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FACTBOX-Key political risks to watch in New Zealand

Source: Thomson Reuters Foundation - Thu, 15 Nov 2012 05:49 GMT
Author: Reuters
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By Gyles Beckford

WELLINGTON, Nov 15 (Reuters) - New Zealand has committed to returning to a budget surplus by 2015, and earlier this year unveiled its toughest budget in two decades, without a spending increase and including moves to increase the tax take in the struggling economy.

The ruling centre-right National Party, which held on to power in a crushing election win last November, said it would hold spending around the previous year's level by reprioritising policies and cutting programmes, and said it would bolster its income by closing tax loopholes.

Prime Minister John Key has said his government will keep to a programme of bolstering economic growth through reduced debt, tight controls on spending, selling state assets, and returning to a budget surplus, as it has nursed the economy through recession and the global financial crisis, while supporting private sector innovation.

The country is also recovery from its worst natural disaster in 80 years, the magnitude 6.3 earthquake which struck its second biggest city Christchurch last February, killing almost 200.

The cost of the damage, and that of a bigger quake which struck the city and region in September 2010, has been estimated at up to NZ${esc.dollar}20 billion (${esc.dollar}16.2 billion), but so far reconstruction has been slow and piecemeal, although the pace is expected to quicken in 2013.

RATINGS: (Unchanged unless stated)

S&P: AA

MOODY'S: Aaa

FITCH: AA

Following is a summary of key New Zealand political risks:

ECONOMIC RECOVERY

New Zealand's public finances are under their greatest pressure in more than a decade, and the country's external liabilities have risen sharply.

The government is committed to returning to budget surplus by 2015 despite posting a worse than expected NZ${esc.dollar}9.2 billion deficit last year, because of the slow and patchy economy, which weighed on the tax take, and state asset writedown costs.

In its budget, the government said it would borrow NZ${esc.dollar}13.5 billion (${esc.dollar}10.2 billion) in the coming year, but expected borrowing over the next four years would be around NZ${esc.dollar}3 billion less than previously forecast as growth and income improve.

The budget deficits were forecast to fall before turning to a tiny surplus of NZ${esc.dollar}197 million in the 2014/15 fiscal year, which Finance Minister Bill English reaffirmed in November is still a government priority.

However, the economy has hit a soft patch in the third quarter, with unemployment rate unexpectedly jumped to a 13-1/2 year high of 7.3 percent, and retail sales falling as consumers stay cautious and repay debt, which some analysts suggest could see the economy contract in the three months to September.

The slowdown and continuing uncertainty about the global outlook suggest interest rates will be held at a record low well into next year.

What to watch:

- Ratings. All three of the main ratings agencies reaffirmed New Zealand's sovereign ratings after the budget announcement, and in November Moody's said it was comfortable with its Aaa rating.

- National debt and government finances data. The New Zealand dollar and debt prices are vulnerable to any marked weakening in the New Zealand government's fiscal position.

- Economic indicators, notably retail sales, confidence surveys, property prices and sales, all of which give a snapshot of the dominant household consumption sectors.

STATE ASSET SALES

New Zealand will go ahead with its first partial sale of a state power company early next year after rejecting the idea of special concessions for indigenous people, the prime minister said in October.

Maori groups are taking legal action over the decision, but the government is pressing on with the sale process and is aiming to have the first offer of a minority stake in Mighty River Power in the second quarter of 2013. It also plans to sell a stake in a second state power company, probably the following year.

Overall, the three to five-year programme to sell minority stakes in three power companies, a coal miner, and the national airline Air New Zealand may be worth up to NZ${esc.dollar}7 billion (${esc.dollar}5.6 billion), although the government has said neither the airline nor the coal miner are suitable for sale anytime soon given market conditions and the state of their industries.

Key has promised the government will maintain at least a 51 percent stake in all the assets, give local small investors preference in share sales, and place a 10 percent cap likely on how much any single investor, other than the government, can hold.

The government needs to satisfy its coalition partners, the Maori Party and United Future, that there are sufficient safeguards of public and Maori interests, and this may affect the final sale conditions.

What to watch:

- Progress towards bringing stakes in these firms to the market, and investor appetite for them. Market conditions, with any global or local weakness likely to delay the IPO or depress the price.

- Changes to foreign investment rules to alter the criteria to be applied on applications, possibly involving greater restrictions on the sale of rural or conservation land. Poll ratings for the National Party and its minor support parties may suffer and if so may see policy changes or even a freeze on some actions. (Editing by Daniel Magnowski)

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