MNI ANALYSIS:Headwinds Grow for New Zealand Econ From New Govt

--Labour Leader Jacinda Ardern Set to Form Government with NZ First

By Sophia Rodrigues

     SYDNEY (MNI) - A ban on foreign ownership of existing houses and slowing

net migration are two key risks for the New Zealand economy from the new

coalition government.

     Some of these risks would be offset if the exchange rate falls further and

makes exports more competitive, though any sustained currency weakness due to

worries about the domestic outlook would not necessarily be a positive

development. 

     New Zealand's Labour Party looks set to form the country's new government

after the New Zealand First party -- which held the balance of power in last

month's election outcome -- announced it would form a coalition with Labour.

     The announcement was made on Thursday by Winston Peters, the leader of NZ

First, and will pave the way for Labour leader Jacinda Ardern to become the new

prime minister. 

     In reaction, the New Zealand dollar fell because of worries about the

economy's outlook. The new government is expected to favour a weaker exchange

rate.

     There won't be an impact on the Reserve Bank of New Zealand's monetary

policy model, which is determined by the level of the overnight cash rate, as NZ

First did not receive support to change the model in the coalition negotiations.

However, the Labour Party suggested that other changes are likely as they were

discussed during negotiations with NZ First. 

     In the general elections held on September 23, the National Party won 44.4%

of votes, followed by Labour with 36.9% votes, NZ First with 7.2% and the Green

Party with 6.3%.

     According to Peters, Labour will form a coalition government with NZ First,

with the Green Party likely to be outside the government but in support of it.

The Green Party still have to formally announce their support.

     Peters has always supported a lower New Zealand dollar. In reply to a

question at a media conference Thursday, he reminded that "we live or die by

exporting."

     So if external agencies like the International Monetary Fund are saying the

New Zealand dollar is overvalued, then the political system should respond to

it, Peters argued.

     Peters also suggested the government will work to slow net migration,

putting emphasis on skills and excellence, as well as genuine export education,

for immigrants.

     The large number of unskilled immigrants are the concern, Peters said. 

     Peters said he didn't secure support to change the RBNZ's monetary policy

model to his preference for a Singapore model, where policy works by tweaking

the exchange rate.

     Peters said his decision to partner with Labour was mainly made for

economic reasons. According to him, an economic correction is looming in New

Zealand and will lead to a slowdown in the economy.

     At her media conference, Ardern said the economy cannot rely on housing and

a simple population increase to drive growth, and needs other policies.

     Ardern said she remains committed to build houses because the government

has a role to play in reducing the housing shortage.

     The government will also be proactive in curbing foreign ownership of

existing houses and critical infrastructure, Ardern said.

     The RBNZ's next OCR decision is due on November 9, which will be

accompanied by updated forecasts for the economy.

     A likely ban on foreign ownership of houses and a slowing in net migration

could have a direct impact on housing activity, which has already slowed because

of macro-prudential policies implemented by the RBNZ.

     The RBNZ's central projection assumes that capacity pressure increases

significantly over the medium term, driven primarily by strong growth in

consumption and residential investment. 

     But it also noted the risk if domestic demand does not pick up to the

extent expected, which could occur if consumption is more heavily affected by

the weakness in the housing market, or if funding constraints in the

construction industry are more binding than assumed. 

     Weaker domestic demand would generate a more gradual rise in capacity

pressure and non-tradables inflation and would increase the risk of headline

inflation settling below the target midpoint over the medium term, thus

requiring an easing in monetary policy, the RBNZ said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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