'THE NATION'
ANDREW THORBURN
Interviewed by DUNCAN GARNER
Sean Over the past week we've seen what looks like the beginnings of a second global recession, from the United
States where the latest job figures show the country's economy has stalled, to Europe where fears about the Italian
economy in particular have driven stocks down nearly 10% in a week. Here in the Asia Pacific regions, markets and
currencies have tumbled, the news has been all bad. And we have extensive coverage of what's happening first up what it
all means for New Zealand.
Duncan Thanks Duncan, with me now is the CEO of the bank of New Zealand, Andrew Thorburn. Thanks for joining us this
morning. Can you explain what's happened here and how serious, how bad is this, as people wake up this morning and
wonder what's gone on?
Andrew Thorburn – CEO BNZ
Well Duncan I think what we're seeing is markets obviously being very uncertain, and what markets want is some
confidence and I think that uncertainty's being driven by a couple of specific things. One is, obviously the US debt
ceiling and what was gonna happen, would the US default, I mean that’s obviously a scenario that’s been averted, but
there was some pent up concern there. I think the other issue which has been going on for months to be quite honest, is
what's happening in Europe, what's happening with Greece, what's the bailout plan? Why can't they get a deal together?
Why can't they just lock down a plan that closes that issue down? So I think you're seeing those two issues but I think
underneath it all – I mean you're seeing volatility, you'll see it for some time. But you’ve gotta go right because, cos
this is a structural generational issue of excessive debt by government's that’s gonna take a long time to address.
Duncan It sounds like what you're saying is that the global financial crisis of 2008 was never fixed properly. If
that’s the case is this the second meltdown, the next big recession?
Andrew Well I think the GFC was an extraordinary situation. You had the build-up of excessive debt, you had asset
bubbles, you had opaque financial instruments and nobody knew who held what debt, and then you had banks collapsing. So
I think if you look at that and today, I don’t think it's the same situation.
Duncan This is not the next financial crisis?
Andrew Not in my view, no. I think what we've got now is we're dealing width, I agree with part of your point,
governments now having to deal with excessive debt, and I don’t think that’s being dealt with fast enough. So I think
that issue is sitting there as the fundamental issue that has to be addressed and that will take some years and while
it's being addressed you're going to see markets going through volatile periods like the last semester.
Duncan So what you're saying in many ways this is about America and about Europe. Implications for New Zealand what are
they?
Andrew Well clearly because we're part of that global economy, we trade with that economy, if there's another
recession, or there's real concerns in European markets, debt markets, that’s obviously going to affect us, it's going
to affect us because (a) our banks do raise money there, although our banking system is arguably the envy of the world.
It's a very strong banking system. And (b) you might see another recession in the US. I think it's unlikely, but if that
happens that’s gonna have a flow on impact in terms of trade. But our economy is quite sound, I think we've made some
good changes in the last few years. Our banking system is strong, and we've got some real opportunities into Asia,
because I believe China and India are a long run growth story, which is great for us.
Duncan When we had you on after the government's budget this year in May you were slightly sceptical about the
government's growth forecast, especially 2013, at about 4%. What's the impact on what's we've seen in the last couple of
weeks leading into this new crisis if you like on those growth forecasts, and I say 4%, it was pretty robust.
Andrew It was. Well my view is look I think the government's budget was the right budget. I think if there was a soft
spot it was that growth forecast, and this sort of environment's going to put more question over that. Having said that
I think in the next couple of years with corporate balance sheets being quite strong, a sound banking system and I think
reconstruction of Christchurch, the Rugby World Cup and still growth in China and Asia, I think we can be confident for
the next couple of years. Now of course what happens in the world next week is going to be a challenge.
Duncan Does this impact in the New Zealand sense, you know we talked about that 4% economic growth in 2013. The
government put a number of jobs, about 170,000 jobs. In what sense does this crisis become a confidence crisis, a crisis
of confidence for New Zealand?
