Two must-read observations on NZ foreign investment

Con Williams

Rural Economist NZ, ANZ

Foreign investment, particularly ownership of rural land, is a controversial and emotive topic all around the world.

A huge proportion of NZ's competitive economic advantage resides in our land and the income generated from it. As such, there is strong interest in maintaining local ownership.

A firm but fair regulatory framework is vital - yet NZ also needs to recognise the many benefits which foreign ownership can bring in the form of capital, market access, innovation and opening up untapped opportunities.

"If the pendulum for foreign investment in the primary sectors swings too far, there could be immediate implications for asset valuations, particularly in those sectors where it has provided a significant proportion of capital.”

Current angst over foreign ownership also deflects attention from NZ’s poor saving record, resulting reliance on foreign saving and poor relative investment returns.

A more proactive stance towards saving and investing is an important part of any policy solution.

Influential

Foreign ownership in the rural land sphere has been very influential in the forestry, viticulture and pipfruit sectors – indeed, these sectors wouldn’t be where they are today without it.

Despite common perceptions, foreign ownership has been less influential in sectors such as dairy, meat and fibre. While there is angst about land ownership, foreign investment beyond the farmgate has arguably been much more significant in influencing sector direction too.

This is especially so for the beverage (69 per cent of turnover) and processed food (60 per cent) sectors, but is true for all to some extent.

With the political breeze clearly favouring a more restrictive stance, it will be interesting to see how far the pendulum swings.

If it swings too far, there could be immediate implications for asset valuations in sectors where foreign investment has been the greatest – namely forestry, pipfruit, viticulture and large-scale operations.

But perhaps more importantly, there would likely be negative long-term implications for high-growth sectors which would struggle to meet their aspirations – as well as productivity, innovation, market access, infrastructure and wages across some of NZ’s key business sectors.

Observation one: this is nothing new

There is always a fear selling New Zealand assets to foreign investors will result in ceding control and a loss of sovereignty.

Another common argument is ‘selling the family jewels’ will leave NZ owning very little in its own country. The standard argument is the sale undermines the next generation’s earning capacity, with the returns on the land accruing offshore.

You can see this in NZ’s balance of payments figures, which show net international liabilities currently sitting at 57 per cent of GDP. The net cost to the country from that large stock of international liabilities totalled the princely sum of $NZ9 billion in the last year – a nontrivial sum.

Foreign investment in New Zealand is nothing new though and it should be remembered it is not just equity – the majority is actually debt.

As of March 2017 total foreign investment stood at $NZ373 billion (excluding financial derivatives and reserve assets), compared to $NZ75 billion in 1992.

Of that, only $NZ113 billion is direct investment – of which nearly half is owned by Australians. The second-largest foreign direct investors in New Zealand are the Americans, with the Chinese (including Hong Kong) third on the list.

Our direct foreign investment, at 43 per cent of GDP, is slightly above the OECD average, but about average for a small, open, advanced economy.

At the same time New Zealand has $NZ220.5 billion of offshore investment, with $NZ36 billion in direct investments. The direct component equates to 14 per cent of GDP, which is low compared to other OECD countries, particularly for a small, open, advanced economy.

By sector, foreign investment is most concentrated in the financial and insurance services sector, which accounts for around half of the total.

In fact foreigners currently hold 58 per cent of the government securities available on the secondary market (which excludes debt held by the RBNZ and EQC).

The amount of foreign investment in New Zealand’s agricultural sector is actually relatively small, at $NZ7.6 billion or around 2 per cent of total foreign investment.

In the primary sector space, controversy usually arises when a landmark or an ‘iconic’ piece of land is to be sold into foreign ownership.

What we do know from analysing land transactions approved by the Overseas Investment Office is since 2001 there have been approximately 2,480 in total. These approvals have involved a gross land area of 2.186 million hectares, of which a net 0.958 million hectares - or 44% - was proposed to go into direct foreign ownership.

While it is unknown whether or not this land was actually sold; whether the foreign investor subsequently became a resident; and/or resold to another foreign investor or a New Zealander, at face value it indicates 15 per cent of the total agriculture and forestry land in New Zealand has involved some form of foreign investment since 2001.

Splitting approvals by land type shows forestry stands out. Indeed, since 2005 the cumulative gross area approved for foreign investment represents 50% of New Zealand’s total forestry area. The cumulative gross foreign investment approvals for viticulture and pipfruit account for the next highest proportion of their land area, at 27% and 14% respectively.

In both cases the majority of the activity was concentrated amongst a handful of large multinational corporates. Other horticulture (vegetables etc) was higher than we expected at 7% of estimated land area. However, foreign investment in meat & fibre and dairy land since 2005 represented only 4% of total area, likely a lot lower than the general perception.

While the spotlight is often turned on foreign investment in land, in most sectors there has, in fact, been a higher penetration in businesses beyond the farmgate.

Analysis by Coriolis and the Government showed the share of foreign ownership by turnover of different sectors at the start of 2017. By turnover, the highest proportion of foreign ownership was for the beverage sector followed closely by processed food.

In total there are estimated to be about 9,650 enterprises operating in New Zealand with some foreign investment (about 2 per cent of enterprises) but these businesses employ around 464,700 people (around 22 per cent of the total employee count).

Observation two: does NZ need it?

The debate around foreign investment seems often premised with the starting assumption it is ultimately ‘bad’ for New Zealand. This argument suffers from several misconceptions and inconsistencies.

First, statistical and empirical evidence generally points to foreign direct investment bringing substantial economic benefits. This can manifest in areas such as opening up markets and introducing new capital and expertise, innovation and knowledge.

Indeed, an NZ Treasury paper (and many others) in 2016 noted a number of other positive effects from foreign investment beyond just the provision of capital to invest and better economic growth potential.

These include:

Better productivity;
Higher wages and more employer opportunity;
Exit opportunity for entrepreneurs;
Spillover effects;
More consumer choice;
Integration with global supply network; and
Technology spillovers.

All up, there are a range of studies by various economic institutions (OECD, World Bank, International Monetary Fund etc) which conclude foreign investment provides real net benefit to economies – especially small, open and trade-dependent ones such as New Zealand.

Second, the argument foreign investment is ‘bad’ ignores a basic reality check: NZ’s poor savings culture. By definition, the fact the country runs a current account deficit means its domestic savings performance is insufficient to fund its investment needs.

The last time NZ ran an annual current account surplus was in 1973. It has been in the red ever since! Hence, NZ has have had to borrow or sell assets in order to balance the books.

NZ is now at an interesting juncture. The ability of the economy to borrow internationally to fund a saving shortfall is being challenged by increased regulatory scrutiny of the banking sector or from warnings by credit rating agencies.

More onus therefore falls on boosting domestic saving. The alternative would be lower investment, which would clearly have implications for productivity and growth.

Imagine where NZ would be without the $NZ113 billion invested to date?

Con Williams is a rural economist at ANZ NZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.