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Long-term threats to New Zealand’s supply of credit to business have prompted suggestions of tapping the locked-up wealth of state-owned enterprises and the creation of a sovereign wealth fund.
They come from a business think tank, the New Zealand Institute, in two new reports of the effect of the global recession and credit squeeze on the economy,
The papers, by the institute’s new research director, Benedickte Jensen, outline three options:
• Leveraging individual SOE balance sheets through cash withdrawals that could then be used for strategic investments. If no new sources of SOE financing are drawn on, this would entail trade-offs with lower funding for existing SOE investment plans. Alternatively, SOEs could raise new debt financing or the government could use partial listings to attract new equity finance.
• Encourage the New Zealand Superannuation Fund to invest more actively in New Zealand companies.The would require some changes in governance at the fund but investment decisions would need to be consistent with the fund’s mandate.
• The creation of a sovereign wealth fund (the New Zealand Growth Fund) to leverage the government balance sheet and invest strategically in New Zealand companies. It would be modeled on those used by nations such as Singapore to successfully invest in growth companies. Initially, the fund would own the majority of the SOEs (probably about $14 billion) and would be a fully commercial operation, actively managing the SOEs in its portfolio for growth.
The institute believes the long-term lending markets for NewZealand banks do not provide anything like the degree of funding they did in the past.
“We don’t know exactly what probability to attach to this scenario. However, it is prudent to manage this risk, as the impact would be severe if it eventuated,” it says.
The institute estimates that around $63 billion in bank funding is due to mature at some time in 2009, with a large proportion coming due over the next three months. Around half of that funding is sourced from Australia and this may mitigate the risk.
However, Australia’s access to funding is not completely assured at this time either, the institute says.
“Short term funding raised by the banks since October has come at a high cost. Successful raising of long term debt is likely to come at a high cost as well. This may cause banks to question the profitability of new lending.”
Read the full reports: