, and in turn NZ borrowers, is that a lot of the current stubborn inflation is not a result of an overactive economy but relates to factors which are not affected by the current state of our economy. The effect of high interest rates, and ballooning Council rates and insurance costs, flows through to landlords needing to increase rents. Every week the public receive news of a likely large jump in their non-discretionary cost of living, with the latest being hikes to the cost of water, as Councils try to catch up on a lack of historical infrastructure spend. Also, wages are continuing to increase, with the Labour Cost Index running at 4.3% annually, and a lot of this is made up of Government pay agreements for Teachers, nurses and other parts of the Public Service, with the Police next with their hands out.

The latest rise in unemployment to 4.3% is unfortunately a necessary evil to get on top of inflation. We would expect a jump in the next quarter’s rate, with expectations that it will sit at over 5.0% over the next 12 months. New Zealand has been through a period of historically low interest rates and low unemployment, with a return to the historical averages now happening.

The non-Bank financing markets are still active, with good levels of enquiry, however we are experiencing a larger volume of distressed asset refinance enquiries, and investors are increasingly reticent to just continue to roll loans over. This means borrowers need to be on top of their facilities that are coming due, to allow for a possible need to bring a new funder in. It is increasingly difficult to fund deals where there are no recent Registered Valuations available, particularly if you are looking to gear up at over 65-75% of value.

A number of the funders we deal with are sitting on strong levels of liquidity, but due to the fact most have a number of problem transactions on their books, they are obviously cautious as to the deals they will get into. A clear exit plan for a new financier is becoming more important, as the repayment from sales now needs a reasonable lead time built into it. As with any transaction, the more thorough you are with the supporting information and background, the greater the chance of a successful outcome.

Should you or your clients have a transaction you are looking to place and require financing, please don’t hesitate to get in touch.