Finance Minister Nicola Willis has come back from meetings in Washington having received mixed messages about the United States’ reaction to the economic damage the war in the Middle East is doing in New Zealand.
Her report is subtly different from that at the beginning of the month, from that of Foreign Minister Winston Peters, who said the US wanted to co-operate with New Zealand to lessen the impact here and in the Pacific.
Throughout the crisis, the Finance Minister has been more sceptical about the United States actions than the Foreign Minister.
She has reason to be.
Yesterday, she presented the latest Treasury thinking on the potential impact of the war.
The situation is changing so rapidly that Treasury have taken the highly unusual move to re-open the Budget forecasts and, in effect, do them again.
Willis has yet to receive those new forecasts but will now take them to Cabinet over the next two meetings and nail down the Budget then.
But with another warning from a credit ratings company yesterday about New Zealand’s deficit and borrowing projections, she has little room within which to move.
It would seem from what she said yesterday that to maintain spending on health, education, corrections and defence, she will have to once again “reprioritise” other non-core spending.
Inevitably, the tax take and possibly revenue from state-owned companies will be less than she might have hoped over the next 12 months.
Oil prices rose further in Asian trade on Thursday, aided by few signs of fresh talks between the US and Iran, while shipping activity in the Strait of Hormuz remained scant after attacks on vessels this week.
Treasury has produced three scenarios based on three different oil prices: April ceasefire, average $US110 a barrel falling to pre-conflict levels in early 2027; Strait of Hormuz constrained for a prolonged period, average $US135 a barrel to the end of the year and Strait of Hormuz not recovering for 4-5 years, average $US180 a barrel.
The US oil futures market yesterday showed Brent oil crude trading between $US59.5 and $US119.5 over the next 52 weeks, well below the Treasury’s second scenario.
That scenario would see growth fall this year to 1.5 per cent; inflation at 5.2 per cent, and unemployment at 5.4 per cent.
But the futures market is giving Willis some hope.
Treasury’s most optimistic scenario, with Brent crude at $US110 a barrel and projects inflation to be 3.9 per cent; growth down from 2.3 to 2.0 per cent and unemployment the same as pre-conflict forecasts at 5.3 per cent.
“Of the three scenarios Treasury developed last month, the first one, scenario one, looks the most likely. If that does remain the case, that means we face some significant short-term challenges and heightened medium to long-term risks,” she said.
However, the key factor will be the oil price.
“The Treasury’s advice to me is essentially this, that the markets are expecting oil to dip back below US $80 a barrel about the end of the year,” she said.
“And that is based on what futures markets are saying.
“And on that basis, Treasury’s advice to me is that New Zealand’s economic recovery is delayed but not derailed.”
Willis has just returned from meetings in Washington at the International Monetary Fund, and she learned there that there was more oil flowing outside the Strait of Hormuz.
“We are seeing crude oil coming out of West Africa, the US, frankly Russia, other parts of the world and wherever possible oil producers are increasing their supply so that they can sell that in a world that’s clearly demanding oil and that’s happened in real time and we’ll continue to see that crank up because when prices are as high as they are, more people want to be in the business of selling oil,” she said.
But all this uncertainty is impacting the New Zealand Treasury, which has delayed its Budget forecasts.
The Budget is due in five weeks on May 28.
Willis said she expected the Cabinet to agree to its fiscal measures at its next two meetings.
They have now been redone.
“”It is unusual, it’s very unusual for them to re-open their forecasts and I think it just reflects the volatility of the global situation and Treasury are working their hardest to make those forecasts as accurate as they can be, but they are just very cognisant that every time these numbers move in international markets it has pretty significant implications for what they’re forecasting in growth, inflation, the state of our books<” she said.
But this “rejig” has implications for Willis’s fiscal policies.
“We set out very clearly in our fiscal strategy that it will always be a priority for us to deliver funding for health services for New Zealanders, to educate our kids better, for law and order,” she said.
