NZIER confirms vital contribution public market makes to NZ
NZX Limited
Level 1, NZX Centre
11 Cable Street
PO Box 2959
Wellington 6140
New Zealand
Tel +64 4 472 7599
www.nzx.com
12 February 2018
NZIER confirms vital contribution public market makes to New Zealand
An NZIER report has confirmed the vital contribution New Zealand’s public market makes to the
broader economy, and the active role the local exchange plays in supporting market health and
participation.
NZX commissioned specialist consulting firm, NZIER, to undertake an independent assessment
of the exchange’s direct and indirect value to New Zealand as part of the delivery of its recent
strategy.
The report highlighted that the economic and employment footprint of the public market was
significant, with combined revenue of S&P/NZX 50 companies totalling more than $61 billion.
These companies generated $24.6 billion of Gross Domestic Product – some 10% of the entire
New Zealand economy – and produced $2.5 billion in tax annually used to fund Government
initiatives.
Companies in the S&P/NZX 50 employed close to 100,000 New Zealanders, and created over
38,800 jobs for brokers, accountants, lawyers and media in the closely related financial sector.
NZIER analysis and market feedback found that the New Zealand economy benefited
considerably from the market’s presence, supporting growth in Gross Domestic Product,
employment, household spending, investment and productivity. This is in addition to the
fundamental role it played in helping companies to raise capital.
NZX Chief Executive Mark Peterson commented: “A strongly performing public market
contributes significant value to New Zealand. The NZIER report highlights the importance of
having a healthy public market, and the direct contribution this makes to the prosperity of our
broader economy, creating jobs and improving productivity.”
“The report reinforced NZX’s strategic decision to refocus on its core markets business and
deliver initiatives to widen participation, grow investable product, deepen liquidity and expand
the market’s global presence.”
The report detailed the reach of the exchange which extends to most sectors of the economy
including energy, tourism and infrastructure, banking, telecommunications, construction,
healthcare and retail. The dairy industry was cited as a sector which benefited considerably
from NZX after the exchange developed a series of tools to support New Zealand farmers better
manage their risk.
NZX provides several other services to New Zealanders. It is the operator of the country’s
energy market, which supports the buying and selling of electricity between generators and
retailers. This includes firms such as Meridian Energy, Contact Energy, Trustpower, Flick
Electric, Powershop who supply power directly to New Zealanders.
It also provides a low-cost entry point to invest via its Smartshares exchange traded funds
business – a product which now being used by other financial technology companies to reach a
great number of retail investors starting to build their investment portfolios.
The report notes that the exchange plays a critical role in making the New Zealand economy
function efficiently and effectively while supporting wider participation in financial markets by
thousands of New Zealanders who may not otherwise be able to do so.
For further information please contact:
Hannah Lynch
Head of Communications
T: 09 308 3710
M: 021 252 8990
E: hannah.lynch@nzx.com
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The economic contribution of NZX
New Zealand’s exchange and its role in supporting the
New Zealand economy
February 2018
L13 Willeston House, 22-28 Willeston St | PO Box 3479, Wellington 6140
Tel +64 4 472 1880 | econ@nzier.org.nz
© NZ Institute of Economic Research (Inc) 2012. Cover image © Dreamstime.com
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About NZIER
NZIER is a specialist consulting firm that uses applied economic research and analysis
to provide a wide range of strategic advice to clients in the public and private sectors,
throughout New Zealand and Australia, and further afield.
NZIER is also known for its long-established Quarterly Survey of Business Opinion and
Quarterly Predictions.
Our aim is to be the premier centre of applied economic research in New Zealand. We
pride ourselves on our reputation for independence and delivering quality analysis in
the right form, and at the right time, for our clients. We ensure quality through
teamwork on individual projects, critical review at internal seminars, and by peer
review at various stages through a project by a senior staff member otherwise not
involved in the project.
Each year NZIER devotes resources to undertake and make freely available economic
research and thinking aimed at promoting a better understanding of New Zealand’s
important economic challenges.
NZIER was established in 1958.
Authorship
This paper was prepared at NZIER by John Ballingall, John Yeabsley, Aaron Drew and
Daniel Pambudi.
The assistance of Sarah Spring, the NZX team and finance sector interviewees is
gratefully acknowledged.
i
Key points
Exchanges are key parts of modern economies
The services that NZX provides, including equity and debt raising and
trading, and risk management, are vital activities in fully fledged financial
systems.
The wider activities the NZX undertakes strengthen the institutional base
for today’s commercial and productive sectors and thus contribute to the
health of the whole economy.
NZX plays several important roles in the New Zealand economy,
supporting firms wanting to expand...
It provides capital for issuers, both liquidity for entrepreneurs through
initial listings and additional capital to issuers through floating further
equity and debt issuance.
The NZX Main Board covers 159 listed issuers with a market capitalisation
of $135 billion
1
served by 16 cash market participants (including brokers)
and some 340 Authorised Financial Advisers at NZX firms, supporting 68
fund managers and 193,330 individual investors.
Capital raising is more efficient the wider the circle of investors that can be
tapped. A formal listing market creates a natural avenue for launching new
public ventures, once they have reached a certain stage.
Similarly, a readily available liquid secondary market increases the appeal of
all quoted investments.
It raises the profile of companies, allowing them to reach a wider range of
potential investors.
It also offers debt options via a strong precondition-based market,
supporting 45 listed issuers with $27 billion market capitalisation, including
KiwiSaver and two sovereign funds.
...and linking them with informed investors
NZX’s clearing house role enables efficient market activity and provides
confidence to the wider financial market and economy.
It provides a platform to deliver investment opportunities for New
Zealanders, allowing them to make informed choices about their
investment portfolios and facilitating risk reduction through diversification
(e.g. away from residential property towards more productive asset
classes).
1
As at December2017.
ii
NZX provides a low-cost entry point for households wanting to start
investing
As well as supporting institutional investors, NZX with its transparency
requirements provides low entry cost share market access to individual Kiwi
investors who in the past may not have felt equipped to participate.
It offers ready-made investable products (Exchange Traded Funds) focused
on the local market, such as Smartshares, Sharesies and InvestNow that
primarily target investors who are just starting to build their portfolios.
It introduces transparency and oversight to the market to encourage better
firm performance, and asset use through the continuous disclosure of
material information and periodic reporting to allow shareholders to make
informed investment decisions.
In addition to these disclosure and reporting requirements, it provides a
broader NZX Corporate Governance Code to support boards in protecting
the interests of shareholders.
Key principles cover board ethics, diversity (e.g. gender and ethnic mix of
the board), performance assessment, remuneration and risk management.
NZX’s role in keeping the cost of capital relatively low delivers $2.4
billion of value to the New Zealand economy
Firms using NZX face a lower cost of capital, relative to raising capital
offshore.
Using our Computable General Equilibrium model of the New Zealand
economy, we have estimated what would happen if firms faced a higher
cost of capital, which our interviewees expected if NZX had a smaller
domestic presence to support New Zealand firms’ finances.
We model a ‘what if?’ scenario, based on our interviews, where small and
medium enterprises face a 300-basis point increase in their cost of capital
and larger firms face a 25-basis point higher cost of capital.
2
Under such a scenario, it is more difficult for New Zealand firms to borrow
to expand their operations. Capital investment falls by 1.8% and real GDP
drops by $2.4 billion.
Exports fall by 0.49% or $342 million as New Zealand exporters become
marginally less internationally competitive.
Households have less disposable income as the economy shrinks, leading to
real wages falling by 0.8% and $2.2 billion less household spending.
As a consequence, NZX has a much larger economic footprint than
most people realise
The total GDP contribution of the S&P/NZX 50 companies, which accounts
for approximately 90% of New Zealand’s equity market capitalisation, is
$24.6 billion, and they have a combined revenue of $61.9 billion
3
.
2
Note this is an illustrative exercise to explore the wider economic impacts of firms facing a higher cost of capital than
offered by NZX, rather than a forecast.
3
For 2016/2017 financial year.
iii
This indirect economic contribution is 470 times as large as NZX’s direct
economic contribution ($52 million of GDP).
These S&P/NZX 50 companies contributed $2.5 billion of tax in the year to
March 2017. This is a useful contribution to the government’s revenue
base, especially given continued international concerns about base erosion.
Its employment footprint extends widely across New Zealand
NZX employs 327 workers in its own offices, but supports an entire network
of highly skilled ‘knowledge economy’ workers, including brokers, financial
advisers, fund workers, accountants, lawyers and financial media.
Around 33,800 workers are employed in closely related financial sectors.
4
NZX 50 firms employ a total of over 96,300 workers.
NZX touches New Zealand’s most economically vital sectors
NZX supports most sectors of the economy, including energy, tourism and
infrastructure, banking, telecommunications, construction, healthcare and
retailing.
The dairy sector benefits, in particular, from NZX's provision of a derivatives
market covering key exports such as whole milk powder, skim milk powder,
anhydrous milk fat and butter. Trading these futures and options, in
cooperation with Fonterra’s GlobalDairyTrade, allows farmers and
processors to manage the price risks inherent in dealing with commodities.
NZX also provides the Fonterra Shareholders’ Market, a private market on
which those eligible can openly trade Fonterra shares.
NZX Energy contracts to the Electricity Authority to provide the platform for
spot trading in electricity, as well as calculating half-hour energy and
reserve market settlement prices. This supports energy providers and users
to make informed decisions and manage their risks.
In addition to equity, debt and risk management offerings, NZX also
provides several other valuable services to the New Zealand economy
NZX provides data services reaching 7,250 users in 30 jurisdictions through
terminals and serialised and bespoke reports.
It has the skills, resources and experience to efficiently support markets in
emerging investment areas such as environmental finance and carbon
trading.
It is a provider of key infrastructure for New Zealand’s capital markets
system, including tools such as NZX Wealth Technologies, an online
platform to help investment advisers and providers to efficiently manage
their clients’ portfolios.
