My question is: does this benefit New Zealand’s overseas exchange?
First, I would like some clarification on what is meant when there is talk of our overseas exchange deficit – is this a combination of government and private money, or what?
Clearly the locals will have a lot of money, which could benefit the Government by way of tax on investments the locals may make, but will it favourably affect our country’s balance of payments – or not?
Taking a longer-term view, by selling the business overseas, there may be short-term gains, but the country and the local business are losing future earnings to the overseas buyer.
Regards, Frank Coulter
A: Hi Frank,
This is a really good question. The answer (to my simple brain) is not intuitive. It goes to the difference between what a country earns and what it owns.
First, let’s deal with the terminology.
When people talk about our “overseas exchange deficit”, they usually mean the current account deficit. That is the broadest measure of what we earn from the world versus what we spend and pay to it. It covers everything: goods and services, trade and the income flowing in and out on investments, such as the profits paid to foreign owners and the interest paid to overseas lenders. It’s the whole economy, private and public, not just the Government’s books.
If we run a deficit, we’re spending more offshore than we earn and the gap has to be funded somehow. We either borrow from the world or sell bits of ourselves to it. That’s the other half of the balance of payments, the financial account, and it’s where your business sale shows up.
Now to the example of a local business being sold offshore.
A relevant one right now is the sale of Fonterra’s brands business to Lactalis, which is bringing an additional $4.2 billion into the country in one big hit.
You’d think that much money arriving from overseas would flip us briefly into a current account surplus.
It doesn’t. That money lands in the financial account, which records who owns what and how the deficit is funded. The balance of payments always nets out to zero, so our deficit has to be matched by borrowing or asset sales. Selling a business swaps one asset for another. It isn’t income. So the sale doesn’t change the size of our current account deficit.
On your tax question, the Government doesn’t get much directly. New Zealand has no general capital gains tax and Fonterra is returning $3.2b to its shareholders as a tax-free capital return. The benefit depends on what happens to the money next.
Downstream impact
The sale will affect the current account indirectly, and later. The most obvious longer-term effect, as you identify, is that the profits from the business will now flow offshore, a drain on our current account.
But there are a couple of ways that could offset this.
One is simply where the payout ends up. According to the Reserve Bank (RBNZ), a lot of it has gone into debt repayment and savings accounts. Both help. When farmers repay debt or build up deposits, our banks need less funding from overseas, so they borrow less abroad and pay less interest to offshore lenders. The flipside is that anything spent on imported utes and holidays widens the deficit.
The other, and the bigger one, is what Fonterra does next.
I know the Fonterra sale example is mine, but it is an interesting one and it may deliver much stronger benefits to New Zealand than we got from selling our state assets and banks in the 1980s and 1990s.
Those sales were, in my opinion, done in something of a panicked fashion. Yes, the Government was in dire need of money and many of the companies we sold weren’t being well run locally. But I don’t think we got enough for those assets and I don’t think the money was necessarily reinvested well (although I’d concede it did go towards getting our debt under control).
The Fonterra sale could be different. Of course, Fonterra is sure it will be and there are some good reasons to be inclined to believe the co-operative.
First, it wasn’t a distressed sale. It was a considered and careful process, and the price was good.
Why sell and give up the profits?
Some have argued Fonterra is making a mistake and giving up on the value-added end of dairy. But Fonterra says it is a case of focusing its investment and energy on the more profitable parts of the business. After years of trying to run a global food brand, the returns were still subpar. The consumer business is high-risk and driven by marketing, which isn’t Fonterra’s core skill.
So it is shifting its focus to its high-value ingredients business, which fits with the current global boom in protein consumption. Fonterra isn’t just selling commodity dairy products. It is refining them into value-added food ingredients.
And the milk isn’t going anywhere. Fonterra has agreed to keep supplying Lactalis with raw milk for at least 10 years, so those export earnings continue.
