'Whopper' current account deficit

[Mr_Market]

What are the odds of a crash landing? What will happen when the foreigners pull their money out? Doesn't look good around mid-2006.

'Whopper' current account deficit set to inflate further
21 September 2005
By KATE PERRY

New Zealand posted the worst annual current account deficit ever in the June year, an amount equivalent to every New Zealander overspending by nearly $30,000.

The $11.89 billion annual deficit was the worst in dollar terms, Statistics New Zealand said today.

Economists estimate the deficit equates to 8 per cent of GDP – the second worst behind a 9.0 per cent deficit during the first oil shock in 1975.

The deficit, also known as the balance of payments and measuring all transactions with the outside world, will worsen as our petrol bill swells.

"It's a whopper," said Goldman Sachs JBWere economist Shamubeel Eaqub. "The very large and worrying deficit reflects the imbalances facing the New Zealand economy."

The June quarter deficit swelled to $2.85 billion, $1 billion higher than the March and June 2004 quarters.

The deficit has to be bridged by borrowing from overseas and economist warn foreign investors may be leery of lending when the deficit gets too big. When that happens, the New Zealand dollar is likely to plunge.
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First NZ Capital economists expect the deficit to peak at 9 per cent of GDP next year, far exceeding Reserve Bank forecasts. RB governor Alan Bollard projected in his quarterly Monetary Policy Statement last week that the deficit would reach 7.25 per cent at the end of next year and stay there for a couple of years. Even at 7.25 per cent, Dr Bollard said the deficit would be unsustainable.

The strong domestic economy has fuelled the spending spree, with consumer demand for cheap imported goods on the rise along with a rising petrol bill.

Growth in imports outstripped exports leading to a deficit in the goods balance of $721 million.

The value of goods exported in the quarter was $7.86 billion, while the value of good imported was $8.58 billion.

Import prices were up 1.5 per cent between the March and June quarters, driven by petrol and petroleum prices, which rose 23.6 per cent.

The deficit on investment income was $2.6 billion, as the strong economy translated into improved corporate profits and higher dividends. This in turn led to a pick-up in dividend flows to offshore owners of New Zealand companies.

The widening deficit is expected to weigh on the New Zealand dollar in the medium term, but not have a big negative impact in the short term.

ASB economist Kate Skinner said it was likely to have an impact on the kiwi dollar at some point next year.

"Rather than being the initial catalyst, a widening current account deficit is likely to exacerbate the depreciation in the New Zealand dollar caused by either a strengthening US dollar and, or, a deteriorating growth outlook for New Zealand."

The currency market was focused on the US Federal Reserve's 11th rate rise. After the current account release the New Zealand dollar initially dipped to US69.65c from its US69.79c opening but later recovered.

International credit rating agency Standard & Poor's said it was unperturbed by the size of the deficit.

"From our point of view, it is a concern and a weakness in relation to the credit-worthiness of the Government, but it's not a huge weakness because there are sufficient mitigants," Fharad Jain a director of S&P's sovereign and public finance ratings unit, said.

He said half of New Zealand's foreign debt was denominated in New Zealand dollars and of the rest, about 90 per cent was hedged.

"Also, Government financials are in a strong position, so if a high current account were to result in a currency deterioration, and as a result, impact on the private sector or the banking sector, the Government has enough flexibility to support that. "Whilst it's a concern, we don't think it's an excessive risk that will affect the rating in the immediate future."

Mr Jain said the agency was also not unduly worr

[Mr_Market]

Kong-sized deficit threatens dollar
22 September 2005
By JAMES WEIR

New Zealand is deep in the red, spending a record $12 billion more than it earned overseas in the past year, with a King Kong-sized shopping spree partly to blame.

The $11.89 billion current account deficit, announced by Statistics New Zealand yesterday, is the worst since the balance of payments crisis in the mid-1980s.

The sea of red ink will get even deeper in coming months, especially because of higher imported oil prices, economists say.

A continued blow-out in the deficit could eventually tip the Kiwi dollar lower and cause interest rates to rise, some economists said yesterday.

