 |
|
 |
|
New Zealand Consulate General and New Zealand Trade and Enterprise New York Luncheon for Investors
Jane Diplock AO Chairman,
New Zealand Securities Commission
Executive Committee, IOSCO
New Zealand Consulate General and New Zealand Trade and Enterprise New York Luncheon for Investors
in Honour of
Jane Diplock AO
Wednesday 10th September, 12.30-2.30
Yale Club
Hosted by Chris Tozer, Consul and Trade Commissioner
Thanks and Welcome
I am particularly delighted to be here in New York, home to the famous Wall Street, and still today one of the worlds leading financial hubs. When I visit I am reminded of the writer Tom Wolfe's words, "culture just seems to be in the air, like part of the weather". This especially as I experience this electrifying, dynamic and exciting city, seeing around me unparalleled manifestations of glorious art, music and theatre, and also the many industries that make up the fabric of this vibrant city.
Indeed it is for me a rather tantalising coincidence to find myself here during New York Fashion Week and I can only say that thankfully the business programme is so busy that I will not have to test my ability to resist temptation! I am pleased to note that New Zealand fashion designer Karen Walker is again participating in this show. It's also certainly very interesting to be here in the lead up to the Presidential election which I am sure, as you know, is being followed closely by people all around the world. Many people of course will not be aware of a quirky New Zealand link in that regard. It won't be widely known that it was a New Zealand software company Silverstripe that won the contract to power the website of one of the national political conventions - the Democratic National Convention.
On that note I know that New Zealand and New York share a vast array of strong and vibrant relationships through exchanges in business, trade, investment, through design, through culture and through the connections made by the vast kiwi diaspora here. New Zealanders make their contribution in the rich fabric of New York life in so many ways. They held, or have held, positions here such as: Chief Surgeon of Sloane Kettering Hospital, Worldwide CEO of a top advertising agency, senior staff research scientist at Google here, Gordon Ramsay's Executive Chef for his flagship restaurant here - The London, and there are many others. The younger generation, of course, have a stronger identification with New Zealand following the Flight of the Concords show.
From the New York side I know that many of you here today play a vital part in fostering and deepening the relationship between our two markets. In this spirit I am delighted to have the opportunity to exchange discussions with you today. I am grateful to our host Chris Tozer, to the New Zealand Consulate and New Zealand Trade and Enterprise, for organizing this marvelous gathering and providing the opportunity to meet with you all today.
Purpose of Visit to the United States
Firstly, just putting a perspective on my visit here to the United States...
I came over in my capacity as Chairman of the Executive Committee for IOSCO, the International Organisation of Securities Commissions, to meet with some of our key stakeholders, notably the IMF and the World Bank in Washington DC. IOSCO works closely with the World Bank and the IMF in its aims to see markets operating around the world on sound and explicit principles and standards, and to have regulatory frameworks that promote investor protection, transparency and efficiency across borders, in all markets both developed and emerging. In particular, we work with them in facilitating assistance for emerging markets. While here in New York I am of course taking the opportunity to meet with NYSE Euronext.
You will all be acutely aware that the aftershocks of the US sub-prime market crisis continue to reverberate around the global financial markets, and a number of the world's economies are suffering or in recession. Certainly the financial markets of the world face the most severe turbulence of recent times. And what there is no question about now is that the world's capital markets are truly global. Globalization encompasses the extraordinary growth rates of cross border capital flows and investment, and the increasing interdependence of markets in different national jurisdictions. This is where IOSCO is assuming so much importance.
IOSCO
Globalisation and the recent market turmoil has led to a flurry of work from across the spectrum of the international global financial system, by financial services regulators as well as other self regulatory and finance industry organizations, in attempts to find solutions to the problems which arose from the sub-prime crisis. IOSCO itself responded promptly to a call from the Financial Stability Forum and established a Task Force which reviewed and reported in March this year on the sub-prime crisis from a securities perspective.
For those of you not familiar with the organisation, to fill you in, IOSCO is the unchallenged standards setter for securities regulation. It is recognised as such by the international financial community, especially the Financial Stability Forum, the World Bank and the IMF. Its focus is securities and derivatives regulation, but it also maintains close relationships with the other major international regulatory bodies, the Basle Committee on Banking Supervision and the International Association of Insurance Supervisors (IAIS) - which are the global standard setters for the banking and insurance sectors respectively. IOSCO's 109 member jurisdictions regulate some 95% of the world's securities markets: It promotes the implementation of its 30 Principles of securities regulation in all member states and facilitates cross border exchange of information and cooperation through its Multilateral Memorandum of Understanding.
