Adrian Orr is not your regular sort of banker or bureaucrat or fund manager, not that you can tell that from his CV.
Years as the Reserve Bank’s chief economist and Deputy Governor, followed by almost a decade as New Zealand’s most successful manager of the nation’s biggest pot of savings, don’t tell you much about Orr as a person, other than that his LinkedIn profile looks like a template for becoming New Zealand’s next Reserve Bank Governor.
This week the Reserve Bank’s board offered him the top job and Grant Robertson must have virtually bit the hand off board chairman Neil Quigley when Orr’s name was presented to the Finance Minister for his approval.
From Robertson’s point of view, Orr was the perfect candidate, and not just because of his CV.
Orr represents the chance to reform a big part of how the economy is run and a major shift in how the nation’s most important independent economic institution interacts with the public. Orr can talk the languages of both the leafiest and the grimiest of suburbs, and has a track record of financial success that the new Government would like to be associated with and emulate.
The excitement and relief inside the new Government needs to be put into the context of what has happened over the last five years and what the Labour-New Zealand First coalition wants to achieve over the next five to 10 years, which is how long Orr could be Governor.
“We’re delighted about the appointment and if the markets are pleased that’s a good thing too,” Robertson said with feeling after hearing the New Zealand dollar had risen in the minutes since his announcement of Orr’s appointment.
The difference with Wheeler
Orr represents a complete change of style from the last five years of remote and dry hawkishness of Graeme Wheeler, who decided to serve just one five-year term.
Most politicians and quite a few people in the financial markets were not sad to see the bookish and rarely-seen Wheeler go after he took two big decisions that were judged by many to be wrong, or at least not popular. Wheeler decided to hike interest rates in the middle of 2014 and he warned home buyers they faced mortgage rates of eight percent within two years. But he had to cut rates back down again the next year when the inflation he warned was coming did not appear, and by 2015 mortgage rates were still stuck on five percent.
Wheeler also introduced restrictions on Loan to Value Ratios in late 2013 that were seen as punishing first home buyers and allowing landlords to waltz into auction rooms with plenty of equity to scoop up what few houses were on the market. Wheeler later sharpened the LVR restrictions to target Auckland property investors directly and then landlords more broadly to ease some of those concerns about first home buyers. His last set of restrictions appear finally to put a roadblock in front of house price inflation.
But it was Wheeler’s occasionally defensive and academic style of explaining the bank’s actions that irritated and angered as much as the substance of his decisions. He refused to do television or live radio interviews, unlike his predecessors. His first select committee appearance turned into type of Parliamentary car crash with arguments with MPs in a public hearing. His LVR decision caught the Beehive unawares and then Finance Minister Bill English was openly sceptical about Wheeler’s decision to hike interest rates when inflation remained so low.
Orr will be a new face and a new voice for the Reserve Bank, and not just because he is different from Wheeler.
Orr comes from a different mold entirely.
He was brought up through his teenage years by his mother after the early death of his father when Orr was 13. He was also close to his Cook Islands-born grandfather, who died when Orr was 11.
“Dad was a builder and he was nine-tenths of the way through building a motel in Taupo when he died,” Orr said in an interview last year with E-Tangata.
“So Mum and us three took that over after his workmates finished it for us. And we ran that right through secondary school,” he said.
“So, it was a good, early introduction to business and to dealing with the public. It was hard times though.”
‘I was well known in the hood’
There was no easy ride through Kings or Auckland Grammar for Orr. He went through Taupo-nui-a-tia High School with his Polynesian cousins.
“We were a mixed up bunch — Cook Island, Maori, and Tokelauan, too, because they arrived en masse in the early 1970s,” he said.
“Pakeha were a rare commodity when we were growing up in Taupo. Our bunch were the scallywags — and I was well known in the hood.”
He went on to be a plumber, a cook and a sewerage pipe layer through his teenage years and early 20s in and around the High School and doing a social sciences degree at Waikato University. He then traveled to Britain to study for his masters degree in development economics, ending up squatting in council flats with his mates.
Orr said that varied background has helped him ease in and out of whichever environment or world he wanted to be in.