Andrew Well I think this is going to be somewhat of a setback because people are going to be concerned about what's
going to happen right. And so you're gonna see businesses who are starting to see a bit of light coming saying what's
happening, should I take on those people, should I invest five million dollars in capital expenditure, and they're
probably going to hold off. So I think that confidence factor, we have to be realistic, but the New Zealand economy's in
pretty sound shape, the banks are in very good shape. I think one of the things that we need to see out of this is that
we cannot rely on offshore markets to fund our economy to the degree that we have. We've got to start to increase the
rate of savings in New Zealand. Now that’s been happening, but my view is we haven’t done enough structurally to
actually sustain that beyond the next year.
Duncan What you're saying then is what has been picked up by both Phil Goff and John Key this week, in the last couple
of weeks about KiwiSaver. You're saying compulsory aren’t you?
Andrew Well I'm saying that there has to be a coordinated approach to this issue, cos a bit like the debt issue around
the world, this is a structural issue for New Zealand. I think you have to look at the tax system. Does the tax system
encourage investment? And I think while some things have been done, not enough right. So that item. If we don’t
disincentivise housing and put it into productive investments.
Duncan Well the Labour Party have just started to do that haven they, Capital Gains Tax?
Andrew Yes. And I think compulsory super is part of that, financial literacy is part of that, and a properly regulated
and commission free financial advice sector is another part of it. So I think there are some fundamental things we have
to do, if we can be confident that we're saving enough.
Duncan What are you seeing on the shop floor as a result of what we've seen in the past few days? Have you noticed any
change in behaviour from consumers, from clients, and what about yourselves in terms of your criteria? Are you going to
keep lending as you have been?
Andrew Well I think you have to be adaptable, right, you cannot have things like this in the world and ignore them,
right. So I think we've got it under constant watch. I'm arguing that these are volatile times, but the fundamentals of
our bank, our banking system and the New Zealand economy are sound. We'll obviously be monitoring this, but I don’t
think we'll see any change in our lending criteria in the short term. We want to lend to businesses who are properly
structured and ready for growth.
Duncan Okay, so take the New Zealand context out, let's look at China okay, and let's look at Australia. Australia's
Reserve Bank has downgraded some of their forecasts around growth, China's trying to convince the world that it is still
strong and it's still buying goods. Are you concerned about our commodity prices? Are you concerned about our markets
that are intrinsically linked to Australia, which is looking a bit flatter now, and to China?
Andrew I think it's a relative thing in the sense that sure, Australia might be growing less and China might, but
they're still growing and growing quite strongly, and if you look at the China story, the demand they need for food and
for infrastructure in the next 50 years, closely followed by India, who are lagging China in that regard, we've got
growth opportunities for many decades I think. Now you're gonna see ups and downs. You're gonna see China's growth
falling a percent or two but still being strongly positive. So my view is in the medium term, we've got some really good
productive businesses, we've got innovative businesses, sound banking system, pretty good economy. Need to do some
things around savings, and then we're on the doorstep of Asia and they want what we've got or Australia's got. That’s
gotta be positive.
Duncan It interests me how positive you are about what you see here in New Zealand, because if you look at what has
happened around the world in the past 48 hours, it is not positive. You remain so positive?
Andrew Well I'm arguing that – I mean I'm not in the markets right. Markets people they will react right. So I'm
stepping back from it looking at it a little more commercially and strategically. I believe this is understandable given
the US debt ceiling and the time it's taking to resolve this Greek issue. I understand that, but if you look at the
fundamentals I believe New Zealand is not backing itself well enough. I think our economy, our banking system, our
businesses, our balance sheets, have got stronger. I'm concerned about the rate of savings for the country in the long
run. I think that’s going to be a real constraint if we don’t address it.
Duncan That’s been a real underlying message from you this morning.
Andrew You know I think pessimism can be overrated, and we need to be a bit more confident, because we're an innovative
entrepreneurial country, a lot of stuff going for us. Now I think we have to be circumspect right, but I think some
fundamentals, including China and India and Australia, I think we should be somewhat more balanced, get more perspective
around this, and have a more positive long run view.
Duncan Just looking at that again, I want to finish on this, interest rates, I mean you’ve seen the indications from
the Reserve Bank Governor here that they will move over the next 12 months. In Australia they're talking about bringing
them back. That’s because they're higher over there obviously now anyway. Is that right?