IOSCO has adopted a formal dialogue with industry, and I am sure many of your organisations have participated in some of our discussions, in some way or other, possibly through industry associations.
Sub-prime Crisis and New Zealand
Reflecting on the current conditions in the international financial markets, I thought I would just touch on how things have fared in New Zealand following the sub-prime crisis, and generally about recent developments there.
The credit constrictions which have accompanied the crisis affected New Zealand companies and institutions as credit became more difficult to source. For the first three to six months of 2007, the turmoil in New Zealand was largely a result of domestic concerns. But post-August 2007 when the sub-prime effects were being felt in the US and the UK, credit to all banks began to be constrained. Inter bank lending was reduced. While few New Zealanders were directly exposed to the securitized products which caused turmoil in other parts of the world, the reduction in liquidity more generally did affect our market. This combined with declining economic conditions, and further falls in the New Zealand property market, began to influence the New Zealand capital market more generally.
In one segment of the capital market we have suffered our own crisis if you like, with the collapse of a number of finance companies over the last year from early 2007. This represents in dollar terms, even in a New Zealand domestic context, a limited part of the capital market, but the failures in this sector were damaging to confidence of the investors affected and had an impact on investor confidence more broadly. Our Reserve Bank [in its financial stability report] observes that the failures in this sector are unlikely to have widespread negative effects on the financial system or broader economy, although particular pressures are evident in certain industries such as property development. Nevertheless these events have raised important issues for domestic regulation, a theme I will return to shortly.
The New Zealand Economy
First however, it is helpful to reflect on the economic context in our part of the world. Last week, just as I was leaving, the New Zealand Institute of Economic Research (NZIER) released some forecasts: After a stellar performance of almost 10 years of largely uninterrupted growth for New Zealand's economy around the 3.5% per annum mark, (which by the way outperformed the OECD average of 2.6%) we saw in the March quarter a contraction of 0.3%. The annual average growth in real GDP in the year to March 2008 was 2.4%, down from 2.6% the previous year. This slowing of economic growth was due to factors not entirely unexpected including:
- last season's North Island drought contracting production and export volumes of diary and meat products,
- a slowdown in world growth reducing demand for New Zealand exports, especially aluminium and manufactured goods,
- the combination of high oil and food prices, falling house prices and the prolonged period of high mortgage interest rates dampening private consumption, and
- high interest rates constraining investment.
NZIER's views are that New Zealand is currently experiencing a recession with real GDP likely to decline for three consecutive quarters starting in March 2008. It is predicted that the bounce back will be relatively quick with growth averaging 3.4% in the four March years between 2010 and 2013 after a low growth rate of 0.5% in the March 2009 year.
The value of the New Zealand dollar has weakened especially against the Australian dollar. NZIER however, do not forecast significant further depreciation of the currency on a trade-weighted basis. NZIER forecast that while there would be short sell offs from time to time, as in early August, they consider the relatively quick recovery of the currency in mid-August reflects the likely pattern of the currency in the near term.
NZIER believe that the bottom of the cycle has been reached. The increases in energy and food prices appear to be past their peak. Interest rates have started to ease, albeit slowly. Wage growth, which always lags behind the conditions in the labour market will remain high. The tax cuts in October will boost consumer confidence and spending. All these factors will support a return to growth in private consumption.
They also think property market will not fall much further from around current levels.
Inflation in the year to March 2008 was 3.4%. The Reserve Bank expects inflation to peak at 4.7% in the September 08 quarter, and then to fall. NZIER also forecast inflation to rise in the March 2009 year, and then to fall.
While NZIER think that the economy will get better in the short-term, they do not think full recovery to robust economic health will be quick and without further adjustments.
Overall, I remain optimistic about the New Zealand economy, which some commentators at least have us seeing full recovery by 2010. Much will depend of course on what happens in the economies of our major trading partners, as we are not isolated from the global economy. I thought I would just touch on some of those economic partners which are particularly significant for New Zealand and our ongoing economic health.
New Zealand-Asia Relationship
New Zealand's strategic position in Asia and the South Pacific is of pivotal importance. New Zealand has vital political, security and trade and economic interests in Asia, whose economies are of increasing significance globally.
