Originally published by The Commonwealth Bank of Australia
- New Zealand’s general election, held on 23rd September, is gaining momentum. The political heavyweights are battling it out. PM English is losing ground in the polls. Whereas Adern, the new Labour leader, has brought a much needed zest to the opposition. And Winston Peters, of NZ First, again holds the balance of power. Figure 1 shows the latest Colmar Brunton poll.
- The 3 parties are centralist enough, predictable enough, and certainly not radical enough to generate too much concern in markets. The RBNZ’s mandate is not under threat. The Labour proposed employment criteria in the PTA, would only add the other axis of the Phillips curve. The length of time it takes to form a government, however, may cause some jitters. Because Peters, the old ‘Maverick’ war‑horse, will demand a lot for his coalition‑forming votes.
- Labour’s policies would produce a greater debt profile (Figure 2). One could argue for “disappointment” in financial markets. That’s the theory, but not necessary the practice. Because New Zealand’s current fiscal position is superior to most other AA+ rated nations (and still ranked AAA by Moody’s). There’s ample room to push the boat out, and issue more bonds.
New Zealand’s election campaign has taken a sharp turn. New Labour leader Jacinda Ardern is surging in the polls. It now appears it is her election to lose. For the first time, Labour (43%) leads National (41%) in the latest Colmar‑Brunton poll. Other polls have Labour a few point behind, but gaining. The first debate was tight, and we have the second debate tonight. Ardern is harnessing the populist movement, as is NZ First’s Peters. While a ‘long in the tooth’ National party looks to defend the last 9 years in office. National leader John Key stepped down in December, and gave once‑beaten Bill English a (hospital) pass 9 months from the election. History is not kind to three term parties. We haven’t seen a fourth term government since National in 1960‑72. It will take a lot more from English to turn the polls around. But English has a huge war chest of surpluses to use. The question is: why hasn’t he?
The 2017 election is the classic battle between centre‑left (Labour) and centre‑right (National), with a populist maverick (NZ First) thrown in the middle for good sport. Both parties promise greater fiscal stimulus. National have given a huge Family Incomes Package consisting mainly of higher tax thresholds for the lowest tax brackets and boosted accommodation subsidies for low‑income families. National policies are more pro‑business, and more fiscally austere. Whereas Labour is promising to keep tax brackets the same, but dish out much larger benefits. Labour’s policies are more welfare‑focussed and contain more fiscal largesse. Peters is promising as much disruption and self‑promotion as possible. Common sense suggests the NZD, equities and market confidence will decline with the uncertainty in a change in government. But history shows any reaction is not lasting. There is no threat to the RBNZ’s mandate or regulatory framework. Adding an employment criteria to the RBNZ’s PTA, and moving the decision making process to a formal committee structure (currently single decision maker), will not alter the expected course of monetary policy. And the RBNZ already has a Monetary Policy Committee.
The NZ First bridge to coalition, has Peters at the gate.
Winston Peters will take the hot seat between 23rd September and self‑appointed 12th October decision date. If the results are close, it may take until 12th October before Peters (not Adern or English) decides the next government. The so‑called “Kingmaker” is back… Peters the Kingmaker, or Queenmaker based on Colmar‑Brunton’s polling, is polling at just 8% himself (Figure 1).
New Zealand’s MMP voting system has a major drawback. Small parties are able to exert extreme influence when holding the balance of power. Peters is a master of major party misfortune. But he’s no master of markets.
In 1996, Peters played “Kingmaker” under the first use of MMP. After a month of negotiations, Peters returned National’s Jim Bolger to power. Peters was paid a pretty penny for power. Peters was (amazingly) anointed Deputy Prime Minister and Treasurer, senior to the Minister of Finance, a post created especially for him. Peters in known for his harsh stance on immigration. A stance growing in popularity with New Zealand in the middle of the largest migration boom in recorded history. Peters is likely to gain enough votes, again.
The “unknown” can scare foreign participants, in particular. Peters’ posturing may result in a period of heightened uncertainty, and a little bit of added volatility in markets. Head of CBA Fixed Income NZ, Simon MacGill notes:
“A labour led government may initially trigger a slightly steeper yield curve mainly due to the stimulatory impact of spending and the potential for increased bond supply. We may also see some increased mortgage related paying in the 2yr as the incumbent national government will scaremonger regarding higher rates under a labour government. This pay side pressure will be somewhat offset by lower house sales. Investors and house owners may wait to see the impact of labours housing and tax policies have on house prices. Spring is a traditional mortgage fixing period. We would view any upside move as an opportunity to receive the front end.
Furthermore investors may not believe Labour’s issuance forecast (figure 2). At the margin they will be better sellers on supply concerns. For a number of years NZGB swap spreads (NZGB 10yr ASW ‑21bps) have traded wider than ACGB (ACGB 10yr ASW‑6bps) due to supply constraints, this could easily disappear.”
There is a good chance the Kiwi market trades awkwardly for a week or three around the election. But we don’t expect a severe reaction at all. Australia’s experience suggests markets will take Peters’ posturing in its stride.
Australia’s recent political turmoil, with 6 Prime Ministers in as many years, failed to cause lasting and meaningful reactions in markets. For similar reasons as New Zealand’s upcoming election, the political parties involved are centralist enough. And not once did the RBA’s mandate or APRA’s regulatory authority come into question. Some interesting characters like Pauline Hanson and Nick Xenophon also failed to concern market pundits. The machine that is the Australian economy battles on, and so do the investors.
The NZDMO will have to be careful, but certainty not panicked.
The NZDMO has two upcoming tenders that could be impacted by the election. The first tender on 21st September, is for $200m Apr‑2025s. The April 2025 is a relatively new line, with just $3.7bn outstanding (Figure 3). The bond is normally very well bid. Depending on market positioning, we could get a slight widening to ACGBs (figure 4). The second tender has a greater risk, however. The second tender of $150m Apr‑2033s on 29th September, is after the election, but before the Peters imposed decision date of 12th October. The timing is right in the thick of it. And throw in the handover of RBNZ Governor Wheeler to Deputy Spencer on 26th September for a bit more spice. The 2033s are a longer dated bond, and more susceptible to changes in term (or risk) premium. Again the 2033 line is in its infancy, and trading cheap to other lines. We would expect this tender to be the most challenging given the political backdrop. Something the DMO could easily negate by postponing the tender, if needed. NZGBs continue to offer a fair pick up over ACGBs (figure 5), and a great pick up to USTs. These will be trying times, but not for long.
New Zealand’s experiences around elections suggest whatever reaction we see in markets, will be short lived and overridden by global events soon enough.
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