Summary
This paper is based on a joint project by The Ministry of Economic Development and Treasury to examine the link between New Zealand’s financial system and economic performance. Overall economic performance is influenced by a wide range of factors including the financial system. There is strong evidence that the level of development of a country’s financial system has a positive influence on economic growth and productivity. The relationship is bi-directional with economic growth also contributing to financial sector development.
Our preliminary assessment is that a lack of development in certain parts of New Zealand’s financial system could be imposing a moderate constraint on the growth and performance of New Zealand firms. The level of development of New Zealand’s financial system is patchy: a large, efficient and sound banking system sits alongside equity, venture capital and debt markets that in size, depth, liquidity and skill base are relatively under-developed. Private equity is currently increasing in importance – an international trend; and there are quite high levels of informal financing activity. As a consequence, firms are unlikely to have access to a comprehensive menu of financial services through all stages of their development. New and emerging firms may face particular difficulties accessing finance and related services.
Some of the likely causes and consequences of the current features of New Zealand’s financial system include: the low level of national saving; the imperfect substitutability between foreign and domestic saving; the relatively high cost of capital and potentially limited demand for capital.
The recent announcement by the Government of the KiwiSaver enhancements and reduction in taxation of collective investment vehicles, represent a major development in savings policy that has the potential over time to lead to a marked increase in household saving, held in the form of financial assets, and some increase in national saving. Based on international experience (e.g. Chile and Australia), a sustained increase in national saving (over 10-15 years) could significantly enlarge and deepen the New Zealand financial system with knock-on effects for firm growth and productivity.
Further measures may be justified but need to be based on a good understanding of the factors responsible for financial system under-development, and sound analysis of the benefits and costs of specific interventions. There is also a need to continue adding to our knowledge on trends in the financial system including for example, the effect of regulatory settings on our capital markets and determinants of firms’ access to finance and their location decisions, including listing and delisting from the New Zealand stock market.