The June quarter deficit swelled to $2.85 billion, $1 billion higher than the March and June 2004 quarters.

The current account measures all New Zealand's transactions with the rest of the world, including traded goods and services, and investment income.

Despite the huge deficit, the Kiwi dollar slipped only slightly to about US69.8 cents, down from about US70.2 cents the previous day. The US dollar firmed after the United States Federal Reserve raised interest rates to 3.75 per cent. Short-term interest rates rose a couple of points yesterday.

A weaker New Zealand dollar increased the risks of the Reserve Bank raising official interest rates before the end of the year from 6.75 per cent to 7 per cent. The Bank of New Zealand has just increased the odds of another interest rate increase to a 40 per cent chance of a rise to 7 per cent in the official cash rate by the end of the year.

The annual deficit is now equal to 8 per cent of gross domestic product, compared with 8.9 per cent of gdp during the 1984 balance of payment crisis. Some economists now predict the deficit will go to 8.5 per cent of gdp by the end of the year and as much as 10 per cent of gdp next year, partly because of strong consumer spending.

"King Kong is on the loose in New Zealand in the form of rampaging domestic demand," a Bank of New Zealand economist said.

People were spending more than they earned, "wrecking the external accounts in the hunger for imports", and borrowing about $16 billion a year to buy into an overheated housing market, the economist said.

Consumer confidence and spending was stronger that expected, despite rising petrol prices, and this was sucking in more cheap imports.
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As well as strong imports, the deficit was blowing out because of weak exports, partly as a result of higher oil costs. Fuel prices jumped almost 24 per cent in the June quarter. They were expected to rise again in the September quarter after the recent spike in oil prices caused by Hurricane Katrina in the US. The goods trade balance is now a record $3 billion in the red for the year.

The strong domestic economy also boosted profits for foreign-owned companies in New Zealand. That increased dividends going overseas, pushing the investment income balance to more than $10.2 billion in the red.

"It is unlikely we have seen the bottom of the current account deficit yet," the economist said. "It is very likely that at some point in 2006 the current account will begin to weigh heavily on the New Zealand dollar."

[Placebo]

So?

[Bling_Bling]

This is nothing new.

NZers have always spent more than we earned.

Maybe the government can lead by example.

[BRICKS]

DONT BORROW.. [8D]

[Gryffyn]

What about interest free? Mug not to really unless deflation occurs.

[blockhead]

quote:Originally posted by Bling_Bling

This is nothing new.

NZers have always spent more than we earned.

Maybe the government can lead by example.


The Labour Govt has led by example, just a pity more didn't think of that last Saturday when "ticking"

[Mr_Market]

Fair enough, I'm sure most of you have much more experience in these matters than me. But, just for the record, I predict that it will all end in tears in the not too distant future.

[saintjohn]

quote:Originally posted by Mr_Market

Fair enough, I'm sure most of you have much more experience in these matters than me. But, just for the record, I predict that it will all end in tears in the not too distant future.
Many diagnosed with a serious illness go into denial; History will determine the outcome.......SJ

[PGL]

Well, I've seen the $11 billion deficit described as being equivalent to every NZer overspending by $30,000 quite a few times now and interestingly, no-one seems to question this (is this because it is printed in a newspaper?)

Can anyone explain?

Seems to me $11b divided by, say, 4 million people, is roughly $2,750 each or am I missing something here?

[PGL]

quote:Originally posted by saintjohn


quote:Originally posted by Mr_Market

Fair enough, I'm sure most of you have much more experience in these matters than me. But, just for the record, I predict that it will all end in tears in the not too distant future.
Many diagnosed with a serious illness go into denial; History will determine the outcome.......SJ


Quite right, and history isn't too far away now.

Simple fact is that the Emperor has no clothes - that's what the deficit is telling us.

The con:

Step 1 - The (Australian) banks and the people of wealth have conspired to lend huge amounts of money into the NZ market thus inflating house prices and creating a large number of asset-wealthy people who have then proceeded to spend their wealth by borrowing on their assets (or borrowing to invest in housing)

Step 2 - interest rates will rise.

