HUGO Assessing the economic and political environmentvision in New Zealand Confidential to March 27 2015 HUGO members

Northland by-election – what happens if Winston wins? Page 2 The National Party has given away any realistic expectation of winning Saturday’s Northland by-election. It could still happen, but it depends now on the party machine getting its vote out. Thoughts are turning to whether Peters can be wooed back to supporting National, even weakly.

Green Party leadership Page 2 By entering the race for the Green Party co-leadership, being decided at the end of May at the party’s annual conference, 33 year-old former environmental activist Gareth Hughes has created a clear choice to the more pragmatic positioning of the more experienced Kevin Hague.

Social housing policy – looking dicey Page 3 If the road to hell is paved with good intentions, then that may prove an apt description for Bill English’s cherished policy goal of reforming social housing to be more responsive to tenants’ needs. The Salvation Army’s pull-out places big questionmarks over the initiative’s political saleability.

Auckland needs bigger wharves Page 4 But will Aucklanders allow Ports of Auckland to extend them any further, even assuming the current consented extensions aren’t overturned by the current political pressure? One thing’s certain: container ships aren’t getting any smaller.

Korea FTA signed, Indian deal as far off as ever Page 4 John Key signed the new NZ-Korea free trade agreement in Seoul, weathering embarrassingly timed leaks about NZ spying on that country’s Trade Minister during the 2013 WTO leadership contest. While India FTA talks have resumed, there is little cause for optimism about an early resolution.

Might a rethink of the 1% to 3% inflation target warranted? Page 6 The US Federal Reserve has indicated a slower track for interest rate increases this year, global central banks are maintaining highly accommodative monetary policy settings. It remains to be seen whether commodity prices will stabilise. If these trends persist, the case can be made for a rethink on the long-standing 1% to 3% target band for inflation.

Tougher workplace sanctions on the way Page 4 A rash of cases of serious breaches of employment law has prompted a government revision of the sanctions that will apply. From June, new, higher fines will apply and mediation will not be possible for serious breaches, which will go either to employment tribunals or the Employment Court. Senior executives should familiarise themselves with this new detail.

Text finalised March 26 Contact: [email protected]. No responsibility is accepted for acts or omissions by clients as a result of items herein. © The Hugo Group 2015 HUGOvision March 27 2015

