Regional Focus

New Zealand: small, but perfectly formed

Published: Sep 2016
Sunset over harbor

The easiest place in the world to start a business and the second best generally to conduct business, New Zealand sure sounds like somewhere corporates should take note of. What it lacks in the size of market, it sure makes up for in growth opportunities, stability and transparency.

The country may have been the backdrop to many of the Lord of the Rings’ most dramatic landscapes, but the reality of doing business in New Zealand is no fantasy. The country repeatedly receives praise from various industry bodies for its ease of doing business (second globally, World Bank Group’s Doing Business Guide 2015), free economy (third freest globally 2015 Index of Economic Freedom) and lack of corruption (fourth least corrupt, Transparency International’s 2015 Corruption Perceptions Index).

Indeed, the country’s open economy is in its seventh year of expansion and looks set to carry this momentum throughout 2016 and beyond. ANZ forecast growth of 2.8%, 2.5%, and 2.6% for this year and the following two respectively. As Mark Butcher, Chief Executive at New Zealand Local Government Funding Agency, says: “Most countries around the world would love to have the low inflation, 3% forecast economic growth, a government in fiscal surplus and historically low interest rates that corporates in New Zealand enjoy.”

The country’s domestic credit ratings as of this year from Moody’s (AAA), Standard and Poor’s (AA+) and Fitch Ratings (AA+) all have a stable outlook and corporate balance sheets are in reasonably good health, Butcher adds. As such, international interest has been growing in recent years. The amount of foreign direct investment (FDI) in New Zealand has almost doubled since 2001 from NZ$55bn to NZ$100bn in March 2015, according to the New Zealand Institute of Economic Research’s Foreign Direct Investment in New Zealand report.

But, due to the fact that New Zealand is relatively small in the global context, the question for investors is “whether they want to spend the time getting involved in this part of the world when there are some major problems drawing attention throughout the rest of the world”, says Butcher. “Nevertheless, it is a well-managed economy and there are opportunities for investors.”

A proven track record

For those who demonstrate willing though, what welcomes them is a stable opportunity with a proven track record. Although the current volatility in global financial markets, in addition to posing a threat to the country, is a reminder of how quickly sentiment can change, New Zealand has demonstrated its resilience to shock and aptness for endurance.

Since the global financial crisis (GFC), the Reserve Bank of New Zealand says a “partial” list of the threats faced includes: the tightening in global liquidity in the immediate aftermath of the GFC; the Canterbury earthquakes; 2012/13 drought; terms of trade that have fallen considerably from a 40 year high; the 70% peak to trough movement in dairy prices; the 75% fall in oil prices; record net migration and labour force participation; sizeable movements in the real exchange rate and annual house price inflation in Auckland that reached 27%.

Overall, the economy has come out the other side of all these exposures reasonably well. As such, it comes as little surprise that New Zealand is often hailed as one of the world’s top safe-haven economies.

And this track record is something which the country may need to rely on in the future, in order to bring further success. Several surveys have indicated varied outlooks for New Zealand, dependent on the sector and region. The agricultural sector, particularly dairy exports, for example, is extremely susceptible to external conditions such as deteriorating trade and therefore has faced headwinds in recent months, a consequence of which is a drop in business sentiment. For example, in Southland, a region with many dairy farms, 38% of consumers had a negative perspective towards the economic outlook in H215. Construction in urban areas, on the other hand, has seen widespread growth; this is mainly due to the major pipeline of construction work, particularly in Canterbury and Auckland.

Ample opportunity

Of course, New Zealand is renowned for its agriculture, but there are also opportunities in other fields. Information and communications technology, tourism, film and special effects production, biotechnology, agricultural research, and wood-based technology, for instance, reports New Zealand Now, an online government guide to immigration.

“New Zealand is moving towards a more balanced economy, away from a large reliance on agriculture. At the moment, there is a strong domestic demand – particularly through construction. Tourism continues to grow too, and there is a desire by government to drive high-value service industries such as software design,” says Todd Voice, Treasurer, Holcim Australia & New Zealand.

