New at Castalia

Crunch to Hit Big NZ Projects

Dominion Post - Wellington, New Zealand
by James Weir, 06/10/08  

It will be much harder for New Zealand to bankroll big infrastructure projects such as roads, rail, power and waterworks because of the international credit crunch, according to a leading economist.

The value of the United States' US$700 billion (NZ$1.05 trillion) bank bailout is more about injecting confidence than cash, according to Castalia executive director Alex Sundakov.
With offices in Wellington, Sydney, Washington and Paris, Castalia advises corporations and governments on strategy, organisation and management, with experts in finance, economics, law and engineering. Mr Sundakov was formerly with the International Monetary Fund and a director of the New Zealand Institute of Economic Research.

Despite short-term market instability, the longer-term, more serious issue will remain: New Zealand needs to borrow heavily in coming years to build roads, power stations, waterworks and other infrastructure.

Power generators and the national grid company alone have billions of dollars of projects in the pipeline in coming years.
That will become harder and more expensive because of the global credit crisis, with tougher international competition for increasingly tight funds. Big groups will face higher interest rates and have to borrow for shorter terms.

The climb out of the infrastructure gap would be really difficult though big government agencies would not fail to get the money, he said.

It would also make it harder for big companies to borrow and invest. Lenders would be much more reluctant to take risks so firms would need to have a much stronger business case.
"You will have to work harder for it [the loan] and pay more for it," he said. That meant fewer projects would go ahead.

Big developments such as roads and power development have been seen as one of the areas of future economic strength, potentially filling the gap left by a huge slump in house construction in New Zealand in the past year.
Mr Sundakov said New Zealand was being hit by short-term instability in the financial markets but he did not think the US subprime crisis would escalate into a global meltdown.
The number of bad mortgages in the US ran into the millions, which was problematic but not huge compared with the overall size of the US economy, and its population of 300 million people.

Working through the underlying problem was not insurmountable, he said.