This, along with an extensive range of other publications, is available at the Deutsche Bank web site Deutsche Bank.

Key Points:

Preliminary poll results suggest that Labour and the Alliance will be able to form a majority government without the involvement of the Green Party. Labour and the Alliance control 63 out of 120 seats.

The Greens failed to take the 5% hurdle. Moreover, Green Party leader Fitzsimons did not succeed in taking the high-profile seat of Coromandel, which would have made the 5% hurdle irrelevant. (NZ First achieved the latter through Winston Peters' narrow win in his electorate of Tauranga.)

The Greens lost the Coromandel electorate seat by only 400 votes (out of around 25,000 in total) and were only 0.13% away from the 5% threshold.

While the closeness of the results suggests that the counting of special votes (ex-patriats etc) could change the outcome, we consider a swing to the Greens unlikely at this stage, with the conservative parties usually having an advantage on special votes.

Nevertheless, a considerable degree of uncertainty remains until the announcement of the final vote count on 10 December. If the Greens gain representation in Parliament, the combined seats of a Labour/Alliance Government would reduce to 60, one short of an absolute majority.

Both the Prime Minister designate, Helen Clark, and Alliance leader Anderton have signalled their willingness to come to some arrangement with the Greens in that case. However, the Greens have been vague so far about the exact nature of such an arrangement, i.e. participation in a cabinet or simply providing parliamentary support of a Labour/Alliance minority government.

The potential inclusion of the Greens would dilute some of the Labour dominance of a future Government. Given a somewhat disappointing performance of the Alliance, Labour has nearly five times as many MPs as the Alliance on current seat allocations - suggesting a strong Labour influence on personnel and policy matters. Including the Greens would not only mean shifting the balance between the parties, but also potentially causing a
greater influence of the left wing of the Labour Party.

With regards to Personnel, the Alliance is likely to get four positions in a 20-member cabinet. Helen Clark will be Prime Minister, Jim Anderton Deputy Prime Minister and Minister of Business Development (a new portfolio), while Michael Cullen will take over as the Treasurer.

Helen Clark and Jim Anderton will set up a team for coalition negotiations. However, unlike in 1996 between National and New Zealand First, any agreement will be rather general, suggesting a fast completion of the talks. Helen Clark intends to have the new Government in office before Christmas.

Election Results:
Party % 1999 % 1996 Seats 1999 Seats 1996
Electorate List Total Electorate List Total

Labour 38.9 28.2 41 11 52 26 11 37
Alliance 7.9 10.1 1 10 11 1 12 13

National 30.7 34.3 23 18 41 30 14 44
ACT 7.0 6.2 0 9 9 1 7 8
United 0.5 0.9 1 0 1 1 0 1

NZ First 4.2 13.1 1 5 6 6 11 17
Green Party 4.9 n/a 0 0 0 n/a n/a n/a

Others 5.9 7.2 0 0 0 0 0 0

Total 100.0 100.0 67 53 120 65 55 120

Ambitious plans have been announced for the first 100 days in office, with Labour promising to move on changing the rules for interest payments on student loans, lifting superannuation payments, introducing a new 39% marginal tax rate for incomes over $60,000, reviewing the minimum wage, starting work to repeal the Employment Contracts Act and to reverse recent changes to the accident compensation insurance, and setting up a new agency for business and industry development.

The Alliance has announced similar policies, with desired changes going somewhat further in most areas. While Labour is unlikely to concede in most cases, it may agree to a rise in the minimum wage as early as 1 January.

From a macroeconomic perspective, the key medium-term issue will be a higher path for government expenditure than would have been pursued by a National-led government. While Labour's costings suggest a medium-term difference in the fiscal balance of only around 0.6-0.7% of GDP compared to current government policy, we suspect the gap to be more pronounced over time, with fiscal surpluses constrained to around 1% of GDP.

A key development with respect to monetary policy will be a review of the operation of policy to be conducted early next year. A foreign expert is likely to be asked to undertake the review. As Treasurer designate Michael Cullen has stated, neither the RBNZ's sole focus on price stability, nor the 0-3% target range will be up for change. However, there is the risk that Alliance leader Anderton will not easily make those concessions, given that a significant tightening in monetary policy next year - which looks
increasingly likely, given latest inflation indicators - constitutes a key risk to his ambitions in the business development portfolio.

In the event of the Greens getting into Parliament, their key direct influence on the Government would be a stronger environmental orientation. However, more indirectly, through the shift of the internal balance of power within the coalition (see comment above), their influence would likely result also in a higher degree of fiscal expansion, as well as a slower path of tariff reductions.

Likely Market Reaction:
The main risk for the market was a strong showing by the parties of the far left - the Alliance and the Greens. As things stand on election night results, this has not eventuated. This should be of comfort to the market and so a small positive reaction seems possible over the coming week. Having said this, the market may already be marginally long the NZD which will limit any short-term increase.

While there is some uncertainty about whether the Green Party will ultimately cross the 5% threshold, this should not be a major focus for the market. It is unlikely that the Greens will have much influence on economic policy settings even if they do manage to gain representation in Parliament.

Of immediate interest to the market are the exact role of Jim Anderton and the review of the operational aspects of monetary policy. The first of these should be resolved fairly quickly.

The monetary policy review has the potential to have to destabilising influence if it is not managed tightly by Michael Cullen. However, these things are not major concerns given the dominant role of Labour in the coalition.

Over the longer term, the policy slippage in the Labour/Alliance programme carries the risk that it will be negative for New Zealand's economic performance. However, any slippage will not be dramatic enough to offset the positive cyclical influences expected to impact on the economy over the next few years.

by Ulf Schoefisch (Chief Economist)
David Plank (Fixed Income Strategist)

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