Indeed, the country has demonstrated innovative spirit. Entrepreneurs are in abundance; the country’s top 100 high technology companies contributed NZ$9bn to the economy in 2015, with record growth of NZ$609m (up 7.3%), according to a Technology Investment Network report. New Zealand’s collaborative research and development (R&D) environment is backed by a government that actively supports science and innovation as one of the core pillars of its formal Business Growth Agenda.

The government also actively encourages foreign investment as there is a light-touch approach to regulation (consent is only required for a limited number of investments, including assets of more than NZ$100m). Certain growth industries – like the film industry – are also supported with incentives and tax credits.

In general, New Zealand’s overall tax system is also supportive for corporates. In 2014, the US-based Tax Foundation ranks it as second in the developed world for its competitiveness, partly in recognition of the 2010/11 budget, reducing its corporate income tax rate to 28%, down from 30%. The thin capitalisation rules for foreign-controlled or owned companies are worth bearing in mind, though. As Voice explains: “There is a maximum level of debt to asset ratio that has to be complied with. If a corporate doesn’t comply, the interest on any debt in excess of that ratio is not deductible for tax purposes.”

Treasury environment

In terms of managing any such controls, treasury teams in New Zealand are without a doubt hard-working. According to PwC’s New Zealand treasury management survey 2015 many organisations (83%), particularly in the small and medium-sized categories, have one or less full-time equivalent treasury staff member. The report notes that this finding came as “somewhat of a surprise” given the increased emphasis on risk management following the global financial crisis, but offers one possible explanation. A “unique treasury advisory and outsourcing services environment”, PwC says, exists in New Zealand where specialist external advisors and treasury outsourcing functions are available to fill any void in talent.

Other findings further suggest some perhaps unique treasury behaviour in the country. A significant portion (66%) of respondents have a single banking partner and, what’s perhaps more revealing, are comfortable with this position (91% see this arrangement remaining unchanged). In addition, 78% of respondents are still using spreadsheets as their treasury management recording and reporting tool. Thirteen percent use a TMS, and 11% use a system provided by a treasury outsourcing service provider.

There are no hard and fast rules in terms of the number of banks corporates use nor their technology preferences, however. And Voice presents a somewhat different picture. “Whilst it is largely basic cash management techniques that are used – cash pooling, offset sweeps and supply chain finance, for example – most corporates are of a smaller size, so tend to keep it simple because the cost benefits of more complex structures don’t always stack up,” he says.

New Zealand is moving towards a more balanced economy, away from a large reliance on agriculture. At the moment, there is a strong domestic demand – particularly through construction. Tourism continues to grow too, and there is a desire by government to drive high-value service industries such as software design.

Todd Voice, Treasurer, Holcim Australia & New Zealand

Butcher concurs: “The average New Zealand corporate is typically New Zealand-owned or owned by an Australian entity or possibly a multinational. New Zealand isn’t the home base for many companies with large numbers of foreign subsidiaries, so there isn’t a lot of complex cash management that takes place.”

“Corporate treasury as a profession and discipline in New Zealand is very mature, though,” says Voice. Most medium to large corporates recognise the value that can be added by a good treasury function. Owing to the fact that the country is both an exporter and importer and exposed to exchange rate risk, even the smaller companies, Voice says, will require some level of treasury services. “It’s just that as a general rule, because the size of the corporates tends to be smaller, the treasury teams will be smaller. The activities could even be carried out as a combined role – by the financial controller, for example,” says Voice.

The size of the country can also impact expected salaries, as Voice explains they are typically lower than can be expected in high-demand places like London (see table 1 for a guide).

Table 1: How does your salary compare to those working in New Zealand?

