Capital markets: Government must keep on keeping on

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The Government’s sound progress in strengthening capital markets has had a strong hand in rising business confidence, though we can’t be complacent.

The latest EY Capital Confidence Barometer clearly shows organisations both here and in Australia are more confident about the year ahead.

Eighty-nine per cent of Australasian respondents believed the local economy is improving or stable (up from 82 per cent in October), 70 per cent expect merger and acquisition volumes to improve, and 63 per cent say capital allocation is receiving greater focus in the boardroom.

After a fair amount of cash hoarding over the past few years, New Zealand businesses are now looking at growth which may, hopefully, lead to some loosening of the purse strings and the creation of growth, employment and lifting of wages.

Among the reasons for the new confidence are stronger equity markets, increased certainty around growth in China and some resolution of the US fiscal cliff.

At home, property prices are on the rise, export levels are picking up and there are brighter prospects for employment, despite headwinds such as the drought.

The right path.  We are a small economy, albeit on a gradient positive incline, which makes us vulnerable to being buffeted and we have seen false starts before.

The Government’s activity to stimulate growth and streamline regulation to make it easier for businesses to get on and grow, is positive. Changing the capital structure of certain key businesses (Mighty River Power, Genesis, Meridian and Air New Zealand, with Solid Energy on hold) should reap economic rewards.

A stronger capital market creates more pathways for New Zealanders to invest in their own equity market, provides more liquidity and therefore provides a churn of capital which will have a spin-off effect on capital markets. We will see other non-Government businesses looking at those pathways for capital allocations which then creates opportunities for growth.

How successful the Government will be does involve an amount of crystal ball gazing but their stated levers of business confidence - more activity and getting capital into businesses -  are the methods by which growth is achieved.

A word of caution.  We can’t ignore the Global Financial Crisis which remains relevant and problematic. In a GFC of this nature it takes a long time for economies, at both macro and micro levels, to recover.
Businesses are looking for evidence moving forward that we are indeed in that gradient positive territory.

And we face our own headwinds. The drought and subsequent torrential rain have impacted on farming, there are issues in horticulture, manufacturing is hurting and there is the high currency issue. Time, however, has a way of healing and resolving. The US fiscal cliff concerns were put off for another day and the world carried on despite concerns around political transition in China. The big picture drivers which give a general sense of confidence now permeate our own economy.

What about the huge cost of infrastructure? Christchurch is the most potent challenge and the Government cannot afford to rebuild the city by itself. We believe non-Government capital needs to be part of that solution. This could be structured both by way of PPP (Private Public Partnership) and a range of partnering models that facilitate the benefits of private sector capital flows and project delivery capabilities and disciplines. We already see aspects of that relationship working with the Hobsonville Schools Project and Wiri Prison, and just this week, the SKYCITY convention centre deal.

Keep on keeping on. As an election looms, the Government will want investors and corporations to remain optimistic and carry on. Its own pipeline of activity is clear and hopefully the MRP share float will create momentum and give them the impetus to carry on with their announced intention around Genesis and Meridian.

Corporate New Zealand faces challenges but we have quality businesses – we just need more of them.  With confidence on the rise the balance sheet building of the last few years should give them greater impetus to invest funds strategically for growth.

Andrew Taylor leads EY's Transactions Advisory Services practice