Finance Minister Dr Michael Cullen’s decision to effectively stymie the partial takeover offer for Auckland International Airport (AIA) is an unwanted reminder of the meddling policies of former Prime Minister Robert Muldoon.

Dr Cullen’s edict was so appalling, and so inconsistent with his policies of the previous eight years, that one can only conclude it was strongly influenced by political considerations ahead of this year’s general election.

A restriction on the overseas ownership of strategic assets is not uncommon in other countries, particularly Australia, but the timing and method of the AIA decision was totally unsatisfactory for investors and overall sharemarket confidence.

Cullen’s decision was announced nearly a decade after the Crown sold its 51.6 per cent controlling interest in the airport and more than seven months after the first offer for AIA was revealed. As a result the offer has been a terrible waste of resources – the airport had already spent $5.

The unexpected announcement will have an ongoing negative impact on AIA’s sharemarket performance but, more importantly, it will erode investor confidence in the NZX and make it more difficult for the country to attract overseas investment.

This week’s development is expected to have the biggest negative effect on overseas sentiment towards the NZX since Lion Nathan’s directors jumped the queue ahead of other shareholders in 1998 to accept Kirin’s 45 per cent partial offer.

One of the first points to note about the New Zealand sharemarket is that it has been heavily reliant on overseas investors over the past two decades.

Just before the 1987 crash the NZX had a total capitalisation of $42.4 billion, almost all of which was owned by domestic investors.

The market started to recover in the early 1990s, mainly because of the inflow of foreign investment. As Table 1 shows, the NZX’s total capitalisation had recouped to $48 billion by the end of 1995 and at that stage the NZX was 58 per cent overseas owned.

One could argue that the NZX was saved from extinction by overseas investors.

The NZX has recovered further since the end of 1995, with overseas ownership falling from 58 per cent to 37 per cent, but it is still extremely small compared with other sharemarkets and the country’s residential housing market.

The total value of the NZX has risen by 36 per cent since 1995, and now represents just 38 per cent of the country’s GDP, whereas the ASX’s capitalisation has increased by 349 per cent over the same period and now represents 136 per cent of Australia’s GDP.

The other feature of New Zealand is the huge size of the residential housing market compared with the NZX.

In 1995 the country’s housing stock was worth $182 billion or 3.8 times the total value of the NZX. In December 2006 the total value of residential housing was $559 billion or 8.8 times the market’s total capitalisation. By comparison the total value of residential housing in Australia has fallen from 3.0 to 2.3 times the ASX’s total value over the same period.

Sharemarkets are a major source of equity capital for companies that create jobs, exports and wealth. New Zealanders want imported SUVs, plasma televisions and the latest life-saving drugs yet we are not prepared to save and invest in the companies that generate the overseas currency that pays for these imports.

The imbalance between the sharemarket and residential housing in New Zealand is startling. At the end of 2006 the NZX represented just 10 per cent of the combined value of the domestic sharemarket and residential property whereas in Australia the ASX represented 30 per cent of the combined total and Wall Street 47 per cent in the US. In other words the bigger the sharemarket the wealthier the country.

We desperately need a strong sharemarket to provide the capital to create economic growth and wealth. Yet the Government is quick to introduce measures to deal with housing affordability problems while at the same time destroying sharemarket confidence by changing the rules more than halfway through a major takeover offer.

But the AIA issue is far more important than just its effect on the domestic sharemarket. It could also impact on our ability to continue to borrow offshore to sustain the country’s unearned lifestyle.

One of the basic problems with the New Zealand economy is that we spend $1.27 each year for every $1 we earn in foreign currency. As a result we have to either borrow offshore or sell assets to foreign interests to fund the deficit.

The country’s balance sheet, the difference between our offshore assets and liabilities as at September 30 last, is summarised in the second table. A number of observations can be made about this data:

New Zealand’s international deficit, which represents 88.3 per cent of GDP, is one of the largest in the Western World.

The deficit has surged from $98.8 billion, or 73.3 per cent of GDP, in September 2002 to $151.1 billion.

New Zealand has a small amount of offshore equity assets mainly because our domestic companies do not have sufficient capital to undertake major overseas expansions.

The country’s equity liabilities are relatively low because of our inability to attract a large number of foreign-owned greenfield operations.

We are much more heavily dependent on debt to fund our current account deficit than Australia.

Just over $127 billion, or 61 per cent, of the country’s total debt of $207.7 billion has been borrowed through banks. Much of this offshore bank borrowing has gone into residential mortgages.

A country that is donkey deep in debt cannot afford to offend offshore investors, particularly during a credit crisis. The impact of this credit crunch is already being felt through higher mortgage rates as the banks find it more difficult to obtain cheap offshore money. Dr Cullen’s arbitrary decision regarding Auckland Airport has created considerable concern among overseas financiers, and they may be less willing to finance our burgeoning deficit on favourable terms in the future.

We are also heavily dependent on overseas capital to fund many of our new export earners.

The Tui oil field, which will generate over $1 billion of exports in the June 2008 year, is majority overseas-owned as is the new $1 billion plus Kupe offshore gas development.

In addition the Pike River coalmine on the West Coast, which could achieve annual export earnings of up to $250 million at today’s coal prices, got off the ground because of foreign capital. Is Dr Cullen going to declare these strategic assets and change the rules regarding ownership and royalty payments?

Most investment sector participants, including this column, have no problem with the Government placing overseas ownership restrictions on strategic assets, but the rules should be clearly established when the assets are privatised and not 10 years later in the latter stages of a major takeover offer.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management and his disclosure statement is on under his profile. Milford Asset Management holds 1.6 million AIA shares on behalf of clients.

Table 1: New Zealanders shun the NZX for residential housing


Australia (A$b)

New Zealand (NZ$b) 


ASX value 

Housing values 

NZX value 

Housing values 

31 Dec 2007 





31 Dec 2006 





31 Dec 2005





31 Dec 2000





31 Dec 1995





Table 2: New Zealand – Deeper and deeper in debt

(As at September 30, 2007) 

Australia (A$b) 

New Zealand (NZ$b) 

    International assets 



    – Equity



    – Debt






    International liabilities



    – Equity



    – Debt












    Deficit as a % of GDP



    Deficit as a of total assets