Our ties in the region are enhanced by a number of free trade agreements signed or under negotiation. For example, New Zealand was the first developed country to sign a free trade agreement with China. We are part of the group along with Chile, Singapore, and Brunei that form the Trans-Pacific Strategic Economic partnership Agreement, or P4, and indeed the US has just commenced discussions to potentially join this agreement. We have Closer Economic Partnerships with Thailand and Singapore. Under negotiation are arrangements with the ASEAN group and Australia; and with Malaysia and Hong Kong.
All these arrangements are important when we consider the tremendous growth in this part of the world. Exports from all emerging markets are now almost half of the world's total, while they consume the bulk of the world's energy and have accounted for four-fifths of the growth in oil demand in the past five years; they also account for three quarters of global foreign reserves. Last year emerging economies grew four times as fast as developed world counterparts; and the Asia-Pacific countries represent a large part of that growth. So far Asian economies have weathered the market turbulence in the financial markets well. Dynamic growth in the Asia region is forecast to continue over the medium term fuelled by growth in China and India.
Australia-New Zealand Relationship
Of course New Zealand has very strong economic links with Australia which is our largest trading partner and with whom we have shared a free trade agreement (CER) for 25 years now. The New Zealand-Australia relationship is a uniquely close one, underpinned by geography, shared history, values, and institutions. Migration, trade, and other people-to-people linkages have helped shape a strong trans-Tasman sense of identity.
In relation to securities markets, this year we crossed a milestone with the bringing into force of a regime for mutual recognition of securities offerings. The regime will reduce costs for issuers raising capital on both sides of the Tasman and will increase opportunities and choices for investors. It has been used somewhat as a model for other counties around the world and it has been pleasing to see that now Australia and the US have entered a mutual recognition regime around exchanges and brokers and dealers.
Economic and Trade relations - US
For New Zealand, certainly the United States remains a vitally important economic partner for us and a source of research and investment. It is New Zealand's second largest individual trading partner, its second largest export market and its third largest source of imports. It's also a major source of foreign direct investment and inbound tourism. New Zealand places great store on its relationship with the United States. Both countries share a deep and longstanding friendship based on a common heritage, shared values and interests, and a commitment to promoting a free, democratic, secure and prosperous world.
So as you can see we remain inextricably linked with the major economies and regions of the world and I think we can be assured that New Zealand's efforts to foster and grow those relationships are in good shape.
The New Zealand Regulatory Framework
I said that I would return to domestic New Zealand regulatory issues. The recent global market turbulence illustrates the importance of a network of sound regulatory frameworks around the world. New Zealand has been on a journey over the last seven or so years and we now have a regulatory framework that is close to international best practise - one that international investors can have confidence in.
The securities laws now in place enables the Commission to take a range of actions that we could not previously take, or that were more difficult to take. For example under law introduced in 2002 we ran the major Tranz Rail insider trading case in which the defendants paid some NZ$27 million in settlements.
Recent law reforms passed this year have further enhanced the rules about insider trading and introduced new laws on market manipulation, and investment advisor disclosure.
The Commission has also been given new powers which allow us to take a variety of administrative and Court action against breaches of the law to help us police what are complex areas of securities markets regulation in any jurisdiction, as you well know.
One of the main reforms which is well progressed is the Financial Advisers Bill which proposes a regime that will lift the professionalism of financial intermediaries. This particular legislative reform was initiated following the Financial Sector Assessment Programme carried out by IMF in 2003. It is an important reform for retail investors and consumers.
The proposed Bill will aid investor confidence in seeking advice on investments from financial or investment advisers by making advisers more accountable. When passed, the law will require all financial advisors who advise on securities to be authorised by the Securities Commission. They will need to meet competency, experience and conduct obligations set by a Commissioner of financial advisors. They will also be subject to ongoing supervision by the Securities Commission, and we will have powers to take enforcement action where there are breaches of the law or misleading or deceptive conduct by advisors or brokers.
Other important areas of reforms are policy on deposit takers and regulation of collective investment schemes. In New Zealand our central bank, the Reserve Bank, has responsibility for prudential regulation. It supervises the registered banks and has a general responsibility to promote the soundness of the financial system as a whole. The Reserve Bank also has responsibility for monetary policy, similar to the Federal Reserve here.
Currently only registered banks are supervised but a Bill passed last week means that in future all deposit taking institutions will be subject to prudential oversight by the Reserve Bank. The measures will include requirements around credit ratings, and standardised measures such as capital adequacy and minimal capital requirements, governance and risk management. Prudential regulation for insurance companies is proposed but will be implemented through a separate piece of legislation.
The Government has also announced it is considering reforms for licensing of fund managers and changes to update our securities laws to ease compliance costs and provide investors with the information they need.
These changes have strengthened the regulatory framework and made it more effective in both discouraging and prosecuting poor market behaviour. This of course is important in attracting investment into the New Zealand capital markets and ensuring that investors can have confidence that appropriate frameworks are in place.
Investing in New Zealand
And for many other reasons New Zealand remains a great place to invest and do business in: I am sure as business people interacting with NZ you are familiar with the attractive features of NZ:
- is an efficient market based economy
- it provides a stable and secure business environment
- there is the unencumbered movement of capital
- there is modern infrastructure
- we have flexible immigration policies for managers and skilled workforce
- we have a highly educated, flexible and multi-skilled workforce
- there is a simple tax system
- New Zealanders are innovative and highly entrepreneurial and this is imbedded in the culture
- there is intellectual property protection
- a great lifestyle!
Companies choose to invest in New Zealand for a number of reasons, but one of the strategic advantages that New Zealand offers its a location as a base for expansion to Australia and the Asia-Pacific region. Another point is that there is excellent local R&D capability, and there are several examples of world leading organisations which have established in NZ to access this- Trimble Navigation, Unisys, Brunswick through Navman, Allied Telesyn with Network Dynamics, to name but a few. Of course access to natural materials and bio resources remains a key draw as well. Organisations such as Fonterra, the world's leading exporter of diary products, are testament to the potential for global businesses to emanate from New Zealand based on our natural resources. Fonterra of course have a significant presence in the US, headquartered out of Chicago.
Some of the recent international benchmarks have also illustrated New Zealand's advantages, as seen in the IMD World Competitiveness Yearbook 2008:
- 1st ranking in the lack of bribery and corruption, ahead of Denmark
- 10th lowest on the cost of living index after Bulgaria and Malaysia, ahead of Chile and India
- high flexibility and adaptability of people in the economy when faced with new challenges - ranked 10th after Singapore and Turkey, ahead of Denmark and the USA.
- overall economic freedom-3rd after Hong Kong and Singapore (Fraser Institute-Economic Freedom of the World Annual 2007 report.)
NZ Stock Exchange and Capital Markets
Before closing I thought I'd just touch on developments with our stock exchange which I am sure will be of interest to some of you here. As a regulator we pay close attention of course to what's happening in the capital markets and to the Commission oversight of NZX's performance of its regulatory role.
NZX which is New Zealand's only listed stock exchange has shown some interesting developments of late. It's a publicly listed company, listed on itself. Whilst the rapid growth in private equity over the last two years, and since 2008 the global credit crunch, have impacted on the number of IPOs it has seen, the NZX has embarked on a diversification strategy which augurs well for its future. It has plans for expanding into Australia to operate an ECN (Electronic Communications Network); it has expanded its information and data services through multiple acquisitions (such as Agr-Fax and The Dairy marketing Group) and it is set to directly benefit from the exposure to the KiwiSaver scheme. The future may see some significant listings from the likes of Fonterra and the state owned enterprises (SOEs).
What NZX is undergoing reflects trends in the stock exchange industry globally, the emergence of new players and the subsequent battle to maximise and maintain liquidity being the most significant trends.
At the aggregate level the stock exchange industry has observed a steady decline in the value of listing revenues and strong growth in trading clearing and settlement revenues. It is interesting to note that the majority of the transaction growth has centred on the Asia Pacific region with NSE India now the third-largest exchange in terms of transaction volume. Furthermore the top 10 exchanges by way of transaction volume growth are located in the Asia Pacific region. Derivatives trading also gained prominence in the new millennia with annual compound growth of 22% over 2000-06.
Conclusion
So in summary - the New Zealand regulatory framework is now close to international best practice and our economy is bearing up against the turbulence in other parts of the world. I do believe you can remain pleased to be playing an active role in the NZ economy and I would encourage you to remain committed to our part of the world and even to explore further expansion. Thank you again for this opportunity.