Step 3 - The tears

[CrossTrainer]

and Cullen is still saying that the economy has been rosy under Labour!!!!

[Cooper]

Not Cullen's fault. When NZ decided to float the dollar we gave up the main mechanism for controlling the current account. Free markets for a small country. Once the currency comes back we'll be right.

[PGL]

quote:Originally posted by Cooper

Not Cullen's fault. When NZ decided to float the dollar we gave up the main mechanism for controlling the current account. Free markets for a small country. Once the currency comes back we'll be right.


No no and no!

The money we owe isn't to other NZers it is to foreigners (what NZers own isn't money, it is over-priced real-estate), the foreigners don't want paying in $NZ, they want $US or $AUD - think this through.

In addition, the mechanism by which our currency drops is foreigners bailing out of our sharemarket and bond markets.

[Cooper]

quote:Originally posted by PGL


quote:Originally posted by Cooper

Not Cullen's fault. When NZ decided to float the dollar we gave up the main mechanism for controlling the current account. Free markets for a small country. Once the currency comes back we'll be right.


No no and no!

The money we owe isn't to other NZers it is to foreigners (what NZers own isn't money, it is over-priced real-estate), the foreigners don't want paying in $NZ, they want $US or $AUD - think this through.

In addition, the mechanism by which our currency drops is foreigners bailing out of our sharemarket and bond markets.



Yes, but when we floated the currency we gave up the ability to control the amount of NZ$ foreigners purchased, and Cullen had nothing to do with that. Nor should he change it. We can entice foreign investment with interest rates or financial returns, but we can't directly stop them from investing in NZ firms or currency short of legislation. Our relatively higher interest rates have seen an influx of foreign investment, bidding up the NZ$.

If we owe money to foreigners its mainly because we've been taking advantage of the lower import costs, and our exports have been made less attractive because of higher relative input costs. We've taken advantage of the cheap money available from other countries in order to keep our floating mortgage rates down.

The inability to control currency flows is the unfortunate price we pay for being a small country, but as a small country its better than trying to defend a currency pegging. It's better tah we have monetary policy, or the ability to try and control interest rates, which are partially to blame for inflating the currency.

[PGL]

quote:Originally posted by Cooper


quote:Originally posted by PGL


quote:Originally posted by Cooper

Not Cullen's fault. When NZ decided to float the dollar we gave up the main mechanism for controlling the current account. Free markets for a small country. Once the currency comes back we'll be right.


No no and no!

The money we owe isn't to other NZers it is to foreigners (what NZers own isn't money, it is over-priced real-estate), the foreigners don't want paying in $NZ, they want $US or $AUD - think this through.

In addition, the mechanism by which our currency drops is foreigners bailing out of our sharemarket and bond markets.



Yes, but when we floated the currency we gave up the ability to control the amount of NZ$ foreigners purchased, and Cullen had nothing to do with that. Nor should he change it. We can entice foreign investment with interest rates or financial returns, but we can't directly stop them from investing in NZ firms or currency short of legislation. Our relatively higher interest rates have seen an influx of foreign investment, bidding up the NZ$.

If we owe money to foreigners its mainly because we've been taking advantage of the lower import costs, and our exports have been made less attractive because of higher relative input costs. We've taken advantage of the cheap money available from other countries in order to keep our floating mortgage rates down.


Agree entirely - definitely not Cullen's fault - or any individual's for that matter. Structurally though, we have a problem and there will be a big (and unpalatable) cost to be paid - depreciation won't help - it didn't help Argentina, or more recently Indonesia.

[Cooper]

quote:Originally posted by PGL
Agree entirely - definitely not Cullen's fault - or any individual's for that matter. Structurally though, we have a problem and there will be a big (and unpalatable) cost to be paid - depreciation won't help - it didn't help Argentina, or more recently Indonesia.


I would think we're in more of a position to fare better. We're running fiscal surpluses (well, we were up until the election) and part of the rise of the NZ$ is attributable to US$ weakness, so in that regard it hasn't been without justification. I wouldn't expect a huge devaluation.

