Key Sees Scope for Rate Cuts as New Zealand’s Quake Bill Grows

New Zealand Prime Minister John Key
John Key, New Zealand's prime minister. Photographer: Mark Coote/Bloomberg

New Zealand Prime Minister John Key signaled the onus is on the nation’s central bank and private investors to aid economic growth as he seeks to eliminate a budget deficit while funding post-earthquake reconstruction.

“The government’s preferred position is not to be stimulatory,” Key said in an interview yesterday in a government office in Christchurch overlooking the business district devastated by last year’s earthquake. “We want to get back to surplus. We think the private sector can pick up a lot of the slack and is going to.”

Eighteen months after the worst in a series of temblors struck Christchurch, the government’s share of reconstruction costs might escalate, with the administration potentially needing to apply proceeds of planned asset sales over the next four years, Key said. Meantime, an appreciating exchange rate is easing pressure on monetary policy makers, giving “room to move if they want to,” he said.

Key’s remarks reflect the balancing act of a government that’s trying to avert deeper cuts in the sovereign-credit rating and to oversee a revival of the South Island’s largest city. The planned fiscal tightening coincides with threats posed by the European debt crisis, which has damped demand growth in New Zealand’s trading partners.

Fiscal Scope

“The New Zealand government, from a fiscal policy point of view, is quite limited in terms of what they can do” to aid the expansion, said Khoon Goh, a senior foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd. “The government has made it a clear goal to return to surplus as soon as possible. They are also very careful to ensure they can retain their current credit-rating status.”

New Zealand, a country of 4.4 million people with snowcapped peaks and forested valleys that are the backdrop to director Peter Jackson’s “Hobbit” films, has with other developed nations seen its ratings lowered in the past year.

Standard & Poor’s and Fitch Ratings cut their AAA grade on New Zealand local-currency debt one step in September, to AA+. New Zealand is still Aaa at Moody’s Investors Service. On Aug. 3, S&P affirmed its ratings and called the outlook stable.

Key, a former head of global foreign exchange at Merrill Lynch & Co., also warned against making one-way bets on gains in the kiwi, the best-performing Group of 10 currency this year. The local dollar bought 82.07 U.S. cents at 11:25 a.m. in London yesterday, putting its gain this year at 5.6 percent.

RBNZ Succession

The currency’s appreciation has been a concern at the Reserve Bank of New Zealand, which is on the verge of a leadership change. RBNZ Governor Alan Bollard, who has held the benchmark interest rate at a record-low 2.5 percent since March 2011, ends his decade-long tenure next month, and Key’s government named former World Bank official Graeme Wheeler to replace him.

“The very fragile global outlook, the tightening up in monetary conditions partly because of the high kiwi dollar argues against the need to lift rates anytime soon,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney.

Near Christchurch’s ruined center, about 4 kilometers (2.5 miles) from the suburb of Bryndwr where he was raised, Key said international investors including Chinese and Australian companies are interested in backing the reconstruction. The tremors killed 185 people, destroyed thousands of residences, offices and the iconic Anglican cathedral in the main square.

‘Belly Busters’

The city center resembles a demolition site, with more than 700 buildings razed to make way for a new business district. The lone sign of retail activity in the city’s once-thriving square is a burger van named “Belly Busters,” parked outside the ruins of the cathedral.

Key last week released plans for a urban center, saying as much as NZ$30 billion ($25 billion) could be spent on the overhaul. The government’s direct cost from the quake, and others that have struck the city, is about NZ$13 billion, he said last month. Officials last week formed an organization, Invest Christchurch, to attract capital from global and domestic investors into the region.

“Christchurch is definitely going to cost more money,” the prime minister said. “The issue here is that things have taken longer and cost more.”

That may strain the budget Key is trying to balance. Finance Minister Bill English anticipates the government returning to a surplus in the 2014-15 fiscal year, of NZ$197 million. The 2011-12 deficit was estimated in the May budget at NZ$8.44 billion.

Surplus Target

“We’re on track to get there,” Key said yesterday of the surplus target. “We think it’s important that we get there. It’s part of the confidence that we give the rating agencies and others, that we’re taking our responsibilities seriously.”

To help reduce debt, the government is seeking to raise NZ$5 billion to NZ$7 billion by offering stakes of as much as 49 percent in four energy companies, and by lowering its share of national carrier Air New Zealand Ltd.

The first sale, Mighty River Power Ltd., is scheduled for the third quarter. Indigenous groups have sought to delay the sales by disputing control of the nation’s water and geothermal resources. Ministers last week wrote to the Waitangi Tribunal, a panel that advises on Maori grievances, to ask for their findings on the claims by Aug. 24.

Key’s Support

In his fourth year in office, the prime minister’s popularity shows little sign of waning. His National Party was supported by 48 percent of voters in a poll this week, compared with the main Labour opposition’s 32 percent. Key was chosen as preferred leader by 45 percent of those polled, with Labour leader David Shearer receiving 13 percent backing.

Key, whose personal fortune is estimated at NZ$50 million by the National Business Review newspaper, grew up in public housing in Christchurch after his father died when he was 6 years old. His late mother, Ruth Lazar, an Austrian Jew, had fled to the U.K. in 1938 to escape the Nazis. She married George Key, an Englishman, and they moved to New Zealand in the 1950s.

Hired by Merrill Lynch in 1995 after getting a start in currency trading at Bankers Trust in Auckland, Key rose to become global head of foreign exchange in London. That’s where he earned the nickname “the smiling assassin” after firing 50 members of his team in the wake of the Asian financial crisis and Russian debt default in the late-1990s.

Key became New Zealand’s 38th prime minister by ousting the Labour Party’s Helen Clark after her nine-year tenure. He won a second term last November, forming a government with minority parties under the nation’s so-called mixed member proportional voting system.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE