BusinessSense: Where To Get Money For Expansion?

NZ exports are going great guns, but the question is for how long?

Demand for food will hold up – the world population is expanding, and more people are moving into the affluent middle class, which needs better quality food-stuffs.

But the rural and thus the country’s real productive sector will eventually run into problems. This is because NZers do not save, and hence to gain capital we have to go overseas. Investors then start to buy up productive assets.

The reality is NZers need to save more. The problem is there is no incentive to do so. NZ businesses in the productive sector need equity not debt.

Currently they are feeding on overseas debt. And NZ farmers need to stump up with some investment money if they don’t want outsiders snapping up valuable assets.

This piece by Bob Edlin in The Main Report’s Profitable Agri-Business Letter www.nzagri-business,co.nz sums up the conundrum.

The current account deficit shrunk to around 2.4% of GDP in the March 2010 year thanks to a mix of factors. Too many of the most significant ones were temporary or susceptible to overseas influences, such high commodity prices, revenues from major tax cases involving the banks, and reduced imports during the recession.

This reinforces the need (and the Govt’s policy aim) to tilt the economy towards savings, exports, and productive investment, and away from excessive borrowing, debt and Govt spending increases.

But tilting takes time, and the deficit is bound to widen again as the economy’s growth rate improves, further lifting our overseas liabilities (to 100% of GDP before long according to Treasury forecasts) and our vulnerability.

The seasonally adjusted balance on goods was a $919m surplus in the March quarter, lifted by a rise in exports of goods, mainly due to higher prices for dairy products (+32.1% during the quarter).

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This drove exports of dairy products to their highest level since their peak in the December 2008 quarter. Higher prices for forestry products also contributed to the rise in goods exports.

Paradoxically, the balance of payments explains why the Crafar dairy farms – and, increasingly, other plum chunks of rural real estate – may well finish up in overseas ownership. The deficit attests to the failure of NZers to save, and because we don’t save we are dependent on other people’s savings.

Hence we end up selling our interest in all sorts of ventures to foreigners. MAF director-general Murray Sherwin says NZ is a difficult place for strong capital-intensive conventionally structured companies, which inevitably finish up in overseas control.

This explains why our business sector is dominated by SOEs and farm co-operatives. The co-ops remain in NZ hands only because there’s no competition for ownership. Outfits like Fonterra have good international capability and potential but to fulfil their potential debt finance isn‘t enough - they will need equity, too.

It’s a challenge for farmers: their primary asset is the farm and they are not so keen on pouring piles of money into their co-op. Sherwin likened the co-ops to supercharged V8s locked on idle because they are starved of equity.

It puts the heat on farmers: if they don’t want outsiders investing, it’s up to them to stump up for the equity the businesses need to perform at their optimum and lift the economy.”

The Reserve Bank has been looking at this issue recently, and says if we do not save more or invest in productive assets rather than borrow for houses, we will face consequences down the track.

But it will be extremely difficult to get people to put their money in the bank when the interest they earn is taxed again at their marginal tax rates.

Everyone agrees we should be saving more, but no-one seems to agree on how to do this.

The Australians have solved it, They now only tax the interest on half of the savings people have in term deposits (there are conditions) and the tax on superannuation is nominally 15%, but usually falls to about 6.5% when allowances are taken into account.

There are ways to make saving attractive. It just takes the political will to do it. Hectoring by the Reserve Bank will not work.

Max Bowden
Publisher/Editor In Chief
The Main Report Group

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