4
Defined as workers in the following Statistics New Zealand industry classifications: Non-Depository Financing, Financial Asset
Investing, Superannuation Funds, Financial Asset Broking Services, Other Auxiliary Finance and Investment Services.
iv
NZX is well positioned to support government priorities given its
breadth and reach
Successive governments have shared several economic objectives that are
designed to support New Zealand’s long-term prosperity and address
widely-agreed constraints to economic growth. NZX’s activities align well
with these priorities.
Table 1 NZX role in supporting government priorities
Government priority NZX role
Boosting productivity Supports capital-deepening; more efficient allocation of resources
between firms and investors; offers risk management tools to
support investment
Increasing international
connections
Gives New Zealand firms a higher profile; supports them to raise
funding to enter or expand export markets, or invest offshore
Moving towards a less
emission-intensive economy
Capabilities in carbon trading and environmental finance (e.g. Green
bonds); focus on renewable energy companies
Preparing for the fiscal costs
of demographic change
Helps New Zealanders save for retirement through KiwiSaver
vehicles and simple index investment tools; facilitates listings of
partially government-owned organisations, freeing up capital for
alternative uses
Improving the quality of New
Zealand’s regulatory
framework
Drives, implements and promotes financial markets policy and
regulation
Creating a responsive and
flexible economy
Efficient source of capital for new ventures and firms looking to try
novel ideas
A refreshed strategy will support continued positive growth in NZX’s
economic contribution
This analysis indicates that the New Zealand economy benefits considerably
from NZX’s presence.
It supports economy wide GDP, employment, household spending,
investment and productivity growth.
It also plays a valuable institutional role in the New Zealand economy,
providing best practice corporate governance guidance and matching those
seeking capital with those wanting to invest, at a low cost.
The NZX can capitalise on its existing strengths to deliver ongoing economic
benefits as it moves ahead with its refreshed strategy.
v
Contents
1. Objectives and scope ...................................................................................... 1
2. What are stock markets and why do they matter? ........................................ 2
2.1. What are stock markets? ......................................................... 2
2.2. Effects of stock markets ........................................................... 3
2.3. So, how can we think about the effects of the stock market at
this high level? ......................................................................... 4
3. Where does NZX fit into this framework? ...................................................... 7
3.1. Environment and role of the Crown ........................................ 7
3.2. NZX’s offerings and strategic direction .................................... 9
3.3. NZX and wider goals .............................................................. 10
4. NZX’s economic footprint ............................................................................. 14
4.1. Direct economic contribution ................................................ 14
4.2. Wider economic contribution ................................................ 14
5. What if NZX didn’t exist? .............................................................................. 18
5.1. Headline themes .................................................................... 18
5.2. Defining a counterfactual ...................................................... 19
6. Economic modelling of counterfactual ........................................................ 21
6.1. Modelling framework and scenarios ..................................... 21
6.2. Results .................................................................................... 21
7. Conclusion .................................................................................................... 23
8. References .................................................................................................... 24
Appendices
Appendix A CGE modelling results: value added and output ...................................... 26
Appendix B CGE modelling results: exports ................................................................. 30
Appendix C Overview of ORANI-NZ CGE model ........................................................... 36
vi
Figures
Figure 1 Capital markets in New Zealand: overview ................................................................... 7
Figure 2 NZX strategic pillars ..................................................................................................... 10
Figure 3 The stock exchange ecosystem ................................................................................... 11
Figure 4 Industry use of services auxiliary to financial services ................................................ 15
Figure 5 CGE models show the whole economy ....................................................................... 37
Tables
Table 1 NZX role in supporting government priorities ............................................................... iv
Table 2 NZX economic contribution over time .......................................................................... 14
Table 3 Economic contribution of S&P/NZX 50 companies ....................................................... 16
Table 4 Headline results ............................................................................................................ 22
Table 5 Fixed elements of the model ........................................................................................ 38
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 1
1. Objectives and scope
NZX has asked NZIER to provide an independent assessment of its direct and indirect
value to the New Zealand economy.
The key tasks were to:
Describe the role of NZX in supporting New Zealand’s economy, including
the government’s economic and social priorities.
Quantify the direct economic contribution of NZX in terms of its own value
added, spending and employment.
Estimate the far larger role that NZX plays in facilitating economic activity
through the firms that list on its exchange.
Canvass the views of market participants on the value that NZX provides.
Use NZIER’s model of the New Zealand economy to estimate the economic
benefits of NZX continuing to keep the cost of capital relatively low.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 2
2. What are stock markets and
why do they matter?
2.1. What are stock markets?
“A stock exchange is an organised marketplace, licenced by a
relevant regulatory body, where ownership stakes (shares) in
companies are listed and traded.” (Cleary et al 2017).
This working definition is used in a recent publication which describes the contribution
stock exchanges make to economic growth and to sustainable development.
As we shall see below, modern stock exchanges typically undertake more than this
narrow set of functions, but this is their core activity. As such, the stock exchange is
part of the finance sector, which complements the so-called “real side” of the economy
by being concerned with arranging the funding, including ownership, for economic
activity.
Multiple owners of firms (via equity shares) and direct owners of their debt funding
(bonds) are typically grouped together as the holders of securities. There are many
different types of security, but their base format is that the holders have the legal right
to a stream of income: dividends from shares and interest from bonds.
In addition, to these two basic types, there are more complicated securities which own
more complex rights like a portion of a future commodity (futures).
As per the definition stated above, the important element of the exchange is the
creation of a regulated market. This allows the trading of the securities in a low-cost
secure environment.
The fundamental demand and supply in such a market stems from the different beliefs
investors hold on values of the securities. The reasons for their differences could range
from their opinion about the quality of management of a firm (affecting its share price),
through the coming shape of monetary policy (affecting interest rates) to the likely
rainfall over coming months (influencing the future supply of a commodity).
An important function of such markets that is especially valuable in smaller economies
is their ability to use the range of fundamental capabilities necessary to operate the
core markets, to develop related functions around the core. So, in the local setting, the
New Zealand stock exchange supplies several related services using its market-honed
experience and skills.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 3
2.2. Effects of stock markets
The ability of a market to facilitate trades of securities is of wider importance than the
mere convenience of the market participants. Economists have looked at the wider
effects of finance and identified many aspects.
A quick summary of their views is in the following extract:
“...there are plenty of theories that explain the crucial role played
by finance: from managing risk (Froote et al., 1993) to providing
valuable price signals (Hayek, 1945), from curbing agency problems
(Jensen and Meckling, 1976), to alleviating informational
asymmetries (Myers and Majluf, 1984).
Furthermore, there is plenty of evidence that finance fosters growth
(e.g., Levine 2005), promotes entrepreneurship (Guiso et al, 2004;
Mollica and Zingales, 2008), favours education (Flug et al., 2008;
and Levine and Rubinstein, 2014), alleviates poverty and reduces
inequality (Beck et al., 2007)”.
5
Of course, the stock market is only one element in the finance sector, but it is a key
visible part. Indeed, it is usually classed as one of the key institutions that support the
modern economy.
6
It sits alongside the insurance industry, the banks and the whole
range of commercial law as structures supporting the efficient workings of the
economy.
Institutional economics shows that such structures, both physical and cultural, play an
important part in supporting efficient transactions. Essentially, they contribute to
lower overall costs as they organise regular aspects of behaviour into trusted
mechanisms that can provide services effectively and cheaply.
There is debate in the literature
7
about the precise way and extent to which stock
markets deliver on the factors economists have seen as possible. But the widespread
existence of such markets and their high usage supports a view that they contribute
to the set of institutions that encourage growth.
As an autonomous organisation the stock exchange must be sufficiently nimble to find
its place in the specific environment it inhabits. Like any living organism it must locate
an appropriate niche which allows it to thrive – this will influence its chosen activity
set, and the emphasis it places on the different possible functions, including which
products are given priority.
This feature, as noted above, is particularly valuable in smaller economies where the
scale of organisations, including markets, is usually lower. This means that separate
exchanges for debt, equity and derivative instruments, including for commodities, that
we see in larger economies may not be commercially feasible in a small economy like
New Zealand.
This places a demand on the exchange to play a higher-level role of scanning the
environment to check whether all potential institutions are in play, or perhaps are
efficient.
8
And then, if a gap emerges, to examine the best way the skills of the
5
Zingales (2015).
6
North (1991).
7
Zingales (2015) for instance.
8
The role of the NZX in assisting with the revitalisation of shareholder registers by creating new businesses, was cited to us as
an instance of this.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 4
organisation might contribute, including options such as facilitation of a solution or
creation of a new structure.
2.3. So, how can we think about the effects of
the stock market at this high level?
Much of the literature about the workings of stock markets is concerned with their
place in developing countries – where not only are incomes low, but the commercial
environment (including institutions), social setting, and attitudes to commerce are all
different.
In such an environment, the growing stock exchanges are often trailblazers as effective
operational institutions; sitting beside say a central bank and branches of
multinationals, as relatively non-corrupt, and so establishing standards.
As such, they can be seen as exemplars, available to do more heavy lifting in areas like
the promotion of good governance and spreading good practices through
partnerships
9
than we would assign them in a relatively mature economy like New
Zealand.
There is a sizeable literature on the virtues of stock markets and their correlation with
economic growth – particularly a series of studies involving Ross Levine.
10
While these
studies have their critics, it does seem reasonable that the rise of economic activity is
supported by and contributes to the growth of a public listing market for securities.
But looking at recent – say, over the last thirty years – developments in finance both
locally and internationally it is clear that the way stock markets function has had to
reflect the increased globalisation of finance, and the changing behaviour of
companies and investors.
The international aspect provides both opportunity and a measure of risk (via
contagion from abroad). Changes in New Zealand in the last thirty or so years have
been marked, as a previously sheltered and tightly controlled finance sector became
more open and internationally exposed. The shifting role of the banks over this time
has been particularly important. But the livelier banking world – including the
permanent arrival of a small number of overseas banks – has not cramped the role of
the stock market.
What it has done is shift the natural niche of the local market as it has focused on
taking up opportunities that emerge as the wider economy matures. So, the quoted
bond market has had its ups and downs, but continues to sit alongside the equities
market. And new opportunities in derivatives and commodities allow the application
of existing capabilities, such as market making and clearing.
9
See, for instance, Cleary et al (2017).