Andrew Yes, and what they want to see in Australia is they don’t want to see the economy stall, they want to see the
economy keep growing.
Duncan Do you think we could slow down the rate of growth and interest rates here as a result of what we've seen this
week or not?
Andrew Well I think you're going to see upward pressure on interest rates over the next 18 months.
Duncan And nothing changed as a result of what we've seen?
Andrew Well no I think it puts it more likely that the cost of funds for banks is going to rise, because when you go
into US or European markets as a double A rated bank, and that’s another big plus for us, double A rated banks. There is
still uncertainty, they want a higher risk premium because they're not sure what's going to happen. So it'll cost us a
bit more, but not significantly more at this point.
Duncan The financial market crisis has knocked the sharemarket here, with it now at its lowest level since December.
Over one billion dollars was knocked off share values alone. Across the Tasman the Australian Reserve Bank already on
Friday had lowered its growth forecast by 1% because of the continuing impact of the Queensland floods, and slower coal
exports. Our government is expecting sluggish growth next year as we struggle to climb out of the Canterbury earthquake.
So what will the events of this past week do and how bad will it be? Well to discuss this BNZ Chief Executive Andrew
Thorburn is back with us, and joining him is ASB Bank Chief Economist Nick Tuffley, and from Wellington were joined by
Shamubeel Eaqub, Principal
Economist with NZIER, the New Zealand Institute of Economic Research. Gentlemen thanks for all coming in here today.
Nick I just want to start with you if we can. Andrew said to me he doesn’t think this is the big one in the
sense that it's another global financial crisis, like we experienced in 2008. What's your view, do you agree?
Nick Tuffley – ASB Chief Economist
I do agree. I think the problem is pretty well known, and I think the solutions are actually pretty well known
too. I think we still have a lot of scope to avoid things getting really bad. A lot of it really comes down to, it's the
European politicians, they're the biggest hand brake, they’ve been reluctant to act and they tend to only act when
they're pushed into things by markets, and there are plenty of things they can still do to contain this crisis.
Duncan You wouldn’t say that the American politicians have been that good at this either though would you?
Nick Well they managed to manufacture a crisis of their own. The issue there wasn't so much about people being
reluctant to buy their debt, it was just that they were essentially getting to the point where they're refusing to issue
more to cover their expenses. So a very convoluted issue, and extraordinary to bring it up at a time when you’ve got so
much tension about government debt in Europe.
Duncan Shamubeel I don’t know if we can get some kind of consensus on this here. Do you agree with both the gentlemen
here that effectively this is not the big one as we saw from 2008?
Shamubeel Eaqub – NZIER Principal Economist
Look we don’t have the same issue of sort of falling into crisis and uncertainty, but what this has done is
really pushed us into realisation that we're back to a slow grind, and a very slow recovery. We're still gonna pay down
debt, and that is the big story.
Duncan Because when I spoke to Andrew earlier we talked about these government growth forecasts. I know you look at
those quite closely, 4% economic growth, 170,000 jobs by 2013, 2014, do you still expect that to happen as a result of
what we have seen this week?
Shamubeel Look what we saw in the markets was really a panic reaction and we saw a big correction in equity markets and
financial markets, but the real economy has just gone from kind of okay to flat. We're not going backwards, it's still
not recession, but it's still that realisation you know where things were okay, to something being quite modest, and you
know markets will vacillate and they go from great to fair so quickly.
Duncan Just in response to that question about that sort of the confidence, and is this a crisis of confidence now in a
sense that perhaps New Zealanders might put away their wallets again which would obviously be a dreadful thing in terms
of its recovery wouldn’t it?
Shamubeel Look consumers are pretty careful anyway when they're spending a lot of money paying down debt, and that’s a
good thing. That’s exactly the kind of adjustment we need to see in New Zealand, that we need to see around the world,
and we are actually making some progress. So that’s part of the reason why I think New Zealand hasn’t done as badly as
many of the other countries around the world, because we haven’t had the same big issues. We have been dealing with some
of them, but we still have some big challenges. You know we have an ageing population that no one talks about.