“And, more importantly as well, I’ve been able to square people up when I hear them blaming other groups or other nationalities, just through having that diversity in myself. So I can say: ‘Well, hang on. Taihoa. You probably don’t know who you’re talking to. Or what you’re talking to.’”
Anyone who has heard Orr speak publicly during his time at the Reserve Bank will recognise the matey patois of Te Reo and good Kiwi blokery, mixed with a glint of steel.
Orr is as sharp as a tack on the complexities of monetary policy or investment theory, but has a rare knack of being to explain them to the broadest of audiences with a confidence and directness that comes from a deep understanding and an ability to bring it to life with an anecdote or a parable.
The best example of that easy style mixed with determination and the ability to zig when others zag was in September 2008 during the depths of the Global Financial Crisis. He was just one year into his nine-year tenure as CEO of the New Zealand Superannuation Fund and was presenting news of a $716 million loss for the year by the fund, which was then worth $14.1 billion.
Many feared billions of taxpayers’ funds were about to be sucked into the vortex of the GFC, never to be seen again. Then Finance Minister Bill English was about to turn off the tap of fresh funds, arguing it was too risky to borrow more money to invest in global stockmarkets. Few voters would have disagreed with English during those dark days and Orr could have been forgiven for taking a conservative line.
‘Let’s fill up the trolley’
Instead, Orr told the assembled financial journalists, including me, that late 2008 and early 2009 was the time for the Fund to dive into the markets and take on more risk.
“It’s about remaining calm, sticking to your investment strategy and reminding yourself that this was what was expected when you went into the equities market,” he said on September 28, 2008, which was less than a fortnight after the collapse of Lehman Brothers and well before the markets had stabilised.
“In a sense, we’re in the supermarket and we’ve just heard things are at a discount, and we’re filling our trolley up,” he said.
The analogy seemed almost reckless at a time when markets were freezing up and the swankiest of bankers were panicked into pulling their credit lines from all and sundry.
I remembered at the time that it must take some sort of courage to run into the markets to buy when others were running out, particularly when that money would be needed in years to come to supplement the incomes of millions of pensioners.
But Orr was dead right. Even though the-then Government never restarted contributions, the Fund grew to be $37.2 billion by the end of October as it rode the rebound in markets and the inflation of asset values because central banks were forced to ‘quantitatively ease’ to pump cash into financial systems.
The first dollar invested in the fund in 2003 when it was started by Sir Michael Cullen is now worth over four dollars and the fund’s average annual return of 10.5 percent over that period has created $6.6 billion more than if the money had been invested passively. That’s also $20.5 billion more than if the money had simply been put in the bank. JP Morgan judged the NZ Super Fund as the best performed sovereign wealth fund in the five years to 2015.
‘Bollocks to correction fears’
Orr’s willingness to speak his mind and push back against the consensus was evident as recently as a month ago after a speech to a business audience in Wellington.
He was asked by a member of the audience if he shared Winston Peters’ fears about an imminent economic correction.
“Bollocks,” he said.
He described the global economy as in a “Goldilocks zone” of strengthening economic growth with low inflation and low interest rates.
“We are in a very, very positive situation,” he said, pointing to real per capita GDP growth of 2.5 percent in Japan, for example.
He said global stock markets were neither wildly over-valued or under-valued, with Europe and Japan about 10 to 15 percent under-valued relative to long term valuations, while the United States was around 5 to 10 percent over-valued.
“Should there be a large downturn in 2018 that would be fantastic,” Orr said of the likely effects on asset prices, given the NZ Super Fund was a long term investor keen to buy assets during downturns in the knowledge they would bounce back over the long run.
Orr’s final parting shot for the Peters view of the world came in answer to a question about whether he was concerned about the risks of a nuclear conflagration in North Asia caused by Donald Trump.
“We might be able to solve two of those things because Winston is going to North Korea…” he said, referring to speculation Peters might be called on to act as independent intermediary in talks between America and North Korea.
A different approach
Orr’s language will be different from that of his predecessors, but so is his approach on issues such as sustainability and sharing the rewards of growth around.
He said in the November 16 speech in Wellington that I attended that the NZ Super Fund had reduced its carbon emissions exposure by 20 percent and aimed to further reduce its exposure to carbon reserves by 40 percent. He said politicians and voters in some countries were in denial about climate change.