10
Now at UC Berkley but with extensive experience at the World Bank.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 5
2.4. A modern, developed country stock market
plays four key roles
In brief, drawing on this, we can identify the following four broad aspects of the role
of the stock market in a country like New Zealand.
Investment for business
Mobilising capital to allow new investment in productive enterprises – IPOs
or additional capital raising.
Being an efficient standard entry point for foreign capital to support New
Zealand business investment needs as either direct equity or other forms of
investment (portfolio or debt).
Providing a liquid market for variety of financial instruments and structures
to support business. These are varied and can include sophisticated
instruments, like derivatives or futures, through to specialised commodity
markets, such as those for energy.
Facilitating direct investments in firms, including in debt and other
instruments, by smaller investors, by creating a low transaction cost liquid
market.
Efficiency support
Signalling the investor market view of a company’s prospects and use of its
capital, via prices for the instruments on the markets.
Allowing an efficient, low cost and transparent market for control to ensure
productive resources are put to their best use by the free play of a context
for ownership.
Creating liquidity for a range of financial instruments, which allows them to
be traded on a secondary market to establish their value under ever-
changing economic conditions.
Widening the accessibility of securities to citizens
Low cost access to parcels of shares, bonds and other instruments with
various risk profiles, allowing individuals or their intermediaries to construct
portfolios to meet their goals and objectives, regardless of the scale of the
saver’s financial resources.
Providing a simple open mechanism for business owners to dilute their
shareholdings as they wish to change their investment holdings.
Allowing citizens direct low-cost access to various types of financial
instruments, made up of selected bundles of products, which are openly
traded on the market.
Catering to changing needs by filling out the institutional
offering
Flexibility of function: as a part of the wider financial infrastructure of the
economy the stock market can adjust its role and product offering to fit into
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 6
a different setting, catering to varying demands and to differing
competitors.
Rounding out the financial environment: identifying gaps in the institutional
environment and moving to meet such opportunities, with innovative
products and services taking advantage of the skills and capabilities of the
market.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 7
3. Where does NZX fit into this
framework?
The New Zealand stock market is a central part of a wider market for finance.
11
Figure 1 Capital markets in New Zealand: overview
Source: Nassr & Wehinger, 2016
In the view of Capital Markets Development Taskforce, the capital markets can be
grouped into three: public markets; private markets; and risk and other markets.
The markets broadly sit between investors (with excess capital) and businesses (with
capital scarcity and thus a need for capital). And in so doing they fill the roles discussed
above in section 2.4.
3.1. Environment and role of the Crown
As discussed above, the stock exchange takes the specific shape it does within the
finance market defined widely, as a result of its setting.
The services and products it chooses to offer reflect the other institutional actors in
the wider financial market ecology, and the way the whole finance sector is ordered –
including opportunities, regulatory and other pressures and the prevailing commercial
rules.
11
Also see Capital Markets Development Taskforce (2010).
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 8
3.1.1. Direct regulation
In the latter respect, the government is a key player. It, via the Minister of Commerce,
has formal responsibility for oversight of the exchange. So, for instance, the Financial
Markets Conduct Act 2013 not only has specific parts dealing with markets and the
regulation of their operators, but has as its stated purposes the following.
3 Main purposes
The main purposes of this Act are to—
(a)
promote the confident and informed participation of businesses, investors, and
consumers in the financial markets; and
(b)
promote and facilitate the development of fair, efficient, and transparent financial
markets.
4 Additional purposes
This Act has the following additional purposes:
(a)
to provide for timely, accurate, and understandable information to be provided to
persons to assist those persons to make decisions relating to financial products or
the provision of financial services:
(b)
to ensure that appropriate governance arrangements apply to financial products
and certain financial services that allow for effective monitoring and reduce
governance risks:
(c)
to avoid unnecessary compliance costs:
(d)
to promote innovation and flexibility in the financial markets.
This formal regulatory structure clearly influences the way the exchange works and its
product offerings. But, perhaps less obviously, the government has other influence
points which are possibly even more relevant to what NZX does.
3.1.2. Wider policy effects
Key factors are tax policy and the treatment of foreign investments.
The likely effects of taxes are obvious and their role in diverting funds from one use to
another is well documented. Thus, tax policy can push funds into sectors (by their
treatment of specific investments like forestry) or facilitate saving for stock market
investments by the way employee share investment schemes are taxed.
And as the local market has a high level of foreign capital (36% at present), overseas
investment rules and their application are obviously important for the market as a
whole. There has been recent concern about these for listed companies.
And perhaps seeming even more distant, conceptually, is the string of regulatory
intervention schemes that impinge on the operation of the market by imposing
compliance costs that are relatively high in a small domain like New Zealand.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 9
Indeed, the high unit compliance costs deter new user entrants who would play a role
in spreading the lumpy costs over a wider set of participants.
The regulatory issues include:
Anti-Money laundering rules and activities (under the Anti-Money
Laundering and Countering Financing of Terrorism Act 2009) which is, of
course, part of an international initiative where regulatory measures and
standards are set by our colleagues at the OECD. Limited note seems to
have been of taken in its implementation of the disadvantages of small
scale.
General compliance costs – which as noted are not helping the market
expand its participant numbers – it would be especially helpful to have a
greater number of large overseas players operating here.
Financial advice regime the regulation of such advice has become a
complicated area, and the current review of the Financial Advisers Act 2008
and the Financial Service Providers (Registration and Dispute Resolution)
Act 2008 seems unlikely to free up access to advice to the extent that
would expand the market significantly.
KiwiSaver this is becoming a major source of investment funding. The
recent report by Treasury
12
makes a series of points about the way the
suppliers and funds have shaken down. These show that the settings of the
available offerings seem to favour income over growth (56% income to 44%
growth) which restricts the use of the exchange. Moreover, the suppliers of
these opportunities for investment in this mode, turns out to be
surprisingly concentrated with the large banks featuring.
Financial literacy is a factor in encouraging investors to widen their ambit
of potential investment vehicles. The activities of what is now termed the
Commission on Financial Capability have encouraged New Zealanders to
take more active notice of the way their savings are deployed and thereby
influenced the attractiveness of the share market as part of a balanced
portfolio.
3.2. NZX’s offerings and strategic direction
NZX’s recent strategy review sees the stock market as an organisation aspiring to build
financial strength while being economically, socially and environmentally sustainable.
The strategy also places a high importance on acting with a purpose greater than the
business, which entails seeing the stock market’s actions as having wider facilitative
effects on the economy, and placing customers at the core of its operations.
NZX has identified a four ‘pillars’ approach to development (see Figure 2 below).
12
Heuser et al 2015.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 10
Figure 2 NZX strategic pillars
Source: NZX
As a package, these strategic plans can be seen as NZX moving in a structured way to
put into effect the environmental monitoring and responding approach described
above.
3.3. NZX and wider goals
Beyond the business-relevant role of making investment and other financial markets
broader and more efficient, there are several areas of New Zealand society where the
stock exchange can be seen as having a more indirect effect.
We start with the intention of the government to move the economy ahead. All
governments are interested in having a healthy economy. Different political groups
give this aim different priorities, and indeed, favour different strategies for its
achievement. But all are interested in having an efficient economy that provides
prosperity and jobs. We explore NZX’s role in supporting these government objectives
further below.
While the precise make-up of growth initiatives varies between governments, the
important point here is that the NZX is central to an aspect of the thrust to keep the
economy’s growth levels humming along.
As the discussion in previous sections has illustrated, this is because the market not
only has its own role to play, but via its flexibility and ‘gap filling’ functions contributes
to the range of listed financial market options underpinning the economy.
Resilience/inclusivity
13
Around the world stock markets are playing their part in contributing to sustainable
development as well as their more traditional role of fostering economic growth.
Fundamentally there are two ways in which they support this aim:
The promotion of sustainability themed products and services including
from ESG
14
themed services.
13
This section draws on Cleary, S, S Alderighi, R Fenner, A Miller, S Somerville, N Sukumar and J Zhan (2017).
14
ESG is environmental social and corporate governance.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 11
The promotion of good governance in good governance in business
practices, including greater ESG disclosure among listed companies.
Typical products and services offered include, for example, ESG indices, which promote
transparency about business practices and allow investors to easily build up an equity
or bond portfolio of companies that are assessed to have good ESG ratings, and more
particularly green bonds, which are debt instruments used to finance environmentally
beneficial activities.
At a different level, environmental, social and governance disclosure which provides
investors with better information, is encouraged by several exchanges as part of their
rules.
The UNCTAD, together with World Federation of Exchanges, has developed a
framework for stock exchanges. This is summarised in the following figure. Clearly, NZX
already meets most of the features included in the framework.
Figure 3 The stock exchange ecosystem
Source: Cleary et al, 2017
Supporting productivity growth
Productivity is an ongoing concern of policy-makers and economic commentators.
15
The key agency in the public drive to diagnose and treat this malaise is the New Zealand
Productivity Commission. Their recent overview
16
focused on the poor spread of up to
date (cutting edge) ideas and practices within and across industries in the local
economy.
While other problems (like scale) contribute and are the topic of recommendations,
several of the Commission’s suggestions are related to the NZX.
15
For instance, part of the launch of the latest OECD Survey of New Zealand in June 2017, said: “The Survey recommends a
range of reforms to improve productivity in New Zealand, which remains well below leading OECD countries.”
16
Conway 2016.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 12
Resource allocation
One fundamental issue identified is the lack of any strong drive to reallocate resources,
including technology, from poor productivity firms to better performers. This is of
course one of the (four) base functions of the stock exchange, where not only do the
information disclosure requirements provide investors (including current owners) with
the data to make judgements about such things, but the open market allows a free
contest for control among investors (by buying or selling shares) to allow for a new
regime, or the current ownership to develop and commit to remedying the problem.
Capital depth and risk management
Relatively high (historic) interest rates, small (product) markets, and expensive capital
equipment, have left the New Zealand economy capital shallow.
According to the Capital Markets Development Taskforce, making capital widely
available in an open and effective market will contribute to efficiency and thus lower
the cost of capital. It will also play its part in opening the local market to overseas
investors, thus widening the pool from which the local market is supplied.