[PGL]

quote:Originally posted by Cooper


quote:Originally posted by PGL
Agree entirely - definitely not Cullen's fault - or any individual's for that matter. Structurally though, we have a problem and there will be a big (and unpalatable) cost to be paid - depreciation won't help - it didn't help Argentina, or more recently Indonesia.


I would think we're in more of a position to fare better. We're running fiscal surpluses (well, we were up until the election) and part of the rise of the NZ$ is attributable to US$ weakness, so in that regard it hasn't been without justification. I wouldn't expect a huge devaluation.


I'm not expecting a huge devaluation either (at the end of the day, we aren't Indonesia). But don't be tempted to think that a big fiscal surplus somehow offsets the balance of payments deficit. The fiscal surplus is a product of overtaxation of the 'productive' economy (in NZ we don't tax the unproductive economy, that wouldn't be fair) This overtaxation has the effect of reducing the money available for re-investment into the productive economy.

[Cooper]

quote:Originally posted by PGL
I'm not expecting a huge devaluation either (at the end of the day, we aren't Indonesia). But don't be tempted to think that a big fiscal surplus somehow offsets the balance of payments deficit. The fiscal surplus is a product of overtaxation of the 'productive' economy (in NZ we don't tax the unproductive economy, that wouldn't be fair) This overtaxation has the effect of reducing the money available for re-investment into the productive economy.


Sure, but given the apparent tendencies of the "average NZer" to spend on consumables (we have a woeful savings rate), most of the money not taxed wouldn't be going into investment. It would be going into consumption, and because imports are cheap, it would be fair to say that some of it would be heading towards the consumption of import goods. Not an argument against lower taxation, of course.

[PGL]

quote:Originally posted by Cooper


quote:Originally posted by PGL
I'm not expecting a huge devaluation either (at the end of the day, we aren't Indonesia). But don't be tempted to think that a big fiscal surplus somehow offsets the balance of payments deficit. The fiscal surplus is a product of overtaxation of the 'productive' economy (in NZ we don't tax the unproductive economy, that wouldn't be fair) This overtaxation has the effect of reducing the money available for re-investment into the productive economy.


Sure, but given the apparent tendencies of the "average NZer" to spend on consumables (we have a woeful savings rate), most of the money not taxed wouldn't be going into investment. It would be going into consumption, and because imports are cheap, it would be fair to say that some of it would be heading towards the consumption of import goods. Not an argument against lower taxation, of course.


Good point, I was thinking more of company tax than personal tax.

[Cooper]

quote:Originally posted by PGL
Good point, I was thinking more of company tax than personal tax.


Ah, right... that would be a different story, of course. But corporations can't vote... not a popular target for politicians, in other words.

[Placebo]

Sorry to intrude on this exchange of theories with a dose of reality, but Johnny Consumer sees his house double in value in 7 years, has a new car (ex-Jap import) in the driveway plus a flash widescreen TV, DVD player and the latest playstation. He feels pretty good about this, and good about himself. In fact, feels so good he's rewarded Dr Cullen by voting him back in for another 3 years.

That's the reality. Current Account Deficit is just so much hooee.

[Cooper]

quote:Originally posted by Placebo
That's the reality. Current Account Deficit is just so much hooee.


At the moment. All the costs for that feel good consumerism have been shifted to the future by a high currency and cheap borrowing. That's reality too.

[Placebo]

No, that's a theory.

Reality is what people perceive. Like it or not, and all predictions of future doom aside, people perceive that they are rich and worldly and are rather pleased about it.

As I posted earlier, we've managed 32 years of this already, and still waiting for the sky to fall

[Cooper]

quote:Originally posted by Placebo

No, that's a theory.

Reality is what people perceive. Like it or not, and all predictions of future doom aside, people perceive that they are rich and worldly and are rather pleased about it.

As I posted earlier, we've managed 32 years of this already, and still waiting for the sky to fall


Sure it's a theory. Perhaps as your theory that people perceive they are rich, worldly and pleased about it, and that this can carry on in the future. I'm not forecasting doom, I'm forecasting a drop in currency. Perception can change overnight.

