Economic Week - December 6

by Nick Clark

Ag debt down as farmers squeezed
As farmers feel the squeeze from banks it’s no surprise that agricultural sector debt has been falling. The Reserve Bank’s monthly Sector Lending Statistics show agricultural debt was $63.4 billion in October, down $232 million compared to September and the third consecutive monthly reduction.  Agricultural debt often falls in October months but this is the biggest monthly drop since October 2013. 
Despite its recent falls, agricultural debt remains 1.9% higher than the same month last year.  Personal consumer debt is also falling and is down 0.3% compared to a year ago, but housing debt (up 6.7% for the year) and business debt (up 6.1%) both continue to grow.

Bank capital review
The Reserve Bank’s long awaited decisions on its Review of Bank Capital were released on Thursday and they were broadly as expected. 
Although the Reserve Bank stuck with its decision to substantially increase the amount of capital banks will have to hold to make the banking system safer it has made some changes to soften the impact.
For example it has extended the transition period from five to seven years, will be providing more flexibility for banks on the use of specific capital instruments and providing a more cost-effective mix of funding options for banks.  There will also be a lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail.
The four large banks will have to measure the risks of their lending more conservatively, more in line with the smaller banks.  There will also be more transparency in capital reporting.
The Reserve Bank expects the changes to result in an average increase in the cost of borrowing of around 0.2% but the big banks continue to think the impact will be larger.  It is also unclear what the impact will be on sectors, including farmers where the impact is likely to be larger.  We would have liked more information on this.
Much will depend on whether and how the banks choose to absorb or pass on the higher costs.  Federated Farmers has urged banks to absorb the costs as much as possible and we are putting the banks on notice to act fairly and reasonably with farmers.

Farm Debt Mediation Bill
The squeeze banks have been placing on farmers, coupled with the possible impact of bank capital changes makes farm debt mediation more necessary than ever.  The Government’s Farm Debt Mediation Bill is in its final stages in Parliament and we look forward to it being passed as soon as possible so the regime can be put in place for commencement mid-2020.

Commodity Prices Strong
World prices of New Zealand’s basket of export commodities lifted 4.3% in November and 3.5% in NZ Dollar terms, according to the ANZ Commodity Price Index.
Dairy prices bounced 2.8% in November, with milk powders continuing to display strength.  The meat and fibre index increased 8.8% during November and has gained 29% in the past year. Lamb prices lifted 2.2%, while beef prices lifted a massive 19% in one just month.  Horticulture and forestry also posted monthly gains.
On an annual basis the ANZ Commodity Price Index was up 12.4% while it was up 18.8% in NZ Dollar terms.

Terms of trade soars
Lamb and beef export prices reached new highs in the September 2019 quarter, while forestry product prices fell sharply, according to Statistics NZ’s quarterly Overseas Trade Indexes.
Overall the merchandise (goods) terms of trade rose 1.9% during the quarter.  Export prices for goods rose 1.9% while import prices were flat.  Dairy export prices were up 8.9% while meat export prices were up 4.8% - with beef and lamb prices both hitting record highs.  Forestry product prices fell 9.7%.
Meanwhile export volumes for goods fell 4.6%, with dairy volumes down 12.0% and meat volumes up 1.4%.  Import volumes rose 1.1%.  Overall, taking account of prices and volumes, export values were up 2.0% and import values up 0.7%.
The terms of trade for goods is just shy of its recent high in December 2017, which in turn had been the highest since the early 1970s.  A strong terms of trade is positive for the economy and in simple terms means more imports can be bought from a given amount of exports. 
With the strength in commodity prices over the past couple of months it seems quite likely that the terms of trade will go even higher in the current December quarter.

GDT slips
The strong run in the Global Dairy Trade ended this week, with the GDT Price Index down 0.5% at this week’s auction.
Prices were mixed, with whole milk powder basically unchanged (up 0.1%), skim milk powder up 1.9%, rennet casein up 4.9%, cheddar up 2.7%, and butter milk powder up 1.6%.  On the other hand there were drops for anhydrous milk fat (down 5.1%) and butter (down 4.9%).
Overall, the average selling price was $US3,467 and 36,258 tonnes of product were sold.
This week’s small drop comes after five increases, but despite the drop the GDT is still up 23.1% on the same time last year.

Tax volatility causing uncertainty
Volatility around tax revenue recognition and discount rates continues to have an adverse impact on the operating balance, according to the Government financial statements for four months to 31 October 2019.
The operating balance before gains and losses was in deficit by $1.1 billion.  This compares to a forecast surplus of $843 million, the $1.9 billion difference primarily due to lower than expected tax revenue.
Core Crown expenses of $30.4 billion were close to forecast but core Crown tax revenue of $27.7 billion was $1.4 billion below forecast. Corporate tax revenue is the main driver of this variance, mainly due to the phasing method for monthly corporate tax.  This is expected to reverse-out during the year but Treasury and Inland Revenue are still working to better understand this variance and its impact on forecasts.  Hopefully they will get to the bottom of it before next week’s Half Year Economic and Fiscal Update which crucially sets the scene for Budget 2020.
Meanwhile, net core Crown debt was $60.6 billion (20.2% of GDP) at the end of October 2019, $1.8 billion less than forecast. The lower than expected net debt is largely due to a stronger opening position at 1 July.

Next week
On 11 December the Government will release the Half Year Economic and Fiscal Update and the Budget Policy Statement for 2020. Last weekend the Minister of Finance announced the Government would boost infrastructure spending and is prepared to take on more debt to do so.  As well as setting out the overall fiscal position and priorities for the Budget there will be more information on how much will be spent on infrastructure and on what projects.

NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 5 December) show the north and east of the North Island becoming significantly drier than usual and it drying out in Canterbury compared to previous weeks.  Otago and Southland remain wetter than usual, with the particularly heavy rain in Queenstown-Lakes prominent on the anomaly map.


Exchange Rates

Over the course of the week the NZ Dollar was up solidly against the TWI and against all our major trading partners.



NZ Dollar versus

This Week


Last Week (28/11/19)

Last Month (5/11/19)

Last Year (5/12/18)

US Dollar





Australian Dollar










UK Pound





Japanese Yen





Chinese Renminbi





Trade Weighted Index





Source: Reserve Bank of NZ


Wholesale Interest Rates

Over the course of the week the 90 Day Bank Bill interest rate was down 3 basis points but the rate for 10 Year Government Bonds was up 13 basis points.  The OCR is next reviewed on 12 February 2020.



This Week


Last Week (28/11/19)

Last Month (5/11/19)

Last Year (5/12/18)






90 Day Bank Bill





10 Year Government Bond





Source: Reserve Bank of NZ





Nick Clark

6 December 2019