NZX also offers risk management tools – such as its dairy and energy derivatives – to
help firms plan for investment with more confidence.
Knowledge-based capital
According to the Productivity Commission, New Zealand has traditionally been weak
in investment in knowledge-based capital. This in turn influences the ability of firms to
absorb new technology.
The existence of an open market is a contributor to more efficient investments. This
should see a better spread of capital to address the problems of lack of funds available
for knowledge-based capital.
Overall therefore the NZX has an important role in addressing the productivity
performance of the economy. The greater the coverage of the exchange the more the
investment market will be transparent and efficient.
Facilitating international connections
The Productivity Commission has also highlighted New Zealand’s lack of international
linkages as an important reason for our relatively poor productivity performance.
The NZX plays an important role in assisting Kiwi firms raise capital to expand beyond
the domestic market. It also gives listing firms a platform to lift their international
profile, with listing acting as a signal to foreign markets that the firm is a serious player
with appropriate corporate governance credentials to succeed on the global stage.
Democratising investment – NZX and investors
The stock exchange provides a route for New Zealand investors to access a large range
of savings options for individuals. The mechanism can include directly participating in
the market, and indirectly participating via their financial advisor, or enrolment in
KiwiSaver and other savings schemes which use the market as part of their portfolio.
As discussed above in the KiwiSaver regulatory context, the market for savings
products in New Zealand is somewhat limited. The range is relatively small and the
number of suppliers concentrated around the banks.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 13
In part, of course this is a result of the overall scale of the economy and the history of
savings and investment here, which was, until the financial reforms of the 1980s, still
influenced strongly by state control. But what it means is that the cost to individuals
of venturing beyond such vanilla investments as bank deposits and larger funds to pick
up small parcels of equity has been high, though always available to the determined.
More recently a range of different mechanisms have been developed to both lower
these transactions costs and provide a spectrum of opportunities, both direct and
indirect, for different types of portfolio holdings.
The NZX has been a contributor to this for instance through the medium of the
Exchange Traded Funds (ETFs).
17
This allows small investors to have as part of their
holdings a mirror of the normal market indicator without having to purchase an
appropriate amount of the constituent stocks. NZX now offers products such as
Smartshares Exchange Traded Funds which primarily target investors who are just
starting to build their portfolios. Sharesies and InvestNow also use Smartshares ETFs
on their platforms.
So, the savings options that the NZX facilitates are at much lower cost, and offer much
greater scope for diversification of risk, than normal direct investments in private
businesses or property. This is of vital importance in the context of the unbalanced
nature of most New Zealand household balance sheets with their very high exposure
to residential property, occupied or rented.
Moreover, the rules and the set-up for the NZX have, over time sought to reduce
transaction costs. At the same time, the exchange has worked to actively increase the
range of products providing investment options, including as discussed above, low cost
ETFs, and dairy derivatives.
Taken together all these developments have contributed to improving the investment
environment and enabled savers to build up their wealth over time in ways they prefer.
Crucially this has included the capacity to use flexible, small parcels, which still have
the ability to be appropriately hedged.
Enabling a low-emission future
Successive governments have sought to explore opportunities to help transition the
New Zealand economy to a lower greenhouse gas emissions future. The current
government wants to see a net zero emissions economy by 2050.
NZX plays a supporting role in these efforts through its capability in carbon trading and
environmental finance, such as the use of green bonds. It also lists several renewable
energy companies on its exchange.
17
An Exchange Traded Fund (ETF) is comprised of a collection of normal listed shares that can be traded openly on a share
market. The holdings are organised into a bundle with specific weighting for each stock, allowing the fund to mimic the
performance of market indices such as the NZX50.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 14
4. NZX’s economic footprint
4.1. Direct economic contribution
As Table 2 shows, the NZX itself makes a substantial direct contribution to the New
Zealand economy. The Gross Value Added (GVA) figures below are the firm-level
version of Gross Domestic Product (GDP).
Table 2 NZX economic contribution over time
$ millions, nominal
2014 2015 2016
Intermediate inputs 18.6 22.5 25.2
Labour 22.0 26.1 29.9
Capital 17.8 18.5 18.0
Production tax 6.8 6.1 4.5
Total revenue 65.2 73.2 77.5
Gross Value Added (GVA) 46.6 50.6 52.4
Share of GVA/total revenue 71% 69% 68%
Source: NZX annual reports, NZIER
In 2016, NZX directly contributed $52.4 million to New Zealand’s GDP.
Its share of value added to gross revenue is very high, at 68%. This compares to
agriculture (44%), manufacturing (25%), other business services (53%), and 44% for
the economy as a whole. That means for every dollar of revenue generated, NZX
contributes more to GDP than most parts of the economy.
NZX directly employs 327 people, and pays more than $22 million in salaries.
NZX spends $25.2 million on intermediates inputs from other parts of the economy.
Through this spending, it directly supports other firms’ revenue and employment. In
2016, it spent $7.3 million on IT, $3.6 million on legal fees, $3.1 on marketing printing
and distribution, and $2.0 million on other professional fees.
4.2. Wider economic contribution
NZX is a crucial component of the wider New Zealand financial services sector. Its
activities support GDP and employment in a wide range of industries.
While detailed data on the precise reach of NZX (such as the number of accountants
and lawyers across the economy that work on NZX-related matters) is not available,
Figure 4 provides a high-level indication of how many industries draw extensively on
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 15
NZX’s services.
18
Key users include the insurance, banking, superannuation, and
advertising and market research sectors.
Figure 4 Industry use of services auxiliary to financial services
2013 data (latest available); $ millions; industries that use over $5 million of services
Source: Statistics New Zealand input-output tables, NZIER
The NZX Main Board covers 159 listed issuers with a market capitalisation of $135
billion served by 16 cash market participants (including brokers) and some 340
Authorised Financial Advisers at NZX firms, supporting 68 fund managers and 193,330
individual investors.
19
It also offers debt options via a strong precondition-based market, supporting 45 listed
issuers with $27 billion market capitalisation, including KiwiSaver and two sovereign
funds.
Determining the precise number of workers supported by NZX is challenging, but we
know that around 33,800 workers are employed in closely related sectors.
20
18
Note that NZX’s services are not a separate commodity in Statistics New Zealand’s official data. However, ‘Stock exchange
operation’ is contained within the ‘Services auxiliary to financial services’ commodity (ANZSIC code K641900). Since there
are other services contained within this aggregate commodity, the chart is only indicative.
19
Source: NZX
20
Non-Depository Financing, Financial Asset Investing, Superannuation Funds, Financial Asset Broking Services, Other Auxiliary
Finance and Investment Services.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 16
We can also estimate the contribution to New Zealand’s GDP of the firms that list on
the NZX.
21
As Table 3 shows, the total GDP contribution of the S&P/NZX 50 companies is $24.6
billion, and they have a combined revenue of $61.9 billion for the 2016/2017
financial year.
These S&P/NZX 50 listed firms employ a total of 96,339 workers and paid a combined
$2.5 billion in taxes in 2016/17, making a large contribution to government revenue
and hence spending.
Table 3 Economic contribution of S&P/NZX 50 companies
22
FY2017
Ticker symbol Company
Gross
revenue, $m
Gross Value
Added, $m
AIA Auckland International Airport Limited 629 524
AIR Air New Zealand Limited 5,109 2,526
ANZ Australia and New Zealand Banking Group Limited 3,899 3,211
ARG Argosy Property Limited 125 96
ARV Arvida Group Limited 145 118
ATM The a2 Milk Company Limited 550 146
CEN Contact Energy Limited 2,080 611
CNU Chorus Limited 1,040 726
EBO Ebos Group Limited 1,509 95
FBU Fletcher Building Limited 5,381 1290
FPH Fisher & Paykel Healthcare Corporation Limited 732 481
FRE Freightways Limited 443 207
FSF Fonterra Shareholders' Fund 13,784 2,196
GMT Goodman Property Trust 289 257
GNE Genesis Energy Limited 1,951 410
HBL Heartland Bank Limited 119 101
IFT Infratil Limited 1,557 602
KMD Kathmandu Holdings Limited 148 51
KPG Kiwi Property Group Limited 291 234
MCY Mercury Energy Limited 1,597 606
MEL Meridian Energy Limited 2,319 745
MET Metlifecare Limited 370 325
MFT Mainfreight Limited 610 176
MPG Metro Performance Glass Limited 244 125
21
We can’t conclude that this contribution would not exist in NZX’s absence, because the counterfactual is difficult to
determine (see section 5 below).
22
The S&P/NZX 50 companies were extracted in Q3 2016. The actual constituents have changed since then, notably Xero has
exited and PushPay Holdings has entered the index.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 17
Ticker symbol Company
Gross
revenue, $m
Gross Value
Added, $m
NZR The New Zealand Refining Company Limited 381 277
NZX NZX Limited 81 59
OHE Orion Health Group Limited 17 11
PCT Precinct Properties New Zealand Limited 216 167
PFI Property for Industry Limited 71 43
POT Port of Tauranga Limited 256 172
RBD Restaurant Brands New Zealand Limited 518 146
RYM Ryman Healthcare Limited 585 511
SKC Sky City Entertainment Group Limited 577 382
SKL Skellerup Holdings Limited 46 18
SKT Sky Network Television Limited 894 389
SPK Spark New Zealand Limited 3,614 1,570
SPG Stride Property Limited 73 54
STU Steel & Tube Holdings Limited 513 97
SUM Summerset Group Holdings Limited 276 239
TME Trade Me Group Limited 218 195
TPW Trustpower Limited 903 272
TWR Tower Limited 219 61
VCT Vector Limited 1,227 594
VHP Vital Healthcare Property Trust 49 43
WBC Westpac Banking Corporation 2,156 1,706
WHS The Warehouse Group Limited 3,253 1,224
XRO Xero Limited 63 39
ZEL Z Energy Limited 798 455
Total NZX50 61,923 24,583
Source: NZIER, company reports
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 18
5. What if NZX didn’t exist?
We interviewed participants in the wider financial sector about NZX’s services and
their views on what would happen if NZX didn’t exist in its current form. The aim was
to generate qualitative information to be used in developing a ‘counterfactual’
scenario to run through our model of the New Zealand economy.