Government is going to blow out to the American levels in ten years' time. So there are some big issues to discuss, but
they're not in crisis point yet.
Duncan Andrew what does it mean if the wallets go away? I mean you'll be concerned about that?
Andrew Well absolutely because we were getting to the point where consumers, and particularly businesses who have paid
back debt and deleveraged it's called, got their balance sheets into a better position. We're getting to the point where
they could see some light at the end of the tunnel. So events over the last few days will definitely delay some of that,
but I think we just have to step back from it and see that we're not going to go back to the consistent high growth
scenario any time soon, and arguably for some years.
Duncan You don’t believe that 4%?
Andrew Well I don’t believe the 4% unless some things change. One, in the world, but two, my point around some
structural issues, our tax system, savings rates, and some things that need to be done to generate enough capital for
businesses to hire people to invest and to grow.
Duncan Do you think the government's been too bullish in its outlook Nick. I mean just looking at – and to put into
perspective what's happened in the past 48 hours, does the whole thing, does the whole scenario now need to be reworked
in terms of growth forecast?
Nick I think it's far too early to start scribbling with pencils and figuring out the forecast. Just commenting on
the Treasury's forecast – when they came out around the budget time they looked pretty close to our own forecasts. All
we've done since then is revise up our outlook, mainly because of what's been happening this year. So look I think
they're still achievable, but that’s also the caveat's of course that Europe doesn’t trigger a meltdown. As Andrew noted
a lot earlier on in the programme, we are very linked into the Asian region, and the Asia Pacific region is driving a
lot of the global growth. So what's really important to us is – as long as we don’t get any financial contagion it's
really does China continue to grow, does its commodity demand remain up, do commodity prices remain at pretty reasonable
levels. The Australian economy, domestic demands softing there, but will our exporters there still continue to do well.
Duncan What about sourcing funds Andrew from overseas? Are we exposed in a sense with our exposure overseas about 35
odd percent isn't it?
Andrew Well for many years New Zealand's been running a current account deficit and that means we've had to fund that,
and we funded it through mainly borrowing from overseas. Now, since the GFC that has improved significantly, because New
Zealanders and businesses have been saving. The government moving its own fiscal position to be stronger has also
required less funds, so that’s good and we are borrowing, banks in New Zealand are borrowing now less from overseas,
point 1, and point 2, longer term funds.
Duncan So we're in a better position?
Andrew I think we're absolutely in a better position to day than what we were three years ago. Now, what I'm suggesting
is the next couple of years high levels of uncertainty and flux. Let's not panic, let's just get the basics right, and
we're in a good position as an economy, but we need to do more to generate more savings in New Zealand than what we're
doing today, otherwise we won’t be able to fund the growth of the economy.
Duncan Exactly and this is a point Shamubeel that has been quite strong through the programme this morning. What is
your view on that around this argument about compulsory KiwiSaver. We've seen it from the politicians this week in
Wellington, we're now hearing it here as well. Is that your view? Is this what should happen now, compulsory automatic
enrolments in KiwiSaver to give us capital base?
Shamubeel Well look compulsory savings schemes kind of work, they help you build a capital market, but it doesn’t improve
your national savings. So the question is what are we trying to achieve? So it really is a question of whether we think
our capital markets are failing.
Duncan Do you think it actually improves national savings Andrew?
Andrew Well my earlier point was, we need to increase the rate of savings sustainably in the country to finance the
economy's growth. I think we all agree with that. The question is how, right. And I believe there needs to be a number
of measures that are quite significant interventions to change people's mindset and behaviour. I think as an economist,
Shamubeel's absolutely right, but if you're gonna get people changing of their own volition, sometimes that doesn’t
work, you have to force it, and so I think disincentivising housing, forcing some savings, and giving them some other
vehicles to invest in, like some SOEs listed, and other vehicles on the stock exchange, starts to broaden not just the
supply of savings, but where they can invest it. So you need a few things to go right, not just one thing.
Duncan Alright gentlemen, thanks for joining us this morning on The Nation, Nick, Andrew and Shamubeel in Wellington,
much appreciated.