New Zealand's Opportunity?

NZ could be the next Singapore? Well, now’s the time…

Downturns are supposedly a function of free markets natural mechanisms to clear out dead wood. Economic crises and fallouts are different.  The word crisis has its roots in the Latinisation of the Greek word Krisis; the definitions of which include “decision” or “turning point”; the other rather pertinent one being “the decisive point of disease progression”. 

Crises throughout history have always been kind to the victor and we often became enthralled and in awe of those that steered battalions, vast armies, organisations and even nations through turning points. More often than not those people were able to transact on situations as they had the resources and permission to act; and a little bit of luck. 

 Are we at New Zealand’s decisive point?

Now’s the time to ditch the “she’ll be reet” (a phrase synonymous with my native Yorkshire too) and leverage our geographic situation, resources and ability to the max. I’m not going to get into Epidemiology as I am clearly not qualified but I can see we are in a unique situation geographically and with a skills based to be in a much better position than many of our OECD peers and emerge a much stronger economic power than we currently are. Singapore certainly leveraged (and will continue to) it’s strategic geographic location as the foundation of its economic might, so how can New Zealand? 

As recently as October 2019 a report was published highlighting how New Zealand (as well as Australia and Iceland) could act as an “ark” in a global reboot for civilisation. The report in the journal Risk Analysis was co-authored by Professor Nick Wilson of Otago Uni who noted that in a worst-case scenario New Zealand should “consider investing in resiliency measures and rehearse the rapid introduction of border controls”. Now thankfully we are not at that level but there is going to be a reboot and a “new normal” (sorry!) so how can we quickly capitalise.

Clearly this depends on how long we are in level 4 and how quickly we can “re-tool” and get going again afterwards. I am not for one second saying we should rush things or not follow expert advice; merely we should spend this “enhanced leisure time” thinking and laying some foundations for possible eventualities. 

Sadly, there will be business casualties; the usual suspects are there already making headlines and there will be more. Big companies will weather the storm, they may look different afterwards, but they will have retained knowledge, IP and hopefully relationships to rebuild quickly (new fixed assets will be cheap!) however we run a real risk of losing a very valuable component of the NZ economy; growth companies (very loosely defined in NZ as 5-10+ employees, near positive or just positive free cash flow, revenues $10-100m). 

The Government is helping with a number of initiatives but without sounding ungrateful, there needs to be more and there needs to be private capital engagement too. At present I don't see how initiatives are going to sustain and position for rebound our multitude of growth companies.

Numbers

I have quickly run some high-level numbers using the NZ Stats Annual Enterprise Survey (2018) which goes into considerable detail around key P&L and Balance Sheet numbers across all NZ sectors. Although you can drive a cart and horses through my methodology, I wanted to quickly look at the sensitivity to loss of revenue to costs. 

Revenue can fall instantly; costs take time and sadly things like interest and rent can be incredibly sticky indeed. Furthermore, the very realistic proposition that secured fixed assets have devalued means the nominal cost of interest-bearing debt is significantly higher.

A drop of c.30% in Revenue across many industries puts considerable – and quite likely unsustainable pressure – on the business. Even taking into account the wage subsidy and assuming a down and dirty 20% reduction in costs that can be quickly reduced; however, contracts, agreements and supply chains can be very hard to remove a business from quickly. 

Whilst a solid short-term solution the wage subsidy cannot be sustained long term; simply because the firm is obliged to maintain pay at least at 80% of pre-crises levels; not a small undertaking to maintain in the long term when revenues hurtle downwards. 

Even with the Bank Finance Guarantee Scheme; where the government will underwrite 80% of a defaulted loan is only applicable to new loans under the scheme and will still no doubt have to be run through a banks usual process; which even if this has been rapidly streamlined takes a long time and opens up the bank to risk. No offence intended but Banks are not the swiftest; 90-day decisions are the norm and this won’t have changed.

Whilst the Government have very sensibly delayed the introduction of the much-touted banking reforms the scheme benefits the banks, not the company, in the event of default and the Banks have been considerably risk off in the last 6-12 months.  

Whilst this will be helpful to some companies for sure we run the real risk of losing a considerable number of growth stage companies, 3-4-year-old pre-revenue companies and a considerable amount of knowledge, IP, learning and relationships with them. 

This does not maketh a New Singapore.

Do we want to become a New Singapore?

The recently announced construction initiative is positive and is welcome for projects that will improve GDP and productivity in the long run; Hamilton/Tauranga modern highway – yes please. FDR’s 1930’s “New Deal” program created modern US infrastructure but there is a considerable body of academic research now saying that in itself didn’t end the Great Depression (some argue that was WWII but let’s not go there) in addition what is not widely known is that considerable private capital was engaged too and that banks were very well capitalised (link), the money was just not moving into the right place until FDR got it going.

New Zealand will need enhanced social support, new health facilities, greater robustness, improved infrastructure and the government should put considerable investment into secondary and tertiary education (as Singapore does) especially in the STEM subjects. If we don't want to saddle many future generations repaying massive debts we need to move quickly and with focus on helping support companies and in particular growth companies so there are tax revenues, jobs, spending and the myriad of effects that come with a booming economy. 

So, what we can we do? What will change?

I saw an article the other day saying the Just-In-Time model will morph into a Just-In-Case model. There will be a need for greater robustness in supply chains (for instance pretty much all Pharmaceutical ingredients are made in India), we need a greater knowledge economy and improved local productivity alongside globalisation (we have squeezed the toothpaste out of the tube here and it won’t all go back in). 

Things will be the same, just different. There needs to be Government support (and direct intervention presently), there needs to be support of the Banks but above all else there needs to be greater engagement of private capital into growth companies. The love affair with commercial real estate and safe yields may be over, the stock market is volatile and interest rates and bond yields aren’t going anywhere quickly – well at least up quickly. 

Cash however has not vaporised, but it needs to be deployed. As I discussed in my post the other day there needs to be a concerted effort between private risk capital alongside an element of supportive government money and wherewithal to vastly increase the growth company funding pools. We have start up incubators, we have some larger scale private equity but above all we have an opportunity and a need to fund growth companies.

What do we need to do?

We can't remain an Ark forever. Careful immigration and quarantine controls will ensure we remain safe as a nation, but we can attract significant capital. Over the years New Zealand has been sold (and bought) as the safe haven let’s use this to our advantage. Australia has just announced a somewhat overly defensive approach ensuring all foreign direct investment is vetted no matter how small; whilst we don't want to open flood gates we have a real opportunity to ensure that inbound money comes in (and possibly the people connected with it) with controls to ensure the reduction in leakage of IP and knowledge and the maximisation of value for all of New Zealand.

We need to fund (and currently strongly support) productivity focused growth companies that will continue to thrive. We need to proactively engage significant pools of capital alongside experience and know how. The opportunity is now.

How do we want history to tell our tale? The easy answer is to be victorious and write it ourselves.