New Zealand Inc reaps benefit of hard and fast Covid lockdown

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When Covid-19 struck New Zealand, Jacinda Ardern’s government quickly closed the nation’s borders and imposed one of the world’s strictest lockdowns in a bid to eliminate the spread of the virus.

The decision in late March plunged businesses into crisis, with many forced to implement radical strategic changes to survive. Air New Zealand was an early casualty, requiring a NZ$900m ($610.4m) bailout from Wellington.

But with most restrictions now removed and the virus apparently under control, business confidence is coming back. Many corporate leaders — in industries from tourism to agriculture — hope that Wellington’s decision to prioritise health over keeping its economy open will prove fruitful in the long term.

“One thing most businesses haven’t had to experience throughout Covid-19 is running out of cash or liquidity issues,” said Mark Hiddleston, head of the commercial and agricultural division at lender ANZ New Zealand.

Fonterra, the world’s biggest dairy exporter, is cashing in on strong demand in China despite the pandemic © Brendon O’Hagan/Bloomberg

Mr Hiddleston attributed this partly to decisions by New Zealand’s central bank and Treasury to swiftly roll out interest rate cuts and a wage subsidy scheme.

New Zealand, like many other big economies, is in recession, with its gross domestic product contracting by a record 12.2 per cent in the second quarter. But unemployment has remained low, with the official rate at just 5.3 per cent as of September, while a predicted surge in corporate insolvencies has not materialised.

Business confidence is creeping higher. A survey of 700 global business leaders by Bloomberg in October ranked New Zealand as the nation that has best handled the pandemic and the market they would be most confident investing in.

Line chart of Index showing Business confidence has bounced back in New Zealand

IMF forecasts suggest the decision to implement a strict lockdown early could pay off. While New Zealand’s economy is projected to contract 6.1 per cent this year — worse than in the US but better than in the UK — it could grow more quickly than either of those nations next year, at 4.4 per cent.

“New Zealand looks relatively better off because pursuing eradication, as we call it, has enabled our economy to return to a new normal,” said Mike Bennetts, chief executive of Z Energy, a fuel distributor with almost 400 service stations and truck stops. “Most businesses are open and able to operate without strict social distancing rules in place, even if borders remain shut.”

Mr Bennetts was among the business leaders that advocated a fast and hard lockdown before the spread of Covid-19 in New Zealand had a chance to reach the severity of hard-hit nations like Italy.

When Wellington implemented its most severe lockdown measures on March 25, which included tough restrictions on movement, demand for fuel plummeted 85 per cent. That forced Z Energy to raise NZ$350m to bolster its balance sheet.

But demand for fuel outside of the aviation sector has now almost fully recovered as the economy has reopened. “In hindsight, one could argue that [the capital raise] wasn’t really needed,” said Mr Bennetts.

Some big businesses in New Zealand are benefiting from a recovery in other economies that also locked down early.

Fonterra, the world’s biggest dairy exporter, in October upgraded its milk price forecasts for 2021 by more than 6 per cent due to strong demand from China. That could deliver an additional NZ$10bn to New Zealand farmers who sell to the group.

“Despite the initial impact of Covid-19, we have seen demand for dairy in China recover quickly,” said Miles Hurrell, Fonterra’s chief executive.

Prices for New Zealand’s other main agricultural exports — beef, lamb, and fruit and vegetables — have remained firm, supporting an industry that contributes about 5 per cent of GDP. One big challenge for the sector is finding enough workers to fill fruit-picking jobs during the upcoming harvest.

Coronavirus has also helped boost the profits of healthcare and technology groups. Fisher & Paykel Healthcare, a NZ$20bn maker of respiratory products used to treat Covid-19, has said that its profits in the year ending March 2021 could rise by as much as a third due to the pandemic.

Shares in Xero, a Wellington-based accounting software platform for small businesses, have doubled since Ms Ardern ordered her nationwide lockdown, as its business has boomed.

Parts of New Zealand’s important tourism industry, which is reliant on foreign visitors, have also managed to adapt even as the country’s borders remain closed.

Prime minister of New Zealand Jacinda Ardern arrives for a meeting with her MPs at parliament following a landslide election victory in October © AFP via Getty Images

“It was pretty dramatic because we immediately saw 90 per cent of the New Zealand business disappear overnight,” said Grant Webster, chief executive of Tourism Holdings Limited, one of the largest camper van providers in New Zealand, Australia and the US.

That prompted Mr Webster to pivot towards domestic tourists and focus on new revenue streams, such as providing motorhomes for residents returning from overseas to quarantine in.

The group’s total vehicle sales surged 73 per cent year on year between April and August, helping it to reduce its net debt by almost half. Tourism Holdings’ share price has recovered by 325 per cent since March.

But not all tourism businesses have the flexibility to pull off this sort of transformation.

Air New Zealand lost NZ$454m in the year to June and has slashed 4,000 jobs. It is burning through NZ$65-NZ$85m a month and is likely to have to raise new equity by mid-2021, say analysts.

“The airline is likely to be lossmaking and in a cash burn situation until borders reopen,” said Andy Bowley, head of research at Forsyth Barr. A mooted travel bubble with Australia could help it to break even again, he added. Industry groups have asked the government to relax border rules for visitors from nations deemed low risk in terms of Covid-19.

However, some are concerned that largesse from Wellington in the form of wage subsidies and rules protecting directors from prosecution for trading while insolvent — both of which expired in September — may have delayed a bigger crunch for the country’s corporate sector.

Insolvency experts warn that a spike in bankruptcies is inevitable, with creditors likely to begin enforcing debt repayments in the coming months. 

“There is a disconnect with the economy in recession and only a low level of insolvencies. The concern is that there are zombie companies still operating that would have failed under normal circumstances,” said Karen McWilliams of Chartered Accountants Australia & New Zealand.

“The danger is that when these companies collapse they could pull other businesses down with them.”

Still, some executives say New Zealand’s apparent success in eliminating community transmission of Covid-19 — a feat achieved by few other countries — leaves it well placed to benefit from any global economic recovery.

The country has experienced a surge in professional New Zealanders returning home from jobs overseas during the pandemic and some think more foreign investors and skilled workers could be tempted to follow them when international borders eventually reopen.

“If you’re a kiwi working for, say, Apple in New York, and you’re given the option of returning to New Zealand to live while keeping your job — that’s a compelling proposition,” said Justin Murray, chairman of investment bank, Murray & Co. “The key issue here is more one of government policy. How will the government harness New Zealand’s Covid-elimination success to benefit our economy?”

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