We also drew on the key themes from the recent literature on exchange scale.
5.1. Headline themes
All interview participants felt it was extremely important for New
Zealand to have a local exchange presence
In its absence, corporates would be forced to raise capital in offshore markets which
would likely increase the cost of raising capital and threshold size hurdles for many
(not all) firms. In addition, New Zealand’s small scale means that New Zealand
corporates would be less of a target for international exchanges for listing their debt
or equity.
The implication of this view is that the cost of capital would likely rise if there wasn’t
a local listing option, particularly for many SMEs. There would also be a ‘gap’ in the
financing continuum and a reduction in risk sharing mechanisms.
This view is also clearly aligned with the literature on exchanges which finds that they
help improve both the access and the cost of capital, spurring investment and
economic development.
The literature also suggests that access to a local exchange can also help improve the
diversification of household wealth. Several interviewees also felt this was an
important benefit of having a local exchange – the counterfactual expressed was that
wealth might be even more concentrated in residential property if there wasn’t a local
listed market option for mobilising savings. There would also be an even heavier
reliance on bank-based financing.
Most participants felt it was also important for the exchange to be
locally owned and operated because a larger exchange would be less
attuned to New Zealand’s specific challenges and opportunities
But some participants felt ownership was not so important as control and that at least
regulatory control could be assured because the entity would still need to comply with
local regulations (in the same way that offshore banks still need to comply with the
Reserve Bank of New Zealand regulation).
Most research on the ASX-SGX takeover also rejected the view that the merger would
imply a loss of regulatory oversight, despite this being mentioned as a key
consideration by Australian Treasurer on rejecting the offer.
Participants felt that the costs of a scenario where the NZX was part of
a larger exchange would be much greater than the benefits
There is a global trend towards stock exchanges merging. The common benefit to such
mergers expressed by interviewees was an improvement in technology and in principle
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 19
reduced costs as the fixed costs of providing an exchange would be spread over a much
larger number of listed instruments and market capitalisation. There could also be a
larger range of products available on the ‘local’ market.
However, most – but not all – participants did not think there would be a liquidity
benefit from New Zealand being served by a larger, non-local exchange, and that it
could in fact reduce liquidity, as New Zealand companies would stand out less and get
less coverage on a larger exchange.
The costs attributed to the scenario were various:
Reduced business activity and employment in the ecosystem connected to
local capital raising and funds management.
Reduced access to the listed market option for SMEs and reduced analyst
coverage of New Zealand smaller cap companies that are listed. This would
imply less liquidity and price discovery and a higher cost of capital for SMEs.
Less engagement of shareholders with New Zealand businesses, to the
detriment of corporate governance and decision-making aligned to
shareholder interests (i.e. an increase in principal-agent problems).
Loss of taxation revenue and employment in larger listed corporates who
could face even more pressure to shift headquarters to the domicile of the
parent exchange.
Increased resistance to listing sensitive/state owned assets, e.g. would the
SOE energy company listings have occurred if the market was part of a
larger exchange where New Zealand investors could be swamped by
offshore investors in any IPO?
Reduced ability for corporates and local government to obtain long-term
debt financing, in turn raising the cost of capital for infrastructure projects
to the point where some would not get built.
Reduced diversification for savers compared to the status quo where they
can allocate to New Zealand markets, Australian and other markets
separately.
23
Reduced ability of local regulators to set the rules of the game, or for New
Zealand corporates to influence the regulator and exchange.
5.2. Defining a counterfactual
We sought to use our interviews to design a counterfactual comparison scenario
where NZX did not exist in its current form. This should not be taken as a prediction or
forecast – merely a “what if?” thought experiment required to inform our economic
modelling of the benefits of retaining NZX in its current form.
From the literature and interviews the most obvious counterfactual is that New
Zealand does not have its own listed market. Under this scenario, instead of listing in
New Zealand, corporates would need to go offshore if they want to raise equity or debt
financing. New Zealand savers would similarly lose access to a local market, instead
their capital would be invested wholly in offshore exchanges.
23
Some interviewees expressed that it is inevitable under the status quo that savings flows will increasingly be directed to
offshore investment opportunities unless local product offers increase. Efforts to bring international listings to New Zealand
would help ensure that this savings flow remains intermediated through New Zealand capital markets.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 20
The range of impacts of this counterfactual include:
A higher cost of equity capital, particularly for SMEs. Indicatively, the
number would be 100 to +300 basis points based on the premium that
Private Equity investors require relative to investors in public markets. This
would result in reduced investment in the economy.
Reduced tenure of debt financing, increasing the effective cost of capital
for longer term projects given the uncertainty around roll-over rates.
Indicatively the cost would increase by at least 25 basis points. This would
have a flow-on impact to reduced capital formation, particularly
infrastructure.
Reduced productivity levels given
higher cost of equity capital implies less investment and hence a lower
capital stock
the spill-over impact of infrastructure on multi-factor productivity
levels.
Reduced productivity growth given growth capital, in particular, becomes
more expensive and difficult to access – retarding research and
development and innovation.
Reduced diversity in the sectoral composition of the New Zealand economy
and export base (given the growth capital impact and the increased
likelihood of ‘offshoring’ of headquarters, strategy, service and production
activities of companies as they are forced to list in offshore markets to raise
capital, or are bought out by foreign companies).
Massively reduced employment levels in sectors connected to NZ capital
markets. Demand for listed investments would be 100% met by offshore
markets, with a relatively small number of people being employed to
intermediate this work.
Increased reliance on New Zealand’s traditional bank-based financing and
hence increased bank concentration risk.
Reduced ability of the dairy sector to hedge risk, given a dairy futures
exchange would have been unlikely to be developed.
Reduced diversity and liquidity on household balance sheets – increased
share of savings by New Zealand households into housing and illiquid
investments.
In Section 6 below we formally model this counterfactual, focusing on the cost of
capital increase.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 21
6. Economic modelling of
counterfactual
6.1. Modelling framework and scenarios
We use the NZ-ORANI Computable General Equilibrium (CGE) model to simulate the
New Zealand economy without NZX in its current form by applying an increase in rental
price of capital by around 1.0% economy wide.
Our model contains 106 industries and 201 commodities based on Statistics New
Zealand’s input-output tables 2013 and updated to reflect the New Zealand economy
in 2017. For more detail on the model, see Appendix C.
Our ‘full’ modelling scenario increases the economy wide cost of capital by 1.0%. The
1.0% is derived from our literature review and discussions with market participants.
Based on those information sources, we assume that in the absence of NZX in its
current form, the cost of capital for SMEs would be about 300 basis points higher, and
25 basis points for large corporates.
We weight these cost of capital increases by the shares of total employment in New
Zealand accounted for by SMEs (fewer than 20 employees) and larger firms. Statistics
New Zealand’s Business Demography data shows that 29% of employment is in SMEs
and 71% in larger firms.
Applying these employment weights, the increase in the economy wide cost of capital
is then derived as 105 basis points, or 1.05%.
24
Given that it is difficult to know how precise these potential cost of capital increases
might be (i.e. we don’t know exactly what the counterfactual would look like), we also
consider an alternative scenario where the anticipated cost of capital increases are
halved – to an economy wide increase of 0.525%. We refer to this as our ‘Half’ scenario.
6.2. Results
Table 4 shows our macroeconomic results. An increase of 1.05% in the economy wide
cost of capital causes investment to fall by 1.77%.
As the cost of production increases, economic activity contracts and real GDP falls by
0.89% (or $2.4 billion). The volume of exports falls by 0.49% or $342 million as New
Zealand exporters become marginally less internationally competitive.
As the economy slows, the demand for labour drops, which sees real wages fall by
0.8%. As a consequence, household incomes decrease, and real household spending is
1.44% or $2.2 billion lower.
Table 3, Column ‘Half’ shows the results of our alternative scenario where the cost of
capital cost increases by 0.525%. In this scenario, investment falls by 0.89% and real
wages fall by 0.40%. Real GDP falls by 0.45% ($1.2 billion). Real household spending
falls by 0.72% ($1.1 billion) and export volumes fall by 0.25% ($173 million).
24
[(300bps x 29%)+((25bps x 71%)]
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 22
Table 4 Headline results
Change from 2017 BAU
Full Half
% $m % $m
Real wage -0.80 -0.40
Aggregate capital stock -1.77 -0.89
Real GDP -0.89 -2,355 -0.45 -1,181
Real exports -0.49 -342 -0.25 -173
Household consumption -1.44 -2,190 -0.72 -1,096
Source: NZIER CGE modelling
The detailed results by industry are in Appendix A and 0.
They show that sectors that are capital-intensive – either in physical capital or heavily
dependent on borrowing – suffer the largest falls in industry value added.
These sectors include central government services, residential and non-residential
construction, accommodation, electricity transmission and distribution, banking and
financing, retail, telecommunication services, and various heavy manufacturing
sectors, for example.
This clearly shows the indirect impact that NZX has on a wider range of sectors in the
New Zealand economy beyond what one might normally expect. Through keeping the
cost of capital lower than it would otherwise be, NZX allows these sectors to borrow
and invest at lower cost, thus supporting their competitiveness and value added.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 23
7. Conclusion
NZX plays a critical role in making the New Zealand economy function efficiently and
effectively. It reduces search costs for borrowers and lenders, allows resources to be
allocated to their highest value use, and allows firms to manage their risks.
It also supports wide participation in financial markets by thousands of individual
investors who would otherwise not be able to do so.
NZX has developed new tools to support New Zealand’s competitive advantages, such
as the dairy derivatives market and energy products.
Thinking solely about the direct economic impact of NZX as a business ($52 million of
GDP) misses the crucial facilitating role it plays in supporting other businesses and
sectors to grow.
Firms listing on the S&P/NZX 50 generate almost $25 billion of GDP – some 10% of the
entire economy. These firms employ over 96,000 workers and paid $2.5 billion in taxes
in 2016/17.
