Market sees National in box seat, but 'fundamental' differences with NZ First remain

Sunday, 24 September 2017

As financial markets prepare for weeks of coalition negotiations, focus will be on trying to decipher Winton Peters' bottom lines for the economy.

In the days leading up to the election, as political polls showed National appeared to have established a lead, the New Zealand dollar 'liked it' and rose steadily, ANZ chief economist Cameron Bagrie said.

'We're in what was the odds-on scenario,' Bagrie said, with NZ First holding the balance of power but National in the strongest position to form a coalition government.

Currency and interest rate markets were likely to remain steady in the short term, due to the expectation of stable policies, Bagrie said. However the talks may not run smoothly because of opposing viewpoints in key areas, which could create volatility.

READ MORE: Can National and NZ First bridge the gap over NZ Super?

'Fundamentally, they opposed [to National] on some pretty major issues, in regards to direct investment and migration,' Bagrie said, adding that Peters has 'some interesting ideas about what the Reserve Bank could or should be doing'.

NZ First has long pledged to slash migration numbers, which have been running at record levels for more than two years, helping boost economic growth which has been low on a per person basis. Peters has also promised to tighten rules on foreign investment.

Although migration levels are showing signs of peaking, generally economists are forecasting migration will slow down gradually under current settings.

While National has sought advice on very minor changes to the Reserve Bank's operating model, NZ First's reforms are far more broad.

Peters has restated his commitment to reforming the Reserve Bank Act in virtually every speech he has given during September.

NZ First has consistently pledged to put far greater focus on controlling the exchange rate, adopting what he claims will be the Singapore model of monetary policy, to bring down the strength of the dollar to make export sectors more competitive.

'The dollar will be much lower than it is now,' Peters told an audience in Taupo in July.

Peters has also publicly criticised National's handling of TPP negotiations, and described the deal as a 'corporate protection racket' which challenged New Zealand's sovereignty.

Kirk Hope, chief executive of BusinessNZ said he hoped National would not give ground on trade negotiations, warning that industries such as beef could lose major markets if New Zealand is excluded from the TPP.

Hope also warned that NZ First's pledges to slash migration levels could frustrate his plans to promote regional development.

'It [cutting immigration] will probably have a much bigger impact in the regions if they weren't able to access the workforce to, for example, build infrastructure that some regions are calling out for, including Northland.'

Economist Shamubeel Eaqub questioned whether Peters would make issues such as trade negotiations a bottom line, predicting his focus would be 'far more domestic'.

The pledge to reduce immigration may not find immovable opposition in coalition talks.

​'By and large political parties across the spectrum have been in favour of tightening immigration policy,' Eaqub said, with even National making small steps to increase skills requirements, despite opposition from some in the business community.

'I think the pendulum has swung on immigration. The question is just how far it will go.'

But Eaqub said as skills shortages became more acute, it was clear that immigration was helping maintain New Zealand's economic growth.

'If that [source of workers] is taken away from them, a lot of businesses are really going to struggle.'