- The second half of 2005 saw New Zealand enter its eighth year of economic expansion.
- Concerns about the components of growth and the outlook for inflation led the Reserve Bank of New Zealand to increase the policy rate to 6.75% in March 2005.
- Although 2005 was an election year, both competing political parties were committed to an independent central bank with an inflation target, budget surpluses, low tariffs and modest support for industry.
- The New Zealand banking system, and the cash management business in particular, is constantly moving, and 2006 is providing plenty of opportunity for innovative and creative solutions.
In the second half of 2005, New Zealand entered the eighth year of an economic expansion that has seen national output increase by over one quarter and the unemployment rate fall to a level unmatched for decades. The long run of success has been based on a resilient rise in business investment, residential construction and a higher trend rate of consumption. It has also been associated with a trend improvement in labour productivity, which has long been the weak point in New Zealand growth. Attracted by the prolonged expansion, the number of immigrants to New Zealand substantially exceeded the number of New Zealanders emigrating, adding to the demand for housing and assisting a sharp increase in employment.
In some respects, New Zealand has done too well, and concerns about the components of growth and the outlook for inflation prompted the Reserve Bank of New Zealand (RBNZ) to increase the policy rate to a formidable 6.75% by early March 2005. One of these concerns was the increase in household debt, largely driven by home mortgages. In the past decade, household debt has more than doubled compared with household income, and after a period of relatively slow growth, house prices began to rapidly increase from 2003.
Another concern was the expansion of the current account deficit, with New Zealand’s domestic demand growing faster than export growth over much of the period, due in part to the strength of the New Zealand dollar (NZ$), the current account deficit widened to 7% of gross domestic product (GDP) and net foreign liabilities rose beyond 80% of GDP in the first half of 2005. While not an explicit target of policy, the expansion of the deficit did suggest New Zealand was running into domestic capacity constraints.
While growth in home-building has now slowed, export receipts have been falling and emigration exceeds immigration, other indicators suggested that the economy remained remarkably strong into the second half of 2005. Retail sales growth continued, employment rose in the second quarter after a flat first quarter, and credit growth was lively. There are good reasons to expect that the tightening of monetary policy will successfully slow the economy. Business and consumer confidence is well off the highs and the housing market is no longer driving household spending as strongly as it did through 2004. Meanwhile, the high NZ$ is constraining export growth. As growth slows into 2006, the current account defi cit is also likely to narrow, though only a little.
Labour Prime Minister Helen Clark called an election for mid-September 2005, which resulted in a narrow victory for the Labour Party. While there are considerable differences between the Labour and National parties on symbolic and cultural issues, the differences on economic issues are narrower. Both are committed to an independent central bank with an inflation target, both are committed to budget surpluses, and both are committed to low tariffs and only modest support for industry. With a modified system of proportional representation now operating, neither of the major parties is able to govern without a coalition of minor party allies.
Banking and Clearing Systems
New Zealand has a very developed and sophisticated cash management infrastructure. The roots of this are based on the foresight taken by local banks decades ago in creating a centralised clearing house. The benefits continue to accrue today as recent technological advances challenge historical payment methods such as cheque and direct debit. The payments systems in New Zealand are shown in Figure 1.
All banks must maintain bank clearing accounts or exchange settlement accounts with RBNZ, the central bank, which also controls the settlement and relevant ‘wash-up’ in these accounts.
Bank Account Structures
While New Zealand is a relatively regulatory free environment in which to conduct business, companies need to take into account the taxes shown in Figure 3.
Legal Considerations and Currency Controls
There are restrictions on cross-border transactions and the flow of financial information in certain circumstances, however there are no specific regulations governing foreign exchange transactions in New Zealand.
Cash Management Overview
Typical corporate cash management objectives include the following:
- Improve efficiency of transactions by using automated electronic means as much as possible as opposed to paper.
- Minimise transaction costs by implementing the correct account structures that use the most appropriate clearing mechanisms.
- Obtain enhanced returns through liquidity products.
- Implement an effective electronic banking platform that provides multi-country access through a single point of entry.
- Seek one banking partner that can offer a complete suite of products.
Availability of Cash Management Products and Outsourcing
Electronic Banking, Internet Banking and E-commerce Development
The Internet continues to grow as the delivery channel of choice with the five largest local banks increasing their number of Internet customers from 1.36 million in 2003 to 1.7 million in 2004. Ninety per cent of all payments were made by electronic means in 2004, according to the KPMG’s Financial Institutions Performance Survey 2004.
In the interests of both efficiency and productivity, delivery channel integration to accounting and treasury back-office systems is becoming the norm. Banks are now looking to move further along the supply and payment chain, delivering payable, receivable, liquidity and working capital solutions from a single access delivery channel.
Looking Ahead
As the New Zealand cash management market continues to evolve and change, the following are some of the changes expected.
From the Client’s Perspective
No major policy changes are expected from the coalition government. Economic growth has been particularly strong over the past couple of years but should see a slowdown over the next period.
From the Bank’s Perspective
The potential of increased compliance costs are always a possibility, given demands from various global regulatory bodies. The Internet is fast becoming the preferred delivery method in New Zealand, giving access to a wider range of products that may have traditionally been seen as non-core cash management, such as receivable matching services and beneficiary advising.
The focus on cash management and liability growth will increase, as high-grade asset margins have tended to fall. There will be an increased demand from our customers for more value-added services, whether in customer support or technical integration. Customers are asking for greater automation and access to a wider range of cash management solutions, which we are able to support via the functionality of HSBCnet.
The New Zealand banking system, and the cash management business in particular, is constantly moving, and 2006 will yet again provide plenty of opportunity for innovative and creative solutions.