Our economic modelling also showed what could happen to the New Zealand economy
if the NZX was not present in its current form. Based on discussions with sector
participants and the international literature, we modelled a scenario where the cost of
capital was 300 basis points higher for SMEs and 25 basis points higher for larger New
Zealand firms.
The results show that an economy wide higher cost of capital would see New Zealand’s
GDP fall by $2.4 billion, as firms’ borrowing costs and hence overall costs of production
increase. Households would have $2.2 billion less income available to spend on goods
and services, which would lower aggregate living standards.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 24
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NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 26
Appendix A CGE modelling results: Value
added and output
Change from 2017 BAU
Industry
Full Half
Change in
value added,
%
Change
in
output,
$m
Change in
VA, $m
Change in
value
added, %
Change in
output,
$m
Change
in VA,
$m
Horticulture and fruit growing -0.3 -9.1 -3.1 -0.1 -4.6 -1.6
Sheep, beef cattle, and grain farming -0.4 -32.1 -11.8 -0.2 -16.1 -5.9
Dairy cattle farming -0.4 -48.5 -23.3 -0.2 -24.3 -11.7
Poultry, deer, and other livestock
farming
-0.4 -6.0 -1.4 -0.2 -3.0 -0.7
Forestry and logging -0.4 -16.7 -5.4 -0.2 -8.4 -2.7
Fishing and aquaculture 0.0 0.5 0.1 0.0 0.2 0.1
Agriculture, forestry, and fishing
support services
-0.3 -9.2 -4.8 -0.1 -4.6 -2.4
Coal mining 0.1 1.0 0.4 0.1 0.5 0.2
Oil and gas extraction -0.3 -14.3 -8.5 -0.1 -7.2 -4.3
Metal ore and non-metallic mineral
mining and quarrying
-0.2 -3.4 -1.6 -0.1 -1.8 -0.8
Exploration and other mining
support services
-0.4 -4.4 -2.5 -0.2 -2.2 -1.3
Meat and meat product
manufacturing
-0.4 -41.5 -7.0 -0.2 -20.8 -3.5
Seafood processing -1.2 -25.7 -8.6 -0.6 -12.9 -4.3
Dairy product manufacturing -0.4 -73.5 -8.3 -0.2 -36.9 -4.2
Fruit, oil, cereal, and other food
product manufacturing
-0.8 -58.0 -17.5 -0.4 -29.1 -8.8
Beverage and tobacco product
manufacturing
-1.1 -48.5 -20.5 -0.5 -24.4 -10.3
Textile and leather manufacturing -0.7 -15.5 -3.2 -0.4 -7.8 -1.6
Clothing, knitted products, and
footwear manufacturing
2.0 9.3 4.3 1.0 4.6 2.1
Wood product manufacturing -0.4 -21.1 -5.9 -0.2 -10.7 -3.0
Pulp, paper, and converted paper
product manufacturing
-0.5 -16.7 -3.9 -0.3 -8.4 -2.0
Printing -0.7 -12.8 -5.9 -0.4 -6.3 -2.9
Petroleum and coal product
manufacturing
-0.6 -56.8 -6.1 -0.3 -28.5 -3.1
Basic chemical and basic polymer
manufacturing
-3.0 -42.9 -11.2 -1.5 -21.7 -5.7
Fertiliser and pesticide
manufacturing
0.4 7.0 1.3 0.2 3.4 0.6
Pharmaceutical, cleaning, and other
chemical manufacturing
-1.3 -16.3 -6.3 -0.7 -8.2 -3.2
Polymer product and rubber product
manufacturing
-1.0 -41.5 -15.1 -0.5 -20.9 -7.6
Non-metallic mineral product
manufacturing
-0.5 -13.9 -5.4 -0.2 -7.1 -2.7
Primary metal and metal product
manufacturing
-0.7 -26.7 -5.5 -0.3 -13.5 -2.8
Fabricated metal product
manufacturing
-0.6 -34.1 -12.9 -0.3 -17.2 -6.5
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 27
Industry
Full Half
Change in
value added,
%
Change
in
output,
$m
Change in
VA, $m
Change in
value
added, %
Change in
output,
$m
Change
in VA,
$m
Transport equipment manufacturing 9.8 310.8 125.3 4.9 154.5 62.3
Electronic and electrical equipment
manufacturing
-1.3 -51.2 -21.3 -0.6 -25.9 -10.8
Machinery manufacturing -0.1 -4.4 -2.0 -0.1 -2.5 -1.1
Furniture manufacturing -1.4 -15.6 -6.6 -0.7 -7.9 -3.3
Other manufacturing -1.6 -10.0 -4.5 -0.8 -5.0 -2.3
Electricity generation and on-selling 2.8 343.7 90.3 1.4 174.2 45.8
Electricity transmission and
distribution
-8.3 -369.6 -225.6 -4.2 -186.6 -113.9
Gas supply 1.0 13.4 2.7 0.5 6.8 1.4
Water supply -1.7 -22.2 -14.6 -0.8 -11.1 -7.3
Sewerage and drainage services 0.0 0.3 0.2 0.0 0.2 0.1
Waste collection, treatment, and
disposal services
-3.0 -53.0 -20.8 -1.5 -26.7 -10.5
Residential building construction -0.4 -39.5 -6.5 -0.2 -20.3 -3.3
Non-residential building
construction
0.3 18.2 2.7 0.1 9.3 1.4
Heavy and civil engineering
construction
0.0 -1.4 -0.4 0.0 -1.3 -0.4
Construction services -0.6 -107.1 -48.3 -0.3 -54.3 -24.5
Basic material wholesaling -2.1 -102.7 -44.6 -1.1 -51.6 -22.4
Machinery and equipment
wholesaling
4.8 317.2 190.4 2.4 157.4 94.5
Motor vehicle and motor vehicle
parts wholesaling
0.7 11.3 6.6 0.3 4.7 2.7
Wholesaling -2.8 -334.9 -151.7 -1.4 -166.0 -75.2
Retail -0.6 -113.8 -70.1 -0.3 -56.7 -34.9
Accommodation -1.8 -54.5 -27.2 -0.9 -27.4 -13.7
Food and beverage services -1.7 -120.7 -55.9 -0.8 -60.7 -28.1
Road transport -0.8 -64.1 -28.3 -0.4 -32.1 -14.1
Rail transport 0.2 1.3 0.9 0.1 0.6 0.4
Other transport -0.7 -8.5 -3.1 -0.3 -4.3 -1.6
Air and space transport -0.5 -29.7 -7.4 -0.2 -15.0 -3.7
Postal and courier services 0.0 -0.3 -0.1 0.0 0.0 0.0
Transport support services 0.0 -1.8 -1.3 0.0 -1.3 -1.0
Warehousing and storage services 0.5 4.9 2.2 0.2 2.4 1.1
Publishing (except internet and
music publishing)
-0.2 -4.1 -2.0 -0.1 -1.9 -0.9
Motion picture and sound recording
activities
-1.4 -29.9 -10.4 -0.7 -15.1 -5.3
Broadcasting and internet publishing -1.8 -37.1 -21.9 -0.9 -18.6 -10.9
Telecommunications services -1.3 -127.8 -68.5 -0.7 -63.7 -34.2
Library and other information
services
-2.4 -9.0 -6.3 -1.2 -4.6 -3.2
Banking and financing; financial
asset investing
-1.8 -237.3 -158.9 -0.9 -118.6 -79.4
Life insurance -1.6 -24.9 -8.7 -0.8 -12.5 -4.3
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 28
Industry
Full Half
Change in
value added,
%
Change
in
output,
$m
Change in
VA, $m
Change in
value
added, %
Change in
output,
$m
Change
in VA,
$m
Health and general insurance -1.2 -45.5 -26.9 -0.6 -22.8 -13.5
Superannuation and individual
pension services
-1.2 -4.6 -0.1 -0.6 -2.3 0.0
Auxiliary finance and insurance
services
-0.6 -28.0 -14.1 -0.3 -14.0 -7.1
Rental and hiring services (except
real estate); non-financial asset
leasing
0.4 19.7 12.7 0.2 10.1 6.5
Residential property operation -3.6 -369.8 -219.4 -1.8 -185.8 -110.3
Non-residential property operation -6.4 -701.0 -370.3 -3.2 -352.4 -186.2
Real estate services -0.9 -42.9 -18.6 -0.5 -21.7 -9.4
Owner-occupied property operation -2.1 -471.9 -200.2 -1.0 -236.4 -100.3
Scientific, architectural, and
engineering services
-0.4 -35.8 -21.3 -0.2 -18.3 -10.9
Legal and accounting services -0.5 -33.5 -25.0 -0.2 -16.5 -12.3
Advertising, market research, and
management services
-0.7 -60.4 -32.5 -0.4 -30.3 -16.3
Veterinary and other professional
services
7.1 64.7 46.1 3.6 33.0 23.5
Computer system design and related
services
-1.4 -98.5 -67.4 -0.7 -49.3 -33.7
Travel agency and tour arrangement
services
-0.8 -7.4 -3.9 -0.4 -3.7 -2.0
Employment and other
administrative services
0.0 -0.2 -0.1 0.0 -0.4 -0.2
Building cleaning, pest control, and
other support services
-0.8 -25.3 -15.0 -0.4 -12.5 -7.4
Local government administration
services
1.0 20.5 12.8 0.5 10.3 6.4
Central government administration
services
-19.0 -1350.8 -690.8 -9.4 -671.5 -343.4
Defence 60.5 1358.5 913.6 30.1 675.5 454.2
Public order, safety, and regulatory
services
-2.5 -149.1 -97.3 -1.2 -74.2 -48.4
Preschool education -0.4 -5.0 -3.7 -0.2 -2.5 -1.8
School education 0.3 21.9 16.8 0.1 11.1 8.5
Tertiary education 0.4 27.2 19.1 0.2 13.6 9.5
Adult, community, and other
education
-18.4 -242.6 -130.1 -9.3 -122.2 -65.5
Hospitals 0.0 -4.8 -3.4 0.0 -2.4 -1.7
Medical and other health care
services
-0.6 -58.9 -32.7 -0.3 -29.6 -16.4
Residential care services and social
assistance
-1.4 -68.7 -45.9 -0.7 -34.3 -22.9
Heritage and artistic activities -2.3 -27.2 -15.3 -1.2 -13.7 -7.7
Sport and recreation services -2.3 -70.9 -29.9 -1.2 -35.6 -15.0
Gambling activities -2.9 -66.1 -41.3 -1.5 -33.2 -20.7
Repair and maintenance -8.9 -342.5 -182.4 -4.4 -170.5 -90.9
Personal services; domestic
household staff
-42.6 -969.7 -620.5 -21.5 -489.4 -313.2
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 29
Industry
Full Half
Change in
value added,
%
Change
in
output,
$m
Change in
VA, $m
Change in
value
added, %
Change in
output,
$m
Change
in VA,
$m
Religious services; civil, professional,
and other interest groups
71.3 1689.7 775.2 36.0 853.0 391.3
Total -3704.0 -1907.7 -1858.6 -958.7
Note that total value added ($1908 million) refers to total value added (factor cost). Real GDP is $2355 million) as it is VA plus
tax on commodities.