Stating that nothing is going to happen because it (arguably) hasn't for 32 years and no-one expects it too is a theory as well.

But I don't want to even try and argue against 32 years of whatever. I'm not that old. You decrepit bastards can talk about how much it was like this back in 197X as much as you like, I'll stick to what I know. :D

[zyreon]

The most appropriate reaction the average investor/person should make to the current account deficit is to invest in non-NZD assets.

In all probability the current account deficit will weight heavily on the NZD, once the floor is removed -be it interest rates or market sentiment the NZD will fall. So by investing in non-NZD assets one should be able to obtain a higher net% return on investment from currency translation gains.

As far as I'm concerned its when -not if.

[winner69]

Mr Market ... the August trade deficit figure out today was a shocker wasn't it

Dollar went down when announced .... some say interest rates will now HAVE to go up to curb the spending that drives the imports .... meaning? .... in theory the share market should go down

But then again all the cash sloshing around has to go somewhere

[Mr_Market]

Indeed Winner - some painful lessons are about to be re-learned.

I trust you are well-stocked in overseas investments.

[PGL]

quote:Originally posted by winner69

Mr Market ... the August trade deficit figure out today was a shocker wasn't it

Dollar went down when announced .... some say interest rates will now HAVE to go up to curb the spending that drives the imports .... meaning? .... in theory the share market should go down

But then again all the cash sloshing around has to go somewhere


My pick is that the cash will head back to where it came from - overseas.

You can almost hear the band tuning up for "Closer My God to Thee" on the decks of the SS NZD.

[craic]

Sorry to disappoint those who feel consumerism is to blame and like the fellow on talk-back today who blamed the Warehouse but the major costs in the period were oil and related, ships an heavy machinery. You don't get many of those in the Warehouse. Somebody bought a ship? Now that really kicks a hole in the budget.

[PGL]

quote:Originally posted by craic

Sorry to disappoint those who feel consumerism is to blame and like the fellow on talk-back today who blamed the Warehouse but the major costs in the period were oil and related, ships an heavy machinery. You don't get many of those in the Warehouse. Somebody bought a ship? Now that really kicks a hole in the budget.


Not sure about the ship vs consumerism, but oil doesn't account for a lot of the increase the oil bill was $100m more than in August last year. I guess that looking at an individual month doesn't really give a fair picture, however the trend over the last 12mnths tells the same story. Sooner or later (I think sooner), the offshore investors that are funding the trade gap will decide that a 2% or 3% interest rate margin doesn't cover the risk of a currency depreciation.

[srotherh]

quote:Originally posted by Mr_Market

Indeed Winner - some painful lessons are about to be re-learned.

I trust you are well-stocked in overseas investments.


Mr Market
Timely thread you started
Could not agree with you more

[willy the plunger]

I have NZ dollars in short term NZD term deposit (after recently selling some property).

In forum members opinion, which currency should I convert it in to in order to obtain the maximum benefit from a falling NZ dollar?

I am currently living in NZ and will want to convert back to NZ dollar sometime in the future.

I would appreciate your thoughts

Cheers
WTP

[zyreon]

in my opinion USD is arguably a good idea, its pretty much the benchmark for measuing the NZD, and if you look at a graph of it it looks like its starting into a good down cycle -which if it follows the historical trend would be kinda good.

Other factors include US interest rates -they're on the rise so it should hurt the yeild differential thats been supporting the kiwi.

plus there's the forecasts and consensus estimates of it falling to low/sub 60 by end of 06.

but as with any financial decision - do your own research... if you get it wrong you learn something. if you rely on someone else and they get it wrong all you learn is they got it wrong.