If Fonterra gets it right, the money it pulls into the country by growing high-value ingredient exports could more than offset the lost profit from the brands business. That would be a net gain for our current account.
Optimism grows
The latest Quarterly Survey of Business Opinion from the New Zealand Institute of Economic Research (that’s the NZIER QSBO to economics nerds) has landed.
The good news is that optimism continues to grow in the business community.
The bad news is that the survey captures a downbeat quarter in terms of the activity businesses actually experienced during the quarter.
The survey ran from September 9-28, so it captured the worrying recent surge in fuel prices that has again threatened to hamper our recovery hopes.
NZIER deputy chief executive Christina Leung reported that a net 40% of firms expect a better general economic outlook over the coming months.
“This was a marked increase from the net 14% feeling positive in the previous quarter,” she said.
“However, when it comes to firms’ own domestic trading activity, a net 1% reported a decline in activity over the September quarter on a seasonally adjusted basis.”
The increase in optimism in the September quarter occurred despite renewed conflicts between the US and Iran, which have pushed global oil prices higher again, Leung said.
Expectations of a recovery in demand supported a turnaround in firms’ investment intentions, with firms planning to invest in buildings, plant and machinery over the coming year, she said.
NZIER deputy chief executive (Auckland) and principal economist Christina Leung. Photo / NZME
When it came to hiring, a net 5% of firms reported that they had cut staff numbers in the September quarter, but a sizeable proportion of firms intend to increase staff numbers in the next quarter.
Lack of demand remained the primary constraint for firms.
“Despite a tough September quarter (we’re getting déjà vu), businesses are the most optimistic about the future since 2014,” Kiwibank economist Elliot Lowe said.
“The weak activity but buoyant optimism suggests Kiwi businesses are gritting their teeth and getting on with it.”
“Future investment and hiring intentions have lifted, further signalling optimism about better times ahead.”
Okay, we’ll take that – I guess.
Now, how upbeat are consumers feeling …
Mixed signals
Well, we’ve had two snapshots of consumer spending in the past few days, offering a mixed picture of the economy recovery.
“Patchy” probably covers both the Paymark September spending data and the ANZ September card spending data, even though the latter was up and the former was down.
Neither were quite strong enough to justify the QSBO optimism noted above.
Consumer spending processed through all core retail merchants in Paymark’s payments network in September reached $3.572b, down 1.3% on the same month last year.
“New Zealand is off to a slower start to the usual end-of-year surge as we approach the pre-Christmas shopping season,” Paymark’s chief sales officer Bruce Proffit said.
Consumers faced at least three knocks over September that may have contributed to the slower spending, he said.
Surging fuel prices, rising interest rates and bad weather all combined to slow consumers down.
Spending through Paymark at fuel outlets was running 35% ahead of year-ago levels in the week ending September 30, largely due to higher prices but also due to more transactions.
Meanwhile, ANZ’s figures (based on the data it gets from customers) showed spending up 0.5% in September (seasonally adjusted), with annual growth up from 4.1% to 5.8%.
ANZ chief economist Sharon Zollner noted that spending on necessities outdid the “fun stuff … but spending at bars and on fast food saw a decent lift, as did spending with airlines and at airports”.
Unsurprisingly, spending on fuel rose (2.8%) as pump prices rose.
“Spending on fuel reflects a mix of prices and volumes, which tend to move in opposite directions,” Zollner said.
She noted that you can account for the inflation impact to get a “real” spending by dividing total card spend by the Consumers Price Index (including ANZ’s forecast).
Real spending is still rising, although only just. You have to look really closely at the ANZ chart to see the trend.
We’ll get the full set of nationwide spending figures next week when Stats NZ releases its electronic card data for September.
But it’s probably safe to say that they are unlikely to show consumers embracing the economic recovery with any great gusto.
Don’t forget to check out the Herald’s new podcast, The Economy of Everything, with Liam Dann and Tamsyn Parker – thanks to CMC Markets.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts.
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