Bernard Hickey: Key should be careful what he wishes for

Photo / Martin Sykes

Prime Minister John Key should be careful what he wishes for.

His call for a review of foreign ownership rules around land highlight two fundamental weaknesses in our economy: our lack of savings and our weak capital markets.

Any consistent and comprehensive attempt to stop foreign capital coming in to offset our low savings and poor markets could trigger a few unintended consequences.

They could include higher interest rates, higher unemployment, lower land prices and slower economic growth, all of which would become a bigger political issue than concerns about Chinese investments in a few dairy farms.

Key has recognised a hot political button that could be dangerous if he leaves it out in the open and elevated for any extended period.

He wants to remove it from the political dashboard before someone like Winston Peters pushes it in the run up to next year's election.

That's fair enough. The last thing New Zealand needs is another damaging debate about migration and race in an election campaign. Or at any time.

But there is no easy way to make this issue go away without asking some uncomfortable questions or being so inconsistent as to become a joke in the eyes of foreign investors and lenders.

Why, for example, are foreign investors keen to pay more for our land and assets than New Zealand investors?

Why are Chinese, Singaporean and Russian interests willing to invest in capital to develop our resources when we can't or won't?

What might happen if we said foreigners couldn't buy our land?

What would or should we do to land or companies that are already foreign owned?

Why are New Zealanders so reluctant to risk their own money to build these factors and develop this land?

Let's start with the context to Key's decision to open up this can of worms.

The explosive Crafar story

Back in September last year interest.co.nz reported that New Zealand's largest family-owned dairy farming group, owned by Allan Crafar and family, was poorly managed and was starving calves.

It turned out this was the tip of a large and ugly iceberg. Crafar had built up over NZ$200 million of debt through a credit-fueled spree of acquisitions and conversions.

He was still running it like one big family farm, despite having over 20,000 stock and over 200 staff. He had repeatedly breached effluent release laws and was renowned for neglecting his staff and animals.

Crafar's problems are symptomatic of the worst of New Zealand's productive sector and its savers. Crafar was using foreign debt to buy leveraged land in the hope of capital gains.

He was only ever interested in maximising production of a raw commodity, regardless of the cost to the environment or the risks of passing on crushing debts to the next generation.

The animal welfare scandal gave the banks, Westpac, Rabobank and PGG Wrightson Finance, the excuse they were looking for to put Crafar Farms into receivership. Unbeknownst to them or the receiver, Crafar had been negotiating with May Wang to sell the farms to Chinese interests for over NZ$216 million.

Wang and her backers, UBNZ and Natural Dairy, are opportunists with no dairy industry experience here and a controversial business past.

The flakiness and heat around their bid has helped galvanise the debate.

The real drivers

But the more serious events were:

* the announcement in the last couple of weeks that China's Bright Dairy has bought a stake in Synlait for NZ$82 million to help it build a new factory in Canterbury to make milk powder and baby formula, and,

* the bid by Singapore's Olam International for a controlling stake in New Zealand Farming Systems Uruguay.

Both of these are symptomatic of a more worrying trend from Key's point of view. Both are results of failures of New Zealand's capital markets to funnel what little local savings there are into viable and vibrant investment opportunities here.

New Zealanders have lost faith in their capital markets and are low savers anyway. So companies with growth ambitions or land/asset owners with debt problems are looking overseas for the equity to solve their problems.

This is only natural and is not new. We have been using overseas capital to grow for centuries, although the last 10 years saw the biggest foreign borrowing spree in our history to buy each others houses and go on a consumption binge.

It's all come home to roost

Now it's clear our household sector is indebted up to the gills and we are poor savers.

Many farm owners are also indebted up to the gills and are either being forced to bring in fresh foreign equity or are choosing to do so.

So what are the options for New Zealand?

If we want to turn away the fresh equity in any substantial and consistent way that will impose some equally unpalatable choices.

Land prices will fall. Without foreign demand propping up prices, prices will drop to the levels justifying investment by locals. There is local money there on the sidelines waiting for realistic prices.

Interest rates will rise. If foreigners work out that their interests could be legislated away they may be reluctant to keep lending to us in quite the same way. Local savers will realise they are not 'competing' against foreign lenders and realise their money is more precious to those locals who do want to borrow.

Our economic growth will slow. Lower land prices will discourage consumption based on land wealth and so will higher interest rates.

Unemployment and net emigration will rise.

Maybe it's a price worth paying

The picture I paint is not attractive, but it still may be worth paying the price, if it forces New Zealanders to live within their means and create their own capital markets.

This is the real challenge for John Key and those who support such controls on foreign capital flows.

Can we do it ourselves?

Your view?


Bernard Hickey