John Key’s divine prophecy six years ago is coming true, and a large number of New Zealand zombie companies have collapsed…

The content of this article is reproduced from the public account: NZ Daily Finance

The prediction made by former New Zealand Prime Minister John Key six years ago is now being fulfilled.

New Zealand has recently seen a decade-high number of corporate bankruptcies. In reports from major mainstream media in New Zealand, one word appears frequently: Zombie Companies.

One of the important forces driving this wave of bankruptcies is the New Zealand Inland Revenue Department (IRD)’s significantly increased debt collection efforts.

Over the past year, New Zealand corporate insolvencies have increased significantly:

– IRD files for liquidation of nearly 900 companies in one year

– There were once more than 120 liquidation applications in a single month

– Total corporate bankruptcies hit highest level in nearly a decade

– The construction, retail and catering industries are most obviously affected

Many companies did not suddenly collapse, but have been “operating with illness” for a long time, and have only now been officially liquidated.

What’s going on behind the scenes?

In the past two years, the IRD’s attitude towards corporate tax arrears has changed significantly.

During the epidemic (2020–2022):

– Businesses can defer GST and PAYE payments

– Government launches wage subsidy

– Low-interest loans (SBCS) to ease cash flow

– Interest rates are at historically low levels

At that time, there was only one core policy goal:Protect employment and stabilize the economy.

As a result, tax recovery is relatively relaxed and many businesses enter into amortization arrangements.

But going into 2024–2026:

– IRD began to proactively share corporate tax arrears information with credit reporting agencies

– Make it clear that “small tax debts will also be recovered”

-Significantly increase the number of liquidation applications

– Publicly emphasize that “long-term tax arrears will not be tolerated”

The reason is very practical:

New Zealand’s cumulative corporate tax arrears have reached tens of billions of dollars.

The “buffer period” of the epidemic has ended, the government’s financial pressure has increased, and tax recovery has become a focus.

The so-called zombie companies refer to:

– The business is still operating

– But profits are not enough to cover the cost of debt

– Survive on rolling debt

– There is actually no sustainable profitability

In New Zealand, common characteristics of this type of business include:

– Long-term arrears of GST or PAYE

– Reliance on tax deferral as “financing”

– Very low profits or even losses

– Barely maintaining cash flow

During the epidemic, the low interest rate environment caused many companies to “extend their lives.”

When OCR rises from 0.25% to a high level:

– Loan costs skyrocketed

– Weak consumption

– Construction slows down

– Cash flow deteriorates rapidly

Enterprises that were originally supported by policies began to gradually expose their true situation.

1️⃣ Epidemic policies delayed market clearing

The loose environment from 2020 to 2022 avoided the wave of large-scale bankruptcies at that time.

But that doesn’t eliminate the problem, it just delays it.

2️⃣ Tax debts are treated as “cheap financing”

In a period of low interest rates and loose regulations, some companies use tax arrears as a cash flow tool.

3️⃣ High interest rates coupled with high costs

In the past few years, companies have faced:

– Wages rise

– Rising commercial rents

– Rising material costs

– Rising insurance costs

– Rising energy prices

However, consumer spending tends to be conservative and profit margins have been severely compressed.

4️⃣ New Zealand company registration threshold is low

The low cost of setting up a company and the quick liquidation process also make it easier for companies to “open and close again”.

As early as October 2020, former Prime Minister John Key publicly warned:

Ultra-low interest rates and massive stimulus policies could create “zombie companies”,

Distort capital allocation and harm long-term productivity.

At that time, New Zealand’s OCR fell to a historical low of 0.25%. The central bank released a large amount of water and implemented quantitative easing of NZ$55 billion. The Labor government also implemented large-scale fiscal stimulus.

Key’s concern is that if companies rely on ultra-low-cost funds to survive, a large number of companies will not be able to withstand the impact once interest rates return to normal.

At the time, many people thought this was “excessive worry.” After all, in the early stages of the epidemic, the priority of maintaining the economy was far higher than efficiency issues.

Past links: Former New Zealand Prime Minister John Key has spoken again, still full of anxiety about the future of New Zealand’s financial industry…

The time has come to 2026.

– Interest rates undergo a rapid upward cycle

– IRD fully resumes strong enforcement

– Corporate bankruptcies hit 10-year high

– The number of liquidated companies increased significantly

To some extent, Key’s prediction is coming true.

But it also needs to be viewed objectively. If there is no strong stimulus in 2020, the unemployment rate may surge that year, and the economy may not experience a V-shaped rebound.

Therefore, the emergence of “zombie companies” is a side effect of policy choices, not entirely a single mistake.

In the short term, the collapse of a large number of companies will increase the risk of unemployment and cause fluctuations in business confidence. But in the long run, market clearing accelerates, resources are reallocated, productivity is expected to improve, and healthy companies gain a more level playing field. It can be said that cleaning up zombie companies is a painful but perhaps necessary process.

From extreme easing in 2020 to concentrated clearing in 2026, the New Zealand economy has completed a complete cycle.

In order to avoid economic collapse under the impact of the epidemic, the government and the central bank chose to “prioritize life preservation.” Low interest rates, fiscal stimulus, and tax tolerance policies have successfully prevented a wave of unemployment and an avalanche of businesses.

But any policy comes with a cost.

The loose environment has extended the lives of some companies, but it has also delayed the natural elimination mechanism of the market.

When interest rates return to normal and tax enforcement returns to normal, those companies that have relied on debt for a long time to maintain operations will eventually be unable to continue.

This is not a sudden crisis, but a belated adjustment.

For companies, cash flow is more important than profit. The core reason for this wave of bankruptcies after the epidemic is not that companies have “no income”, but a break in cash flow.

Relying on debt rollover and delaying taxes is not a long-term model after all.

The core of future business operations will return to:

• Healthy cash flow management

• Reasonable debt level

• risk reserve capacity

In addition, the era of low interest rates will not last long. In the past decade or so, the world has become accustomed to “cheap money”. The risk reserves built up by New Zealand companies due to the rapid rise in housing prices since the period of large-scale water release have long been exhausted.

But this cycle shows that interest rates can reverse quickly. If a business is built on the assumption of extremely low interest rates, the risk is extremely high.

This large-scale debt collection by IRD also sends a signal: supervision will not be relaxed for a long time in the future.

Obeying the rules, paying taxes on time, and being financially transparent will become part of a company’s credibility. The credit sharing mechanism also means that tax arrears are no longer “invisible”.

Six years ago, John Key warned against the risks of “zombie companies”. Six years later, New Zealand is experiencing a reality check.

After all, the laws of the market cannot be distorted for a long time. The cycle will complete, risks will emerge, and adjustments will come.

The companies that can truly ride through the cycle are often not those that expand fastest in the era of low interest rates, but those that remain stable in the era of high interest rates.

This may be the most important revelation left to New Zealand’s business society in this round of zombie companies.

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