POLITICS AND POLICY

If National loses Northland, Environment Minister. A ‘win’ for Peters might be engineered by creating an appropriately non-critical what then? concession that allowed a significant tweak in favour The National Party is now resigned to losing the of economic development priorities. Northland by-election and thought is turning to the extent to which NZ First can still be turned to for Northland by-election: it never rains but it support, and perhaps to undermine Labour at the pours 2017 election. Thinking among senior National Party The Key administration’s political management skills figures is that a Peters win in Northland may bring have been sorely tested by a wave of damaging events him not only back to Northland, but also potentially and bad luck that have played into Opposition parties’ back to National. hands in the lead-up to the Northland by-election. Peters’s large family connections in the north are To name but a few: helping him enormously, as is the signal from • The government was forced to vote down the so- Labour’s Andrew Little to back NZ First over the called ‘Feed the Kids’ bill two weeks out from the Labour candidate, and the assistance he’s getting vote. In Northland, where poverty abounds, this from cross-over politician Shane Jones. was a gift to NZ First; Ministers also report that a few stubborn issues, • NZ First had two private members’ bills drawn notably the scandal over the Kaipara District Council’s from the ballot that the government would rather wastewater scheme funding blowout, are constantly had never seen the light of day: the first opposing being raised against the government. Late campaign investor state dispute settlement provisions in the news that National’s candidate, Mark Osborne, was TPP (the Fighting Foreign Corporate Control Bill); manager at a loss-making council-funded community the other seeking to overturn the Sky City convention trust is unhelpful in this context. centre deal. Both allowed NZ First to demonstrate its A string of other issues have also broken against potential to overturn unpopular policy; the government in recent weeks, ranging from the • Bill English’s social housing plan took a major knock embarrassment of disclosures about spying on the with the Salvation Army deciding, four years into South Korean Trade Minister in 2013 while John Key the policy-making process that it has engaged with, and Tim Groser were in Seoul to sign the NZ-Korea that it doesn’t have the scale or capacity to buy and FTA. manage former state house stock; A Peters win would remove the government’s • disclosures that NZ has used its access to the “Five guaranteed one seat parliamentary majority. Even Eyes” surveillance network to pursue diplomatic with ACT on-side, it would have only 60 instead of and trade opportunities. Voters may not especially 61 seats in the 121 seat Parliament. care about this, but there is a politically corrosive In such circumstances, Key would likely overcome effect to the ongoing disclosures. By timing his personal antipathy to Peters and seek a release of spying on the South Korean Trade parliamentary accommodation that might include Minister in 2013 at the same time as John Key commitment to consultation on legislation but fall and Tim Groser were in Seoul signing the new short of support on confidence and supply motions, FTA, that achievement was overshadowed and since the government’s majority is still firm there, embarrassment created with hosts; thanks to agreements with the United Future and • the Young Nats’ unguided missile attack on Maori parties. Key extended an offer of that sort to Winston Peters and candidate Mark Osborne’s Peters before the last election. management role at a loss-making Northland trust Speculation beyond this point is fraught, but any suggested a party machine lacking discipline. working relationship developed between Key and Peters would be likely to weaken Labour’s Green co-leadership contest has expectation that it could count on NZ First’s support at the 2017 election, making a Labour-Green implications for Labour government harder to form. Gareth Hughes has opened up the contest for the Green party co-leadership. The result may be In short, Labour’s tactic of backing Peters to relevant to how Labour and the Greens get on if embarrass and make life difficult for Key could Labour leads the government post-2017. prove strategically counterproductive. Whether any such accommodation could salvage National’s The initial logic was that No 3 MP Kevin Hague RMA reform plans is too early to say. However, its would take over from at the party 2 intentions are softer than when Amy Adams was conference at Queen’s Birthday Weekend. That is still HUGOvision March 27 2015

POLITICS AND POLICY the most likely outcome but is not assured. Social housing policy – dead in Hague is capable, would probably have been the water? Health Minister if Labour’s side had won in 2014 and has managerial experience to complement his The Salvation Army’s rejection of direct involvement in environmental and social-liberal position. But he Bill English’s social housing policy is a serious blow for lacks Norman’s sound-bite skill. what is intended to be a flagship policy. The Sallies had been smarting for some time about the government’s Hughes can appeal to those in the party who want repeatedly painting them as cheerleaders for the policy. to strongly reaffirm the left-of-Labour positioning It’s true they were close to the four years of policy on social and economic issues – Hague favours that formation that led to this point. positioning but more pragmatically. Hughes comes from an activist environmentalist background: he Ministers appear to have been unaware that the worked for a while with Greenpeace in India. Sallies were biting their tongues as long as mid-late last year about the way their support was being And, at a young-looking 33, he can project portrayed. And on closer inspection, the Salvation generational change, which the Greens need, Army realised its work on marginalised groups – including in the organisation, which he says needs addicts, the mentally ill, and the socially maladjusted to be professionalised. But his youth might deter –didn’t represent as close a fit with the government’s potential voters who are only marginally Green. intentions for the social housing policy as may have Vernon Tava, recently appointed an Auckland appeared at first blush. However, its ability to provide co-convener, has taken the line the social “wrap-around” services the government that the Greens should position themselves on a wants to see provided in the context of housing for “sustainability axis” and be more left-right flexible to the severely disadvantaged is unquestioned. The make working with National more practicable. expressed desire to work as partners in “consortia” providing social housing is real. However, the James Shaw, the new MP with buckets of intelligence Salvation Army’s disavowal of the policy is providing and charm who has quickly made an impression, a lead to other community agencies that may have similarly favours the more flexible position, though been contemplating involvement. more pragmatically than Tava. Shaw, like Graham, accepts that economic policy has to reflect a pragmatic An important dynamic the government appears to understanding that the economy is globalised. have missed is that such agencies approach their work as a social mission, not as an investment Most Greens are more sympathetic to the Hughes- proposition. They fear government policy changes Hague positioning than the Tava-Shaw one. Co- could leave them with obligations to customers leader is very much a left-left Green. that they would feel morally unable to quit if Together, these factors limit – but don’t eliminate they become unaffordable. A second significant – any repositioning Tava or Shaw, who is economic influence is the knowledge-sharing between NZ and development spokesperson, try to do. Australian community agencies. In Australia, social Labour has yet to figure how to work with the housing stock has been given away rather than sold. Greens leading up to 2017. Andrew Little has said NZ agencies want the same deal. he would rule out in advance of the election some With the general public, the debate is confusing. Green policies. For example, a mining ban and some Politically powerful lines accusing the government economic policies are off the table, which implies more of making state houses available to “property rejections if Hague or Hughes co-leads the party than developers” are simple appeals, which English if Shaw or Tava does. is seeking to counter with logic and complex Labour wants to recover votes from the Greens, explanation. If one of the National Party’s favourite cutting them to, say, 8%, to limit their influence. The maxims, that ‘explaining is losing’, then National is Greens still hope to get to the 15% Norman aimed at losing this argument at present. last year but that would need more professional and widespread campaigning than in 2014, which was Budget challenge a step up from 2011. Hughes and Shaw, who had a strong campaign team last year, are pushing that. The social housing policy problem creates a bigger challenge: selling the 2015 Budget. Key and English The co-leaders are elected at the conference by are both sincere in their desire for social policy progressive vote. Most branches mandate their innovation that makes a real difference to the lives delegates, so, unless the vote is close, the decision of disadvantaged New Zealanders. Earlier this year, may in effect be sorted in advance. Key expounded the view that he was less interested in economic management than making a difference 3 HUGOvision March 27 2015