Source: NZIER CGE modelling
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 30
Appendix B CGE modelling results: exports
Change from 2017 BAU
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Retail margin -1.0 -0.6 -0.5 -0.3
Wholesale margin -1.0 -1.2 -0.5 -0.6
Living plants, buds, seeds, spice, and aromatic crops 0.2 0.1 0.1 0.0
Vegetables 0.6 1.7 0.3 0.9
Kiwifruit -0.2 -2.3 -0.1 -1.2
Pome fruit (apples, pears) 0.0 0.1 0.0 0.0
Other fruit and nuts 0.6 0.9 0.3 0.5
Forage products, fibres, sugar crops, unmanufactured
tobacco
-0.3 -0.2 -0.1 -0.1
Cereals -1.0 -0.1 -0.5 0.0
Sheep -1.0 0.0 -0.5 0.0
Cattle -0.1 -0.1 0.0 0.0
Other livestock 0.7 1.2 0.3 0.6
Deer -1.0 0.0 -0.5 0.0
Pigs -1.0 0.0 -0.5 0.0
Raw milk -1.1 0.0 -0.5 0.0
Wool 0.1 0.3 0.1 0.1
Other animal products -0.1 -0.4 -0.1 -0.2
Wood and non-wood forest products -0.3 -7.0 -0.2 -3.5
Standing timber -1.0 0.0 -0.5 0.0
Fish 0.1 0.2 0.1 0.1
Crustaceans -0.4 -1.3 -0.2 -0.6
Support services to agriculture (including animal
husbandry)
-1.0 0.0 -0.5 0.0
Support services to forestry and logging 0.0 0.0 0.0 0.0
Fishing services -1.0 0.0 -0.5 0.0
Coal, coke, and tar products -0.5 -1.9 -0.3 -1.0
Crude petroleum -0.3 -7.3 -0.2 -3.7
Natural gas -1.0 0.0 -0.5 0.0
Iron ores, non-ferrous metal ores, and concentrates 0.2 0.2 0.1 0.1
Gypsum, limestone, cement, and building stone -1.0 0.0 -0.5 0.0
Sands, pebbles, gravel, clays, stone, and bitumen -1.0 -0.2 -0.5 -0.1
Chemical and fertilizer minerals and salt -0.9 -0.2 -0.5 -0.1
Precious metals and stones -0.3 -2.5 -0.1 -1.3
Services incidental to mining 0.0 0.0 0.0 0.0
Meat and offal -0.2 -12.8 -0.1 -6.4
Bacon, ham, and small good products 0.1 0.4 0.0 0.2
Hides and skins -0.4 -1.4 -0.2 -0.7
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 31
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Prepared fish -0.8 -12.4 -0.4 -6.2
Milk and cream in solid or processed liquid form -0.3 -24.5 -0.1 -12.3
Other dairy products -0.4 -19.4 -0.2 -9.8
Prepared vegetables -0.7 -2.7 -0.3 -1.4
Prepared fruit and nuts -0.9 -0.9 -0.4 -0.5
Animal and vegetable oils and fats -0.5 -1.3 -0.2 -0.7
Grain products -0.6 -0.7 -0.3 -0.3
Starches -0.3 -0.3 -0.2 -0.2
Animal feed 0.3 0.4 0.1 0.2
Bakery products -0.6 -1.1 -0.3 -0.6
Sugar and confectionery products -0.6 -1.6 -0.3 -0.8
Macaroni and noodles -0.5 -0.1 -0.2 -0.1
Food products -0.5 -8.2 -0.3 -4.1
Beer, soft drinks, and fruit juices -2.1 -5.5 -1.1 -2.8
Spirits and tobacco products -2.2 -6.6 -1.1 -3.3
Wines -1.2 -17.1 -0.6 -8.6
Natural and man-made textile fibres -1.0 -5.3 -0.5 -2.7
Yarn and thread -0.3 -0.3 -0.2 -0.2
Woven fabrics -0.6 -0.3 -0.3 -0.2
Other textiles 0.2 0.3 0.1 0.1
Tanned skins and leather; handbags and articles of
leather
-0.6 -2.5 -0.3 -1.3
Carpets 0.0 0.0 0.0 0.0
Clothing and knitted fabrics 0.2 1.1 0.1 0.6
Footwear 0.8 0.9 0.4 0.4
Wood -0.4 -4.0 -0.2 -2.1
Panels, boards, veneer sheets, and plywood -0.5 -2.8 -0.3 -1.4
Building joinery -0.3 -0.3 -0.1 -0.1
Wood containers and other wood products 1.0 0.2 0.5 0.1
Pulp, paper, and paperboard -0.3 -1.7 -0.1 -0.9
Books and other printed material -0.4 -1.2 -0.2 -0.6
Newspapers and journals -0.2 -0.1 -0.1 0.0
Petrol -1.0 -0.4 -0.5 -0.2
Diesel -1.6 -2.7 -0.8 -1.3
Other petroleum products -0.7 -9.6 -0.4 -4.8
Basic chemicals; other paper and paperboard products -1.0 -8.8 -0.5 -4.5
Other chemical products and man-made fibres -1.3 -19.8 -0.7 -10.0
Fertilisers and pesticides -0.4 -0.9 -0.2 -0.5
Plastics in primary forms -3.6 -1.8 -1.8 -0.9
Pharmaceutical products -1.4 -6.6 -0.7 -3.3
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 32
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Soap and perfumes -0.2 -0.5 -0.1 -0.2
Paints 1.3 1.1 0.6 0.5
Rubber tyres and tubes -1.5 -0.1 -0.8 -0.1
Rubber -0.5 -0.3 -0.2 -0.1
Semi-manufactures of plastics -0.9 -1.3 -0.5 -0.6
Packaging products of plastics -1.7 -4.1 -0.8 -2.1
Other plastics products -0.9 -2.0 -0.4 -1.0
Glass and glass products -0.6 -0.2 -0.3 -0.1
Non-structural ceramic ware and clay products -0.3 -0.1 -0.1 -0.1
Plaster, lime, and cement -1.2 -0.3 -0.6 -0.2
Articles of concrete and stone -1.6 -1.5 -0.8 -0.7
Wastes and scraps -1.4 -7.6 -0.7 -3.8
Basic iron, steel, and other metals -0.7 -6.5 -0.4 -3.3
Steel products, semi-finished metal products -1.4 -8.8 -0.7 -4.4
Structural metal products -1.6 -2.1 -0.8 -1.1
Prefabricated buildings -4.4 -0.6 -2.2 -0.3
Metal containers and steam generators 0.7 0.1 0.3 0.1
Other fabricated metal products 0.6 2.3 0.3 1.1
Weapons and ammunition; accumulators, primary cells,
and batteries
53.7 11.8 27.0 6.0
Motor vehicles, trailers, and semi-trailers; bodies
(coachwork)
4.6 16.7 2.3 8.3
Ships, pleasure, and sporting boats 0.1 0.2 0.0 0.1
Other transport equipment and parts -0.3 -0.1 -0.2 -0.1
Aircraft and spacecraft 5.1 5.1 2.5 2.6
Domestic appliances -2.2 -3.3 -1.1 -1.7
Computers, parts, and office machinery 3.0 6.2 1.5 3.1
Electric motors, generators, and transformers -1.0 -3.7 -0.5 -1.9
Other electrical equipment and parts thereof 0.1 0.7 0.0 0.3
Television, cameras, and other electronic goods -0.8 -2.3 -0.4 -1.1
Medical equipment -1.2 -8.1 -0.6 -4.1
Photographic and scientific equipment -2.4 -7.8 -1.2 -3.9
Engines 0.0 0.0 0.0 0.0
General industrial machinery -1.5 -14.0 -0.7 -7.0
Agricultural and forestry equipment -0.4 -1.4 -0.2 -0.7
Other special-purpose machinery -1.5 -2.5 -0.8 -1.2
Machinery for mining -0.5 -1.0 -0.3 -0.5
Machinery for food production -1.6 -1.3 -0.8 -0.7
Furniture -0.9 -0.9 -0.5 -0.5
Jewellery -0.9 -1.4 -0.4 -0.7
Sports goods -4.5 -1.3 -2.3 -0.7
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 33
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Games and toys -1.0 -1.8 -0.5 -0.9
Services incidental to manufacturing -1.0 0.0 -0.5 0.0
Electricity -1.0 -0.3 -0.5 -0.2
Gas 0.0 0.0 0.0 0.0
Water 0.0 0.0 0.0 0.0
Sewerage services 0.0 0.0 0.0 0.0
Waste disposal, recycling, and environmental
protection services
0.0 0.0 0.0 0.0
Residential building construction 0.0 0.0 0.0 0.0
Non-residential building construction -1.0 -0.4 -0.5 -0.2
Civil engineering services 0.0 0.0 0.0 0.0
Pre-erection work 0.0 0.0 0.0 0.0
Other installation work 0.0 0.0 0.0 0.0
Electrical installation work 0.0 0.0 0.0 0.0
Plumbing and other installation services 0.0 0.0 0.0 0.0
Building completion work 0.0 0.0 0.0 0.0
Land and land improvements 0.0 0.0 0.0 0.0
Wholesale trade -2.2 -5.2 -1.1 -2.6
Accommodation -1.8 -31.0 -0.9 -15.6
Meal services 0.9 7.7 0.4 3.8
Takeaways -1.1 -4.0 -0.6 -2.0
Beverage services -1.7 -4.5 -0.9 -2.3
Road transport freight services -1.0 0.0 -0.5 0.0
Road passenger transport -2.5 -4.5 -1.3 -2.3
Railway transport freight services -1.0 -0.1 -0.5 0.0
Railway passenger transport 0.9 0.1 0.4 0.1
Sea transport freight services -1.0 -0.1 -0.5 -0.1
Passenger transportation by waterborne vessels 0.2 0.1 0.1 0.0
Air transport freight services 1.3 0.8 0.6 0.4
Air passenger transport -0.1 -3.2 -0.1 -1.8
Travel arrangement and sightseeing transportation
services
0.1 0.7 0.1 0.3
Postal and courier services 0.0 0.0 0.0 0.0
Cargo handling services -0.5 -0.6 -0.3 -0.3
Supporting services for road and rail transport -1.0 0.0 -0.5 0.0
Supporting services for water transport -2.0 -0.3 -1.0 -0.2
Supporting services for air transport 2.4 0.2 1.2 0.1
Freight transport agencies and other supporting
transport services
-1.0 0.0 -0.5 0.0
Storage and warehousing services 0.8 0.2 0.4 0.1
Publishing, printing, and reproduction services 0.0 0.0 0.0 0.0
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 34
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Packaged software, tapes, audio, and video records -4.5 -1.6 -2.3 -0.8
Motion picture, radio, TV services -1.5 -12.8 -0.8 -6.5
Broadcasting, programming, and programme
distribution services
-1.0 -0.3 -0.5 -0.1
Telecommunications services -2.4 -4.4 -1.2 -2.2
Internet telecommunications services and online
content
-1.0 -0.2 -0.5 -0.1
News agency, library, and archive services 0.5 0.0 0.3 0.0
Financial intermediation services -1.6 -5.0 -0.8 -2.5
Life insurance 0.0 0.0 0.0 0.0
Other insurance services -1.0 -1.0 -0.5 -0.5
Superannuation and individual pension services 0.0 0.0 0.0 0.0
Services auxiliary to financial services -1.0 -0.1 -0.5 0.0
Equipment hire services -4.0 -5.0 -2.0 -2.5
Computer software and services -1.1 -7.6 -0.5 -3.9
Intellectual property licensing services 0.5 1.2 0.2 0.6
