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Time to support Business Continuation - Cities and Regions NZ

Fuseworks Media
Fuseworks Media

Now that the reserve bank and the government have moved respectively to address COVID19 with monetary and fiscal stimuli we need to be preparing for the economic storm in sight. Many of our key trading partners have now implemented strict border controls and economic resilience packages. Most of these are their own defensive and protective measures. Trade and business as usual will be very difficult. Global demand for our goods and services will reduce. We are vulnerable.

There will be some sectors, horticulture and food related, digital for example, that will fare better than others. Logs may bounce back if China enters a recovery stage and there are some signs already there. Tourism related businesses, however, are extremely vulnerable and amid huge disruption. If there’s one lesson, we must take from this exogenous shock, it’s that we need to diversify and improve the structure of our economy. A greater emphasis on higher value exports, focusing on productivity growth and strengthening our tradables sector are starters.

NZ Inc right now must survive and plan for recovery at the same time. Our domestic economy is small, we can’t sustain the standard of living we have enjoyed based on taking out each-others washing, building houses, online shopping and takeout. We can prop it up with [fiscal] spending but we cannot trade our way through a global downturn in a siege mentality relying on our domestic economy.

Finance Minister Grant Robertson indicated that the budget would bring further measures and there will be in due course a recovery package. Great. My only comment is let’s not wait.

Government has done an excellent job in their first response ensuring the most vulnerable in society will not go without, the health sector is further supported to address Covid19, and SMEs will get relief to support themselves and employees in the short term. These are great first steps but now the serious work must begin on how to ensure our economy weathers the storm and we come out the other side stronger.

Ensuring the survival of medium to large businesses, many of them exporters, was missing from Tuesday’s announcements. Whilst 97.5% of our businesses employ less than 20 people, and they will benefit from the fiscal package, 40% of those employ no one. 1% of our businesses are large businesses that employ 48% of our workers. $150k in wage subsidies would be spent before morning tea for them. They will be looking to batten down the hatches if their future is uncertain or their markets are wobbly. Some businesses, if they are smart, will be looking for silver linings and new opportunities. I have had the pleasure of talking to a couple of those in the last 24 hours; Datacom (large) and MacKay Electrical (medium and growing).

However, in the short-term the national picture is that unemployment is sure to rise, and international demand will plummet creating a downward spiral of disinvestment. Re-deployment of workers is great and I’m sure government will be moving quickly to support this. But this is at the edges, it will not address our international competitiveness in the long run. It’s the medium-term survival of key industries and businesses that needs to be shored up now. If for some reason recovery comes sooner, that is good. Government can easily withdraw support measures, but nowis the time to prepare to ride out the storm.

Medium to large businesses and our key exporters must survive the next 12 to 18 months and be ready for recovery. Many businesses cannot survive past a month with a serious cashflow downturn, some even less, even if their longer-term prospects are solid. Margins are often tight and competition intense. The best way NZ Inc can help them is to ease their debt burden during a recession.

I am suggesting moving fast, using NZ Inc’s strong balance sheet, to ensure the cost of capital is low - very, very low. Yes, it’s the banks that lend, and government has no direct control over their lending criteria, but leadership is key. A signal from the Finance Minister and the Reserve Bank that they are considering a negative OCR would be strong mechanism. The signal on Tuesday from the Reserve Bank was that the OCR will remain at 0.25% for a year. That’s not an adaptive approach, which is what is needed right now, things are changing daily.

Banks can lend, extend credit and help businesses restructure debt, as they know their clients, but they have little room to move at the moment - a 75 basis point reduction in a global recession is small potatoes. In the Global Financial Crisis OCRs internationally moved 500 basis points or more, not 75. If businesses can lower their debt burden, they will be in a stronger position when recovery comes. The OCR is a blunt instrument, it has delayed effects, but banks will react quickly, their livelihood depends on investment too. The OCR has the advantage of adapting to market conditions quickly, so as a macroeconomic tool it’s useful. It can easily be pulled back if recovery comes sooner, but right now that seems very unlikely.

Mortgage rates similarly are a target to ride out the storm. A negative OCR would see banks align expectations of medium-term recovery in the economy with mortgage products. This combined with a, government backed, up to 12-month mortgage forgiveness plan for distressed customers would ensure that homeowners can also ride out the downturn. This would cost little compared to the haemorrhage that sudden devaluations and forced mortgagee sales would cause in the economy.

The rainy day has arrived, time to lean on our balance sheet. Luckily, thanks to good fiscal management NZ Inc has a strong one.

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