Too-Close-To-Call New Zealand Election Spooks Financial Markets

Updated on
  • N.Z. dollar falls when polls show Labour leading National
  • ‘Labour is being priced as a negative event at the moment’

New Zealand’s election is too close to call but one thing is clear: financial markets don’t want change.

The kiwi dollar has dropped whenever opinion polls show the main opposition Labour Party is ahead, while the currency jumped a full U.S. cent after a survey last week put the ruling National Party in the lead. The question is whether investors, including those offshore who hold 61 percent of New Zealand government bonds, simply dislike uncertainty or really think Labour’s policies would deliver poorer economic outcomes.

“A change of government to Labour is being priced as a negative event at the moment,” said Imre Speizer, a currency strategist at Westpac Banking Corp. in Auckland. “It may not necessarily be a kiwi dollar vote against the left wing, it may just be a vote against change.”

Jacinda Ardern speaks to Auckland University students on Sept. 1.

Photographer: Phil Walter/Getty Images

As the campaign enters its final week, there’s a real chance that 37-year-old Jacinda Ardern could lead Labour to victory in the Sept. 23 ballot and usher in policies including immigration cuts, new taxes and increased welfare spending. By contrast, Prime Minister Bill English, 55, is promising tax cuts, record investment in roads and infrastructure, and the same steady hand that has guided the economy through eight straight years of expansion.

While the two main opinion polls have been contradictory, an average compiled for Radio New Zealand has the major parties neck-and-neck on 42 percent. Neither has achieved an outright majority since the country introduced proportional representation in 1996, meaning both are likely to need the support of smaller partners to form a government.

Read more: The maverick who could anoint New Zealand’s Prime Minister

Gaining that backing could involve making policy concessions and take several weeks of negotiation.

“Under most scenarios you’d say that there is going to be uncertainty,” said Jason Wong, a currency strategist at Bank of New Zealand in Wellington. “Even a specialist like me is scratching my head thinking would I buy or sell kiwi on any particular outcome?”

Several offshore economists have warned clients that Labour’s policies could stunt New Zealand’s economic growth, arguing the party’s plans to reduce immigration will exacerbate a skills shortage. Labour wants to cut annual net immigration from 72,000 currently to between 40,000 and 50,000, while potential partner New Zealand First wants to slash it to 10,000.

Bill English attends a National Party campaign in Wellington on Sept. 15.

Photographer: Marty Melville/AFP via Getty Images

“We are cautious that if a reduction in immigration results in a lack of skilled workers, especially in key industries, the impact on growth may be detrimental in the long run,” Standard Chartered analysts wrote in a research note last week.

Still, the Treasury already forecasts that net immigration will drop to 20,000 by 2021 without significantly hurting growth, which is projected to slow to 2.2 percent that year from 3.5 percent in 2018.

Nothing to Fear

Labour finance spokesman Grant Robertson said markets are always unsettled by close elections but have nothing to fear.

“I encourage people to look at the track record of Labour governments who have managed finances responsibly while still undertaking some major initiatives in social and economic areas,” he said in an interview. “We understand the importance of investment in New Zealand and of taking a prudent and careful approach to our finances.”

National returned the budget to surplus after the global financial crisis and a devastating earthquake in Christchurch. Both major parties plan to increase spending while keeping the books in the black, but Labour would spend more than National, particularly on health and education, and borrow to do so.

The biggest difference between the two is their approach to tax.

National has already legislated to raise tax thresholds from April 1, which it says will put NZ$1,000 ($723) more a year into the pocket of someone on the average wage. Labour says they are tax cuts for the rich and will repeal them if it wins office.

Tax Attack

Labour wants to close tax loopholes that it says encourage speculation in residential property and have contributed to a housing crisis. It won’t rule out capital gains and land taxes on investment properties, but in a back-down last week said it wouldn’t make those changes until after the 2020 election. The kiwi dollar rose on that announcement.

Steven Joyce

Photographer: Mark Coote/Bloomberg

“The public simply can’t trust Labour on tax,” Finance Minister Steven Joyce said in a statement. It may have postponed two new taxes but intends to go ahead with others that would “slow down the New Zealand economy and restrict growth,” he said.

Labour plans to impose a royalty on commercial water consumption to assist with the cost of keeping waterways clean, and it will charge international visitors NZ$25 to help fund tourism infrastructure.

Risk Premium?

First NZ Capital said a change of government could see offshore investors apply a higher risk premium to New Zealand equities, though it was difficult to quantify and may only be temporary. The country’s benchmark stock index has climbed about 178 percent since National took office in 2008, compared with 148 percent in the U.S. and 42 percent in Australia.

Labour’s water tax “would weigh on earnings for all food, agriculture and beverage companies” it covered, including Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, the investment bank said in research published Sept. 5. On the other hand, Labour’s plan to reintroduce tax credits for research and development may benefit healthcare and technology stocks, it said.

With two more opinion polls expected before election day, the kiwi’s rollercoaster ride may continue. But Annette Beacher, head of Asia-Pacific research at TD Securities in Singapore, said New Zealand’s economy will remain attractive to investors regardless of who wins.

“People love New Zealand, it’s a rock solid economy and a nice place to put your capital,” Beacher said. “If you go from slightly center-right to slightly center-left, I don’t think it’s Armageddon.”

— With assistance by Tracy Withers, and Garfield Clinton Reynolds

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