Treasury Manager (turnover up to NZ$50m) Treasury Manager (turnover NZ$50m-NZ$500m) Treasury Manager (turnover >NZ$500m)
Auckland 80,000-90,000 90,000-110,000 100,000-140,000
Wellington 80,000-120,000 110,000-130,000 120,000-180,000
Christchurch 80,000-100,000 85,000-110,000 100,000-120,000

Source: Hays 2016 Salary Guide

All the best things come in small packages

The country’s small size isn’t much of a problem, however. New Zealand enjoys proximity to Asia’s biggest economies and currently has free trade agreements in place with: China, Australia, Vietnam, Philippines, Cambodia, Brunei, Indonesia, Hong Kong, Myanmar, Thailand, Malaysia, Laos, Singapore and Chile. In particular, New Zealand over the years has been boosting symmetry between financial markets, tax policy and the broader regulatory environment with its closest neighbour, Australia, to assist businesses operating across the two countries.

To put the country’s size into context, Butcher says, “New Zealand is an open economy and relatively small in size on a global scale. But the financial markets are actually mature and deep, relative to their size. The corporates and domestic markets here are very well-serviced”.

The capital markets “really punch above their weight”, he says, particularly when it comes to the debt capital markets. “You can get good volume transacted in terms of your debt issuance. It is also a really cheap place to borrow because while we’ve still got relatively high nominal and real yields we have tighter credit spreads relative to other markets.” This has resulted in New Zealand achieving a record year of corporate bond issuance for every year for the last four, he says. “The actual tenor of corporate bond or corporate debt issuance has moved longer as well.”

In terms of the banking sector, there are the four Australasian majors (ANZ, Bank of New Zealand, Westpac and Commonwealth Bank of Australia), a small number of Chinese and Japanese banks and two major international banks, HSBC and Citi. “This has shrunk considerably in the last 15 to 20 years,” notes Butcher. The domestic banks are full-service banks with all treasury products, but often have joint venture arrangements with some of the global banks to provide offshore services to corporate clients.

The presence of Japanese and Chinese banks is relatively new. “They tend to focus on trade finance, providing access to global networks and cross-border banking platforms,” he adds. “Some of them are mainly here to service their offshore domiciled clients back in their own jurisdictions and participate in domestic activity, but it is a bit selective.”

In the know

Treasurers in New Zealand certainly don’t have the luxury of being selective though, especially when it comes to up-to-date knowledge about what is going on in the global economy. Proximity to Asia, the country’s open economy and the fact it is very export-driven (exports account for around 30% of GDP), doesn’t come without issue. The country is exposed and vulnerable to changes elsewhere. A persistent slowdown in China, for example, is a concern for corporates. “Treasurers in New Zealand have to be very aware of events which unfold in other countries that can have a larger impact on the exchange rate, interest rate and commodity prices here than domestic factors do,” says Butcher.

This is, in fact, one of the biggest challenges in the country. “Keeping on top of everything, being across lots of different countries and markets and ensuring segregation of duties is difficult when, because of the small scale, treasury functions tend to be one or two staff. Everyone has to become generalists and keep an eye on everything,” he says.

Of course, this is something that the banks can help with. Working in the countries favour, however, is that it is relatively straightforward for corporates. “I would characterise New Zealand as a very easy place to do business,” says Voice, who also has experience working in Europe and Africa. “It’s also worth noting that New Zealand is internationally recognised as a place where you have a great lifestyle with access to numerous outdoor activities and an advantageous life/work balance.”

And quality of life is something which shouldn’t be overlooked. Nor is a country’s track record. Despite its exposure to the global economic climate, New Zealand weathered the GFC well, amongst other threats in recent years, and could be a place to take shelter in what looks set to be a stormy future. Contrary to the thought that major problems elsewhere in the world may draw attention away from the southwestern point in the Pacific Ocean that is home to New Zealand, these issues may actually draw corporates towards a country that is a rare stable offering.

All our content is free, just register below

As we move to a new and improved digital platform all users need to create a new account. This is very simple and should only take a moment.

Already have an account? Sign In

Already a member? Sign In

This website uses cookies and asks for your personal data to enhance your browsing experience. We are committed to protecting your privacy and ensuring your data is handled in compliance with the General Data Protection Regulation (GDPR).