POLITICS AND POLICY

for children in poverty. will automatically go to the Employment Relations Clearly, that was never going to be voting for the Authority or Employment Court, rather than to so-called ‘Feed the Kids’ bill, but the antidote to mediation. The changes will apply from June 6 the negative coverage on that issue has been the and are in response to rise in the number of serious expectation that new policy will emerge in the employment law breaches. Employers will be Budget that takes a more intelligent, incentivising named publicly if they are found to be in breach. approach to getting low income families and their Labour inspectors will have enhanced powers to children into better circumstances. demand documents. Directors, senior managers, and other individuals who exercise positions of However, the knocks to the social housing policy, significant influence can be caught under the new combined with the effective way that Opposition provisions. An MBIE explanation of the changes parties have been able to portray the government as cites the potential for a senior payroll manager to be heartless towards the poor will make the sales job in liable if, for example, they have acted on direction the Budget far more difficult. from a company officer, to deny employees their full entitlements. New standards for record-keeping will Free trade agreements also apply. New Zealand and South Korea have formally signed a free trade agreement regarded as critical Deloitte report finds widespread in-house to catching up with similar agreements already corrupt practice reached with Seoul by Australia and Canada, key Deloitte’s second Australasian bribery and competitors in the meat trade. Tariffs imposing corruption survey asked for the first time for costs of around $230m p.a. will reduce over the evidence of in-house malpractice and found a next 15 years to a point where 98% of NZ goods disturbingly high incidence. Some 23% of firms should be entering the Korean market duty-free at reported incidences within the last five years. Most the end of the transition. Tariff reductions in the prevalent were undisclosed conflicts of interest, first year of operation are estimated at $65m. The supplier kickbacks, and personal favours. Most Parliaments of both countries have yet to ratify the commonly these occurrences were identified through arrangement. While FTA’s do not enjoy the same management reviews, internal controls, and tip-offs level of unalloyed bi-partisan support as they have from employees. Just 2% were identified by external in the past, it is inconceivable that this agreement audits. The survey showed a rising incidence of will not gain support of the Labour Party, given exposure to “high risk jurisdictions”, with 40% of its value to NZ exporters. Meanwhile, the Indian firms operating in such areas, compared with 34% in High Commissioner to NZ, Ravi Thapar, poured the 2012 benchmark survey. cold water on aspirations for early conclusion of an FTA with India, despite the resumption of However, the number of firms that have never stalled talks in Delhi last month. At an investment undertaken a risk assessment, despite exposure and summit in Auckland, Thapar warned Indian experience of such incidents in foreign countries, rose industry was ill-placed to face competition, that the to 23% from 14% between the 2015 and 2012 surveys. country’s democratic politics made FTA’s harder “How do these organisations determine whether or and that its Korean FTA had not worked well. “We not they are at risk, and whether a corruption event acknowledge that trade with China and some of the has occurred, is occurring, or is likely to occur?” other countries have picked up immensely. Whether Deloitte asks. that will apply to India has to be seen from the The survey identified organisational culture and perspective of Indian industry. India is a democracy. “tone at the top” as the two most significant If the industry, wants to take its time in getting influences on preventing bribery and corruption. into the FTA act, I think we have to respect it. So what we are saying is we will do the FTA, no one Auckland wharves conundrum is saying we will not, but please let the industry be Auckland Council is under huge public pressure satisfied.” not to allow Ports of Auckland to extend Bledisloe Tougher sanctions for employment law Wharf. But if it buckles its ability to make key calls breaches for the city’s economic development will be even further weakened than is already the case. However, Fines for serious breaches of employment standards whether PoA will ever gain further extension rights are to increase from $10,000 and $20,000 for must now be highly questionable. Time to dust off company officers and companies respectively to the plans for a container port on the Manukau? 4 $50,000 and $100,000 and cases of a serious nature HUGOvision March 27 2015

DOMESTIC ECONOMY

1. RBNZ Says Rates on Hold 5. Currency Risks Remain

2. But Might Cut 6. Inflation Not Dead

3. If Inflation Expectations Fall 7. Oil Has Bounced

4. Or, Perhaps Growth Falters 8. Dairy Has Bounced

5 HUGOvision March 27 2015

DOMESTIC ECONOMY

9. House Prices Keep Rising Time to rethink the 2% inflation target? It’s a heretical thought, but is the current low inflation, highly accommodative global monetary policy environment creating a reason to rethink NZ’s implicit 2% annual inflation rate target? Driving that thinking is the potential for a softer US economy to delay interest rate rises there and for global deflationary risks to continue to dominate this year. In this scenario, US 10-year yields end 2015 closer to 1.5% than 2.5% and it would be reasonable to assume the RBNZ cuts the OCR from 3.5% at present to 3%. That raises the question of whether the current 10. Capacity Pressures Real inflation target is unreasonably high in the current climate and should be lowered from its present 1% to 3% target band, or that at least its lower reaches be tolerated as a “new normal”. Otherwise monetary policy risks pushing too hard for too long in a vain attempt to drive CPI inflation up to a precise annual rate. Inflation in some parts of the economy is far from dead - Auckland house prices, for example, and wages have been growing at around 3% p.a. But finished-goods price inflation has lagged, reflecting the degree of spare capacity still present in the global economy, even with reasonable growth rates. This cyclical feature has combined with structural 11. Looking Good disinflation/deflation tendencies in technological products, internet-enabled competition on an increasingly global scale, and falling tariffs globally. The consequences of these trends all add up to downward pressure on New Zealand’s CPI. Trade balance heading south February’s trade surplus was considerably smaller than expected, at $50m, led by declining dairy exports, while the annual deficit widened to the largest in more than five years. Dairy exports fell 41% y/y on lower pricing and quantities, with further weakness expected. Consumption and capital goods continued to increase, reflecting strong 12. Employment Growth Too domestic demand, consistent with a widening annual trade deficit in coming months and deterioration in the current account deficit, which is likely to pass 4% of GDP by mid-year. That’s despite an improving services surplus, reflecting tourism buoyancy. Carbon prices rising Prices for NZ Units are recovering slowly. OMF is forecasting that with trades now occurring around $6.50, prices may move to $7 or higher, and that this may bring forest owners holding NZU’s into the market in larger numbers. 6 HUGOvision March 27 2015

