Essay on "Financial Market in New Zealand"

Essay 6 pages (1808 words) Sources: 10

[EXCERPT] . . . .

Financial Market in New Zealand

As the forces of globalization opened up boundaries, economic agents took the opportunity to transcend geographic borders and benefit from the comparative advantage of countries. While the generally discussed advantages refer to an abundance of the natural resources or a more cost effective labor force, it must not be forgotten that market liberalization also encouraged the movement of capitals. Investors quickly seized the opportunity to increase their gains.

A major part in the ultimate success of foreign investors was played by the national financial market. The financial market is a broad concept, referring basically to place in which trade between commodities and financial securities occurs; the purpose of the trade is a dual one -- investors look for new ways to make money, whereas economic agents look for new capital and enhanced opportunities to grow their business. "Quite simply, that is what the financial markets are - any type of financial transaction that you can think of that helps businesses grow and investors make money. Here is an overview of the financial markets, from the simple to the complex" (About, 2009).

In this understanding of the global market place and the definition of the financial market, this report strives to identify the distinctive features of the financial market in New Zealand. The ultimate scope of the research is that of establishing whether or not one should invest in the country.

2. Financial Markets in New Zealand

Without in fact realizing it, financial markets are present and impact all features of life. Given this situation, it becomes obvious that the financial market is in itself characterized by a wide number of elements, coming from fields such as politics or economics. From an economic standpoint, the country is fairly well developed, and its gross domestic product of $116.6 billion secures the country its position as the 61st largest economy of the globe (out of 228). Not until so long ago, New Zealand relied on agriculture to support its population, and was also dependent on the support of Great Britain. The reform process that was commenced two decades ago however strengthened the economic system in New Zealand, led to the creation of an open and market oriented economy, in which the income per capita, and the adjacent living standards of the population, continually increased.

The industrial sector also developed, now being one of the most technologically advanced ones. The downside of this rapid development was that not everybody got to benefit from it, meaning then that the income gap was further deepened. In 2008 then, the economy of New Zealand went into recession. Since this state was declared, the Central Bank has been striving to increase the stability and strength of the national currency (NZD -- New Zealand dollar). They have also reduced the interest rates, and are now focused on increasing the productivity levels and the strength of the infrastructure (Central Intelligence Agency, 2009).

From a political standpoint, New Zealand is a relatively stable democratic parliamentary. The laws created nowadays are aimed to protect the country from future economic problems, and are also aimed to attract more foreign investors. "New Zealand's current policy for screening and approving foreign direct investment is designed to ensure that foreign investment inflows bring overall net benefits to the New Zealand economy. The economic benefits of a foreign investment proposal may take the form of new technology, increased competition, new export markets, job opportunities or other benefits. Foreign investment need not contribute to each and every one of the above areas, but the current screening procedures are designed to ensure that a foreign investment project brings overall net benefit to the New Zealand economy" (Organization for Economic Co-operation and Development, 1993).

This necessity to protect the very interest of the country has often materialized in reduced development opportunities. Probably the most relevant example in this sense is revealed by the country's reduced spending for research and development. Additionally, there is an enhanced problem in the ability of the financial sector to support development operations. This impossibility is generally explained through the insufficient access of banking institutions to vital information. Regardless of the underlying reason however, the situation translates into the poor quality of the services offered by the New Zealand capital markets (Healy, 2001).

In its 2009 report of the country's financial status, including the stability of the financial markets, the OECD retrieved several interesting findings. Most importantly, they found that the banking sector in New Zealand, unlike most banking sectors in the countries impacted by the internationalized financial crisis, is still strong. This is explainable by the prudential approach to financial operations implemented by the New Zealand banks. They for instance did not grant sub-prime mortgages, nor did they operate with mortgage-backed securities, which represented less than 1% of the funds of the lending institutions.

Additionally, the operations handled by the New Zealand banks were generally traditional operations, and the banks did not offer complex financial services and products. Furthermore, they paid increased attention to their investments and they required guarantees on loans, all to ensure that they were not exposed to risky assets. The direct result is revealed now in the still sustainable strength of the financial sector. In particular, unlike the United States and other countries where the national governments have poured money into the banking sector, New Zealand has not revealed such a necessity. "Accordingly, there has been no need for nationalization nor capital injection into the financial system by the public sector, and there has been no failure, threatened or actual, of any large financial institutions" (OECD Publishing, 2009).

In 2010, the economy is expected to still face difficulties. As a result of this situation, increased pressure is put on the financial markets. In this light of events, economists proposed several ideas for the following year. On the one hand, they argue the importance of implementing new regulations that balanced investments between properties and economic agents. On the other hand, they militate for better enforced financial regulations on institutions which raise money from the public (The New Zealand Herald, 2009).

The operations of the financial markets are regulated by the New Zealand Financial Markets Association, the institution which also ensures that the rights of the financial markets are adequately safeguarded and respected. There are a total of 26 institutions that form the NZFMA, organized into five different categories as follows:

Financial markets members -- ANZ National Bank, Bank of New Zealand, Westpac Institutional Bank, ASB Bank, Deutsche Bank, Citibank, Commonwealth Bank, Hong Kong Shanghai Banking Corporation and Kiwi Bank

Affiliate members -- Reserve Bank of New Zealand and NZ Debt Management Office

International members -- BNP Paribas, Credit Suisse AG, Morgan Stanley and Royal Bank of Scotland

Financial intermediary members -- CMC Markets (NZ) Ltd., Direct FX Ltd., HiFX Ltd., ICAP New Zealand Ltd., KVB Kunlun New Zealand Ltd., LatitudeFX Ltd., OM Financial Ltd., StoneBridge Group and WSD Financial (NZ) Ltd.

Partner members: Bell Gully and Interactive Data (Australia) Pty Ltd. (Official Website of the New Zealand Financial Markets Association, 2009)

4. Investing or not in New Zealand

As mentioned throughout the introductory part, the aim of the research report is that of establishing whether or not an investor ought to advance his financial resources in New Zealand. In order to offer the final answer, it is necessary to pin point the arguments relative to what makes New Zealand a worthwhile investment destination, and what does not make it a notable destination. As such, the reasons as to why a foreign investor should invest in New Zealand refer to the following:

the country has been registering sustainable growth for over two decades they welcome foreign investors and present them with numerous business growth opportunities despite the internationalized economic crisis, the banking sector in New Zealand is still stable is also the economic and political climate, and this is generally due to the prudential policies that guide operations in the country the New Zealand Financial Markets Association is formed from members from across the globe, which ensure the access and opportunities of foreign investors in the country

Aside the above mentioned benefits to investing in New Zealand fact remains that there are also some negative points to this decision. Some of the most important ones include:

the decision of welcoming a foreign investor is pegged to his ability to somehow improve the economic state of New Zealand; this means that the investor will have to prove how his endeavor will benefit New Zealand, otherwise it would be rejected the NZFMA is constructed on complex principles, which limit the activities and gain opportunities of foreign investors

the capital market in New Zealand is generally underdeveloped, providing investors with limited opportunities to finance their operations through debt; this virtually translates into the reduced access to financial resources

As it can easily be observed, the general aspect of the New Zealand financial market is that of a prudent one, in which the gains opportunities are lower than in other states, but… READ MORE

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