“We are also rebuilding the capability of our defence force and investing significantly in infrastructure.
“To achieve those things, we always need to be reprioritising on the other side of the ledger and finding savings.
“And so in this Budget, we’ve had to once again double down on that.
“I fully expect it, even before this crisis, that I would still be nailing the details of the Budget at this point, but it is the case that we’re having to squeeze additional things into the Budget that we hadn’t envisaged.
“That’s things like the support package for low-income working families, which we are having to fund out of this year’s Budget.
“It’s things like the support for home and care workers, and a number of other contingencies we’re putting in place for pressures that we can expect and public services as a result of the higher fuel price.
“So that has meant a rework, and just like every Kiwi household in the country right now who’s looking at their higher costs for petrol or diesel and having to rejig things elsewhere, we’re having to reject things a bit elsewhere.”
Her problems were compounded yesterday by Moody’s Ratings, which revised its outlook on New Zealand’s ‘Aaa’ sovereign rating to “negative” from “stable”, citing increased risks to the country’s fiscal trajectory.
The agency said that global economic and geopolitical uncertainty presented downside risks to growth, while inflation pressures also persisted, including fuel price increases, stubborn non-tradable housing costs and utility prices, and higher electricity costs.
It said that the potential for a combination of tighter monetary policy, slower short-term growth, and increased debt-servicing costs might further delay fiscal consolidation, after recent shocks had increased the debt burden and weakened debt affordability.
That leaves Willis with little room to increase borrowing to fund fuel price – relief measures.
“I am very conscious that many New Zealanders would like to see us splashing the cash right now, and I would love to ease the pressure that many people are feeling,” she said.
“We simply can’t do that responsibly as a country right now because we cannot just keep spending more and borrowing more, as some have suggested.
“If we do that, as the credit rating agency is confirming we would risk higher interest rates, higher borrowing costs, which would put more pressure on Kiwi families and would weaken our economy into the future.”
However, NZ First leader Winston Peters believes it is possible to borrow more.
“There’s a way out of this, of course, and that is the capacity to borrow money at much cheaper rates, and this country hasn’t demonstrated its capacity to do that, but I believe that can be done,” he said.
Asked how, he replied: “Stand back and watch.”
Peters is not just at odds with Willis over borrowing, but the pair have different views on what Washington’s response to New Zealand’s economic plight might be.
Peters has been almost totally silent on any criticism of Trump’s Middle East War.
He claimed after travelling to Washington in early April and meeting US Secretary of State Marco Rubio that he had made sure the US understood the “significant economic impacts on New Zealand and the Pacific arising from the war”.
But Willis got a different reaction in Washington last week.
“I had two different official engagements in one of them, which was with a Treasury Secretary, an official, as opposed to a politically appointed person,” she said.
“Actually, at one point, he did say, ‘ Look, I recognise that it’s creating a lot of impact for your economy. Are there ways in which we could assist?
“And you can imagine I was pretty clear, which is yes, an enduring ceasefire and peace in the Middle East would assist.
“In my second briefing, a difficult message for me to hear was that the US does view that it is largely going to be resilient to the economic effects of this conflict and that it recognises that other countries won’t be that lucky, but is of the view that it will be okay.
“And the point that I emphasised was just to say, okay, I recognise that this might be okay for the US economy, but it’s doing a lot of harm to economies like mine, and I urge you, in the interest of a world in which we have shared global prosperity, that you consider that.”
Peters maintains that he got a different response.
“They sure do understand it, and in fact, they volunteered to help out and now are trying to service the Pacific nations as well, and (Deputy Secretary of State Christopher) Landau and his team made that very clear at the time that if they could help, they were going to seek to do so.”
Throughout the conflict so far, Willis has been careful to present a realistic warts-and-all view of the economic impact of the war.
And she has also made it clear she does not support the war.
The gap between her and Peters is getting wider.
But for now, all she can do is hope for peace and that her Budget doesn’t further alienate National’s support.
That won’t be easy.