INTERNATIONAL ECONOMY CORPORATE ROUND-UP

Sliding towards Grexit? Institutional portfolios April 9 is looming as the date to test Greece’s desire US fund manager BlackRock, which manages more to stay in the eurozone. That’s when Athens is due to than US$4.7 trillion in assets worldwide, has emerged make a repayment on its IMF bailout. with a 5% stake in Fletcher Building, according to a notice that shows it has been buying and selling Greek PM Alexis Tsipras has been in Berlin this week the stock for various portfolios since November. attempting to engineer a political breakthrough by Blackrock holds 34.4m shares in the Auckland-based directly lobbying the German Chancellor, Angela construction and building supplies firm. Last year, a Merkel. However, Merkel holds all the cards and BlackRock subsidiary declared a 5% stake in SkyCity is insisting the Greek government take seriously and has since built that holding to 7%. EU demands for commitment to economic reforms before agreeing to extended bailout terms. Generation assets Those efforts have been foundering as EU officials in MightyRiverPower will close its 140MW Southdown Athens twiddle their thumbs waiting for permission gas-fired generator at the end of the year and even to meet with their Greek counterparts. the plant will be dismantled for sale overseas. Meanwhile, a Greek attempt to claw back 1.2b euros Southdown is the power company’s only gas- in unspent bailout cash that was repatriated to EU powered station, which had high running costs lenders has failed. compared to the company’s geothermal and hydro While much economic commentary has suggested plants. It accounts for 5% of MRP’s installed a Greek eurozone exit, or “Grexit”, would be generation. The station has a book value of $50m and more easily managed than when it last threatened the company hasn’t yet determined the full cost of to leave, shortly after the GFC, that view is not mothballing it. Southdown was developed as a joint universally shared. Opinion is divided over whether venture between TransAlta and MRP. that outcome would be a discipline to other weak eurozone economies, or could spark a rash of Coal mining withdrawals, possibly brought on by bank runs. Hamish Bohannan has resigned from Bathurst Resources after five years leading the coal miner. Chinese economy Bohannan joined the company in 2008, playing a The Asian Development Bank’s latest forecasts for leading role in establishing it as a coal producer and China expect growth of at least 7% this year, stronger driving the heavily contested consenting process for than the official line from Beijing, which expects its Escarpment project on the Denniston Plateau. The growth at “about” that level, and more bullish than expansion was approved but subsequently put on the IMF, which is forecasting 6.5% growth. hold pending a recovery in coal prices. The global downturn in coal prices forced Bathurst to restructure US interest rates its operations, cut staff and trim the size of its board. Signalling from the US Federal Reserve has pushed Bohannan will be replaced by chief operating officer expectations for the start of a monetary policy Richard Tacon, a 30-year industry veteran. tightening cycle into the third quarter of the year. While it dropped the term “patient” in describing Investor claims its attitude to tightening, the Fed was also “not Liquidators of Ross Asset Management have impatient”. launched the first of three test cases to recover funds from investors who withdrew from RAM’s The impact in NZ has been to put the kiwi dollar Ponzi scheme before it collapsed. In the High back on a firming track in the meantime, with yields Court, lawyers for PwC's John Fisk argued that on the kiwi again attracting global investor interest the liquidator had a claim on $954,000 under the amid what some traders are saying is the most Companies Act and the Property Law Act. The volatile period for foreign exchange markets since the investor had borrowed $500,000 from a bank and the GFC. total sought includes his windfall interest. Currently, A stronger USD and a series of US data defrauded RAM investors expect to receive 3 cents disappointments may temper the profile of US rate in the dollar and the claw-back would lift that to 4 hikes, but the Fed remains the only central bank cents, Fisk’s lawyer said. likely to raise rates this year. This alone is enough to permit a cautiously constructive view on the US Oil and gas industry dollar. Our NZD/USD forecasts are unchanged at NZ Oil & Gas has lifted its interest in Melbourne- 0.70 by end-2015, and 0.66 by end-2016. based Cue Energy to about 42%, nearing the 50% 7 HUGOvision March 27 2015