“It’s the tragedy of the horizons,” he said then.
Regulators and consumers were already reacting, and climate change itself was already having dramatic effects on economies. Investors and companies should move to get ahead of the likely impacts, he said then.
“It’s on its way. You don’t have to buy into the science. You just need to understand that the regulatory response and the consumer response is here already.”
His views on climate change and on infrastructure investment in housing have been music to the ears of the new Government.
But it is more than skin deep.
Orr was criticised this year by English and the State Services Commission for receiving a $1.22 million salary at the Super Fund, but he himself has said he does not do the job for the money. He will be taking a 40 percent pay cut when he takes up the Reserve Bank Governor’s job and moves back to Wellington from Auckland.
The language he used last year in the E-Tangata interview showed how differently he thinks to other bankers or fund managers — and how in tune he would be the language of a Labour-New Zealand First-Green Government.
“Pursuing wealth has never driven me. I wanted to be able to — and I know it’s going to sound corny — I wanted to make the world a better place than how I found it,” Orr said.
“The kaitiaki concept is deeply ingrained in me and I think that’s throughout the Polynesian mindset. And it’s stuck with me forever. For me it’s about how societies move. What is equality? What is wealth generation? It’s those big societal questions that fire me. Trying to be a merchant banker doesn’t do it,” he said.
Orr followed through on that when he joined the global Coalition for Inclusive Capitalism, which was formed by the Rothschild family in concert with a range of fund managers and bankers.
In tune with the Government
Orr is seen as both sympathetic to the new Government’s reforms and popular in the markets — a rare combination.
He is an outsider with the authority and track record of successfully running a large organisation with a big balance sheet who can ‘clean house’ and enact reform. But he’s also an insider with the experience of working at high levels in the bank over a decade ago (as Deputy Governor and Head of Economics). He is also only 54 so has plenty of time left in a career to serve a couple of terms.
This selection could have turned into a major problem for the Government.
Robertson was so concerned about the potential to be lumped with a Reserve Bank Governor he didn’t want that one of his first actions when he was sworn in on October 26 was to have a quiet chat with Quigley to make clear he wanted a change manager.
The Reserve Bank was most of the way through selecting a Reserve Bank Governor to replace the retiring Wheeler and had closed applications on July 8, when most people thought the National Government would win a fourth term. The risk was that the board, which was appointed by English, would foist a status quo selection on Robertson who could obstruct the new Government’s plans to reform the Reserve Bank Act and the way the central bank runs monetary policy. Most believed the Reserve Bank was ready to recommend Deputy Governor Geoff Bascand to replace acting Governor Grant Spencer.
“One of the things I did was speak to the chair of the board when I first took up this role to ensure that the process of appointing the Governor included the candidates being aware of the direction that we were going in and to assess their ability to implement that direction,” Robertson said this week.
“I’ve been assured by the chair of the board that Mr Orr is in a position to do that and that he will be able to manage a period of change well for the board, and I’ve accepted those assurances,” he said.
The Government has already begun a review of the Reserve Bank to give it a dual mandate that targets maximising employment as well as keeping inflation stable and low.
Robertson also wants the bank to move to a full monetary policy committee system where members from outside the bank are involved and the bank issues minutes — a system well established in Australia, Britain and the United States.
‘Thank god the world is awash with cash’
It’s not clear whether Orr will be more ‘dovish’ and keep interest rates low to push unemployment even lower, or whether he will be a ‘hawkish’ Governor keen on hiking rates to stave off inflation. The bank itself has been wary this year about hiking rates again too quickly given inflation remains low despite the jobless rate being under five percent.
However, Orr has downplayed the risks around central banks having to withdraw stimulus from the global economy as the recovery took hold, which suggests he won’t be reluctant to hike rates if he needs to.
“The world is awash with liquidity and thank God for that. That’s what central banks are supposed to do and it has worked,” he said.
He expected central banks would be able to carefully and slowly remove that stimulus.
(Updated at 10.15 to clarify links to grandfather. Also clarifies to make clear ‘Bollocks’ was a response to the fears of a correction, rather than Winston Peters’ personally)