Capitalised exploration 0.0 0.0 0.0 0.0
Leased residential property services -1.0 -2.1 -0.5 -1.0
Leased commercial property services -1.0 -0.4 -0.5 -0.2
Other real estate services 0.0 0.0 0.0 0.0
Owner - occupied dwellings 0.0 0.0 0.0 0.0
Research and development -0.4 -0.5 -0.2 -0.2
Architectural and engineering services 0.4 0.8 0.2 0.4
Other business services -3.0 -2.6 -1.5 -1.3
Legal services -3.2 -2.6 -1.6 -1.3
Accounting and taxation services -0.7 -0.6 -0.3 -0.3
Advertising and marketing services -1.2 -1.2 -0.6 -0.6
Management consultancy -1.7 -9.0 -0.8 -4.5
Placement and supply of personnel -1.0 -0.1 -0.5 0.0
Cleaning -1.0 0.0 -0.5 0.0
Other support services -1.0 -0.2 -0.5 -0.1
Local government administration services 0.0 0.0 0.0 0.0
Central government administration services -1.0 -1.3 -0.5 -0.6
Investigation and security services 0.0 0.0 0.0 0.0
Preschool education 0.0 0.0 0.0 0.0
Primary education 0.0 0.0 0.0 0.0
Secondary education -0.8 -1.4 -0.4 -0.7
Higher education 1.1 14.3 0.6 7.1
Other education services -0.2 -0.8 -0.1 -0.4
Hospital and nursing care 0.0 0.0 0.0 0.0
Medical, dental, and other health services -1.0 -0.6 -0.5 -0.3
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 35
Commodity
Full Half
Change in
export
volumes, %
Change in
export
volume, $m
Change in
export
volumes, %
Change in
export
volume, $m
Accommodation for the aged 0.0 0.0 0.0 0.0
Child care services 0.0 0.0 0.0 0.0
Other social services 0.0 0.0 0.0 0.0
Libraries, museums, and art 0.3 0.3 0.2 0.1
Sport and recreation services 0.4 0.5 0.2 0.2
Gambling services -2.8 -1.2 -1.4 -0.6
Maintenance of domestic and office equipment -1.0 0.0 -0.5 0.0
Maintenance of transport machinery and equipment -1.1 -4.7 -0.6 -2.4
Maintenance of other equipment 0.0 0.0 0.0 0.0
Other personal and community services -1.0 -0.5 -0.5 -0.2
Total -340.9 -172.5
Source: NZIER CGE modelling
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 36
Appendix C Overview of ORANI-NZ CGE model
C.1 CGE modelling
To capture the full effect of increasing the cost of capital on the New Zealand economy, we have used
the ORANI-NZ model, one of our suite of Computable General Equilibrium (CGE) models.
CGE modelling is widely regarded as more robust and providing more credible impact assessments
than input-output (‘multiplier’) methodologies.
25
Multiplier methodologies typically over-state economic impact estimates because they assume that
economic resources such as land, labour and capital are infinitely available, are never idle or can be
reallocated without adjustment costs. They also assume that all prices remain constant, even if
demand increases.
In contrast, CGE models are not only driven by prices that respond to changes in supply and demand,
but they also account for resource constraints and flow-on effects. That is, in a CGE model, there are
no “free lunches”.
CGE models therefore produce more conservative, but more credible, economic impacts compared to
multiplier methodologies. CGE models are now our preferred method for assessing economic impacts
and are used extensively in New Zealand and internationally.
As a recent commentary noted regarding CGE modelling “a well-designed model that is used by skilled
practitioners to shed light on issues the model was designed to illuminate can make a significant
contribution to policy debates and decision making”.
26
Using actual economic data, CGE models estimate how an economy reacts to major projects or changes
in policy, technology or other external factors. CGE models are useful whenever we wish to estimate
the effect of changes in one part of the economy upon the whole of New Zealand.
In summary, to estimate the effect of some change such as change in the cost of capital (referred to as
a “shock”), the modeller specifies a starting position for the economy based on data in which supply is
equal to demand in all markets (known as being “in equilibrium”), changes parts of the data to reflect
the shock and then, using a highly detailed model of the economy and specialised software, determines
what needs to happen to return the economy to a new equilibrium.
To allow the model to achieve a new equilibrium, some aspects of the economy have to remain fixed.
These aspects are collectively known as the model ‘closure’. Common closures, for example, are
population and the labour force, the exchange rate, interest rates or export prices.
Determining what should be included in the closure and what should be allowed to vary within the
model is a key part of any modelling exercise and it is very important that the modeller be very
transparent about what is a result of the modelling and what has been imposed via the closure.
We detail the specific closures we have used in this model in Section C.3 below.
The difference between the old and the new equilibrium can then be analysed to determine the effect
of the shock on a range of economic indicators, like Gross Domestic Product (GDP), employment,
wages and living standards.
25
See Gretton, P. (2013) On Input-output Tables: uses and abuses. Australian Productivity Commission Staff Research Note for a thorough discussion of
what multipliers are, how they are constructed and their short-comings as tools for assessing economic impacts.
We also note that the Australian Bureau of Statistics has ceased to provide multiplier estimates from its input output tables.
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5209.0.55.001Main%20Features42014-
15?opendocument&tabname=Summary&prodno=5209.0.55.001&issue=2014-15&num=&view=
26
Denniss, R. (2012) The use and abuse of economic modelling in Australia, Australia Institute Technical Brief No. 12.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 37
C.2 Our national CGE model, ORANI-NZ
NZIER’s national CGE model, ORANI-NZ
27
, is a top-down model of the New Zealand economy, which
begins with components of the economy and sums them up to obtain an aggregate description of the
economy.
It is based on Statistics New Zealand’s 2013 input-output tables, which have been updated to reflect
the economy in 2017.
A visual representation of ORANI -NZ is shown in Figure 5. It highlights how the model is able to capture
the complex and multidirectional relationships between the various parts in the economy and how
they interact with the rest of New Zealand and rest of the world.
Figure 5 CGE models show the whole economy
Source: NZIER
More technical details on the model are available on request.
The model includes 106 industries and 201 commodities in its standard form. We aggregate some retail
industries so that the model has 98 industries and 201 commodities.
C.3 Closure
As we noted above, in any CGE model, it is important to understand which factors have been allowed
to vary and which remain fixed by assumption (also known as exogenous variables). The particular
combination of fixed factors is known as the closure.
In Table 5, we list the main variables included in the closure in the modelling underlying this report.
Labour is completely mobile between sectors. A wage differential is needed to induce labour
movement between sectors. Total national employment is fixed in the long-run closure.
The price of capital rental is our model’s cost of capital variable. It is exogenous and we use this variable
to shock the model.
27
ORANI-NZ stands was developed at NZIER based on the original Australian ORANI model created by the Centre of Policy Studies, Victoria University-
Melbourne, Australia. http://www.copsmodels.com/oranig.htm. NZIER maintains close connections with the Centre, ensuring that our modelling
techniques reflect international best-practice.
NZIER report – New Zealand’s exchange and its role in supporting the New Zealand economy 38
Foreign currency prices of imports are naturally exogenous. Real government consumption is also
exogenous. Other exogenous variables include rates of production tax, technological coefficients,
national population, and national labour supply.
Table 5 Fixed elements of the model
Items
Taxes on production
Technological change
Government demand
Gross growth rate of capital
Price on capital rental
Number of households
National population
National labour supply
Import prices, foreign currency
Foreign demand for New Zealand exports
Land usage
Source: NZIER
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.