CORPORATE ROUND-UP

threshold at which it can close the hostile takeover Retailing offer. NZOG had indicated it is seeking only about Pumpkin Patch, which hired Goldman Sachs last 30% of Cue, which owns 5% of the Maari field, year to assist in a capital review when it came close offshore Taranaki, adjacent to NZOG’s 27.5%-owned to breaching bank covenants, said it will seek formal Tui field as well as an interest in the nearby Manaia proposals after being approached by third parties prospect. It has reportedly gained acceptance for interested in acquiring or refinancing the children's its offer at 10 Australian cents a share from Zeta clothing retailer. It posted first-half profit of $749,000, Resources, a vehicle associated with NZOG director an improvement on earnings a year earlier, on sales Duncan Saville, which hold 12% of Cue. of $121.9 mln. Kathmandu said it will slow the pace Commodities of new store openings after reporting a first-half loss that resulted from discounting in Australia. The first- NZ export log prices have dropped for the first time half loss was $1.8 mln, from a year-earlier profit of in eight months, reflecting a buildup of inventory at $11.4 mln. The loss was within company guidance of Chinese ports. The average wharf gate price for New last month. Zealand A-grade logs fell to $106 a tonne, from $110 a tonne in February, marking the first decline since July Staff training 2014, according to AgriHQ. A-grade logs delivered Warehouse is touting the success of its ‘career retail to China are at the lowest level since AgriHQ started wage’ programme, which encourages staff to upskill tracking the grade in February 2012. and choose retailing as a career, potentially moving Dairy product prices dropped in the latest up into management. Some 4,100 team members, GlobalDairyTrade auction amid signs the supply of or 63% of permanent staff, are now earning at least milk powder hasn’t been constrained by drought as $18 an hour under the programme and the company much as expected. The GDT average winning price has cemented the initiative with the opening of the dropped 8.8% to US$3,136 in the March 17 sale. Some Sir Stephen Tindall Learning Centre in Auckland, 20,258 tonnes of product was sold, down from 22,957 which has capacity to train 250 people. CEO Mark tonnes two weeks ago. Fonterra confirmed a $4.70 per Powell said staff retention had improved since the kg/MS farmgate milk price for the current season, and programme was launched. a reduced 20 to 30 cent dividend, surprising farmer shareholders who had expected lower input prices Telecoms to improve value-added returns. The cooperative 2degrees has bought the Christchurch ISP, Snap, to promised attention to improving returns, especially allow it to offer broadband and fixed line services to from under-performing Australian assets. Meanwhile, entice business customers. Commentators suggest it Fonterra has announced a 45 cents per kg/MS will also need to consider a content partner, given the premium for producers of organic milk. entry of Netflix to the NZ market and the partnerships for online content involving Spark and Vodafone. WTO complaint NZ and the US have escalated a complaint against Confidence Indonesia to the World Trade Organisation over Near term consumer confidence rose in the first import restrictions on plant and animal products quarter on cheaper fuel prices and lower fixed that led to a slump in NZ beef exports. They have home-loan rates. The Westpac McDermott Miller requested that a WTO dispute settlement panel look Consumer Confidence Index rose to 117.4 in the latest at the import barriers. They first teamed up for a survey from 114.8 three months earlier. The present WTO complaint in 2013 but that was derailed by conditions index gained 1.8 points to 113.2 and the an Indonesian rule change. The countries lodged a expected conditions index rose 3 points to 120.1. NZ’s fresh WTO complaint in May last year, which until services sector, which makes up about two thirds of now had been in the consultation stage, where the the economy, slowed in February, while remaining countries meet to try and resolve their dispute. in expansion. The BNZ-BusinessNZ performance of services index (PSI) fell 2.2 points to 55.6 last month, with all five sub-indexes above 50.

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