Brian Fallow: Rebuilding trust isn't enough

The local capital markets still look like a building site. Photo / Brett Phibbs

They haven't put up many red lights but you wouldn't say they have poured rocket fuel into the tank either."

That was Ernst & Young managing partner and Capital Markets Development Taskforce member Rob McLeod's appraisal of the Government's response yesterday to the taskforce's recommendations.

While there is a lot of emphasis on regulatory changes to build trust and confidence among "Mum and Dad" investors, and so boost the demand for decent financial securities to invest in, the Government's "action plan" is thinner on what it plans to do to boost the supply side.

Carnage in the finance companies sector has reinforced lingering memories of the 1987 sharemarket crash and its aftermath.

So it is imperative the Government do all it can to improve financial literacy, raise standards among financial advisers, improve the relevance of the information investors get and strengthen the markets' regulatory superstructure.

Addressing those issues is no doubt necessary. But it is not sufficient if New Zealand is to develop capital markets which are any more than puny.

People also need something worthwhile to invest in.

The Government has not budged on a selldown of state-owned enterprises which the taskforce had, with perhaps more hope than expectation, called for.

"The Government will not be moving in that direction in this term," said Commerce Minister Simon Power, "and if that policy was to change the Prime Minister would ensure it was campaigned on and a mandate sought."

What about encouraging agricultural co-operatives to access public capital markets for equity? Well, the Government will have to think about that, next year, taking into account Fonterra's internal debate on its capital structure.

It is more positive about resuming the issuance of inflation-indexed Government bonds, possibly as soon as May. It supports the idea, canvassed at the Job Summit a year ago, of a local government "bond bank" to make it easier - and hopefully cheaper - for local bodies to raise debt.

And it supports calls to exempt some corporate bond issues from the approved issuer levy, to level the playing field with banks raising money from offshore lenders and so deepen corporate debt markets.

Power also pointed to the review of the Securities Act which is under way as something intended to make companies looking for additional capital more confident about doing so through public equity issues. But any changes from that review look to be 18 months away.

All this occurs in an environment where the only question is how, not whether, the Government moves to reduce both the tax attractions of investing in residential rental properties, and the incentive to do so.

Given the economic damage the last property boom did, that needs to work.

But for investment money looking for another home, the local capital markets still look more like a building site.