PM JOHN KEY OFFERS ECONOMIC ASSURANCES AND GENERALITIES

UNCLAS SECTION 01 OF 02 WELLINGTON 000018 SENSITIVE SIPDIS STATE FOR EAP/ANP AND EEB, STATE PASS TO USTR, PACOM FOR J01E/J2/J233/J5/SJFHQ E.O. 12958: N/A TAGS: ECON ETRD PGOV PREL NZ SUBJECT: PM JOHN KEY OFFERS ECONOMIC ASSURANCES AND GENERALITIES WELLINGTON 00000018 001.2 OF 002 ¶1. (U) Summary: On January 15, Prime Minister John Key held his first high-level meeting of the New Year to address growing negative economic news. Major financial research firms recently forecast significant contraction in the New Zealand economy resulting in a projected fifth quarter of no growth, weakening demand for exports and growing unemployment. Key offered only generalities and set February 4 as the date to release details of his economic stimulus package along with kickoff of "Summit on Employment." The opposition Labour Party claimed the lack of specifics pointed to a Government without any coherent plan to save jobs and turn the economy around. End summary. How to Staunch the Red Ink -------------- ¶2. (U) On January 15, Prime Minister John Key returned from his two-week holiday in Hawaii. Along with five senior ministers, the State Services Commission, and the Department of Prime Minister and Cabinet, he received his first economic brief for 2009 from senior Treasury officials on the state of the New Zealand economy. Just before the meeting convened the New Zealand Institute of Economic Research (NZIER),Dunn and Bradstreet (D&B) and Standard and Poor's (S&P) released a series of gloomy economic forecasts. ¶3. (U) The New Zealand Institute of Economic Research quarterly survey of business opinion for the December quarter offered a resoundingly bleak outlook, with a net 44 percent of firms reporting a drop in business activity, the worst result since at least 1970. Many economists reacted negatively to the news, with ANZ Bank picking the likelihood of a significantly negative gross domestic product (GDP) figure for the quarter resulting in a fifth successive quarterly contraction. Analysts widely agreed the figures from the survey showed a worse 2009 than previously expected, with an intensifying recession more likely than an abating one. ¶4. (U) Dunn & Bradstreet in its "Economic and Risk Outlook Report" released January 14 reported, "With world economic growth falling 1 percent in 2009 before rebounding 2.1 percent in 2010, New Zealand's growth will 'slow sharply' during the year." The report predicted that global trade conditions were expected to deteriorate further and bankruptcies and late payments by businesses and consumers would rise. The outlook in New Zealand was "pessimistic" because consumers overall are carrying high debt levels, housing prices were falling, and the export and tourism sectors face negative conditions in the months ahead. "Demand from Asia is critical to New Zealand's economic prosperity but export demand is expected to decrease markedly and default risks likely to rise with New Zealand's exporters hit hard in 2009," according to D&B corporate affairs director Damian Karmelich. He further said that regardless of GNZ's fiscal and monetary policy changes, the year ahead would be tough for local businesses. ¶5. (U) Standard & Poor's has also revised its outlook on New Zealand's foreign currency rating from stable to negative, and is warning of a possible downgrade in the country's currency ratings if the next budget does not contain a credible medium-term fiscal (stimulus) plan. "The outlook revision on the foreign currency rating is driven by S&P's view of New Zealand's narrowing economic policy flexibility in light of the country's widening external imbalances, as evidenced by the sizeable current account deficit," said S&P primary credit analyst Kyran Curry. New Zealand's current account deficit was NZ$15.5 billion, or 8.6 percent of GDP for the year to September 2008. At the same time, S&P affirmed its 'AA+' foreign currency and 'AAA' local currency long-term ratings for New Zealand, as well as its 'A-1+' short-term ratings and the ratings on New Zealand's debt issues. ¶6. (U) The NZ Treasury's forecasts reiterated the negative prognosis of the private financial research firms and predicted that there will be no economic growth this year. Treasury estimated that unemployment could reach 7 percent in 2009, rising to 7.5 percent by ¶2011. It also forecast that the number of unemployed could double, from 94,000 today to 170,000 by 2011, and that Government debt would expand to almost 40 percent of GDP by 2013. PM Key Offers Lots of Assurance but Few Details -------------- -- ¶7. (U) PM Key did try to allay fears at his press conference WELLINGTON 00000018 002.2 OF 002 following the Jan 15th meeting and promised strong measures to stimulate the economy in the face of Treasury's forecasts. He said that measures already announced, including tax cuts starting on April 1, would put at least NZ$7 billion into the economy and there was more to come. Mr. Key also tried to further reassure the NZ public saying New Zealand was in a much better position than many other countries to ride out the international crisis and he expected the economy to rebound in the near-term. "We see 2010 as a moderate year and 2011 as quite a strong year," he said. Key outlined the broad themes of his economic stimulus program to be announced in February which included: -- Reminding investors that the NZ banking system was continuing to function and the deposit guarantee schemes put in place before the election were working; -- The NZ Government was going to choose road (highway construction and upgrades) and other infrastructure projects for its stimulus package that could be started quickly; -- There would be important changes to simplify the Resource Management Act and red tape would be cut to help businesses; -- The May 2009 budget would detail programs which were going to be scrapped so that the money could be better used elsewhere; and -- Reserve Bank Governor Alan Bollard "obviously has room to move" and announce further interest rate cuts that would help the economy. (Note: Next rate announcement scheduled for January 29. End note.) -- The "Summit on Employment" (to be held in February) will be chaired by the New Zealand Stock Exchange (NZX) chief executive officer Mark Weldon to address the growing unemployment problem. ¶8. (U) Following the meeting with his ministers, PM Key said he would make a speech next month (February 4) outlining his government's specific stimulus measures to boost business confidence and help small to medium businesses through the downturn. ¶9. (SBU) Comment: The PM's reticence to deliver details opened the door to the opposition Labour party to claim the lack of specifics pointed to a Government still lacking any coherent plan to save jobs despite layoffs being predicted to escalate dramatically over coming months. The National Party, however, seems prepared to weather the criticism from Labour now when the recession has yet to bite hard so it can keep the introduction of more substantial relief measures up its sleeve for when things get really become difficult. Moreover, the media are not giving credence to Labour's nattering, noting that the answers to New Zealand's economic woes cannot be found overnight and are, in part, tied to external influences beyond the government's control. End comment. KEEGAN