[neopole]

i happen to agree with all this talk of NZ being in trouble soon.
we cant just keep spending, and ticking up the credit card etc, as with house prices too, spirelling up in price etc.
my question is,
whats an investor to do?
some say by overseas stock or cash,
what about NZ companies doing business overseas?
like GPG, FPH, etc.
or companies dealing in comodities NOG, TEN etc.
im not that skilled an investor, but am learning, and i dont want to take my wealth overseas.
so in your humble opinion, what could a kiwi do locally to protect himself from a possible NZ downturn?
i'm sure there are others out there that are aware of the situation, but dont know the best solution.

[zyreon]

commodities have been in a huge bull market, trees dont tend to grow to the sky -and this time it could be different, but it rarely is. so commodities may not be the best answer

multinationals would be a valid solution - though it depends very much on their hedging policies, however generally a multinational co, particularly an exporter, will tend to become more globally competitive after a home currency depreciation. However if they source their raw materials from overseas then theyll get hit with higher expenses -depending on hedging.

so you can include exporters etc as one way of getting exposure to falling NZD.

another conservative method is a eurodeposit -i.e. an account domiciled in new zealand but denominated in a non NZD currency. e.g. ASB securities foreign currency accounts, they pay something like moneymarket rate in US... like 3-4% at the moment. So you could deposit some funds and earn the interest while you wait - of course there's currently a negative interest opportunity cost of doing that at the moment i.e. NZ rates are higher than US (for now). but if we assumed NZD would fall from 68 to 60 by December 2006, then total translated return would be about (1+0.03)*(1+-1*((60-68)/68))=15% (where 0.03 = 3% interest rate)
[or something like that!]

[PGL]

You could also hedge the risk by buying a currency option say Kiwi against the $US.

By doing this you can keep your existing assets/investments in NZ but buy an option to cover the risk that the value of your assets falls as the value of $NZ falls. The option will give you the right(but not the obligation) to purchase a specified amount of $US for a specified amount of Kiwi at some date in the future - say 1/12/06. If the Kiwi falls then this option will be worth money and will compensate for any loss in value of your existing investments.

Note that you purchase the option so it costs money to start with but maybe look at this cost as an insurance premium that guarantees that your investments won't be adversely affected by fall in NZ Dollar.

Talk to your bank if you want to find more details on hedging with options.

Hope this helps.

[Base Trader]

The issue with the purchase of options is that you will pay for gamma. As everyone is picking the NZD to fall - the longer the tenor of the option the more you will pay. In valuing the option the gamma adds considerably to the price in taking a NZD put at present. hence, an option will be expensive.

I now believe it is time for the RBNZ to be bold and not increase the OCR in October. Conventional wisdom would dictate that they should increase but this will again fuel the yield play on the NZD and maintain much of that hot money in the currency. If they resist increasing – and we see the Fed and other Central Banks maintain their increasing bias (which they will - except Europe) – then this will likely take some of the air out of the NZD. An adjustment to the overpriced NZD will be a far greater dampner to inflation than a 25bp rise in variable interest rates. However, this does carry the risk of over-cooking a correction if world commodity prices remain high.

In the past I would not have supported holding off on OCR rises – but with the significant CA deficit the last area of resistance in the currency shift appears to be yield.

On commodities - Copper has just breached USD4,000 cash price last night and it is my feeling that was close to its high. The price was pushed up with overnight short covering and my spies tell me that there have been some large losses worn by trading houses as they were stpooed out due to breach of board set trading limits. If this is the case - then I would expect to see weakness in the coming months. I have professed not to short the base metal complex - but with copper I have changed my mind now.

[bermuda]

NZDollar.Sell

Get out now.The last 6 years have seen a huge increase in domestic spending.And now it is about to translate itself into a rapidly increasing external deficit which despite the forthcoming interest rate rises will see overseas investors in NZ run for cover.

Aussie Dollar. Buy

They have a lot going for them.

Oil,Gas,Gold,Coal,Uranium,Nickel,Copper,Iron Ore all at record prices.

$US Sell

They have a huge downside ahead of them.And when Iran seeks to trade their oil in Euros next year(March)...watch out for a dust up.

[Mr_Market]

Change course . . . or crash
02 October 2005

By ROD ORAM
August's $1.1 billion trade deficit should shock business into changing its ways. If it doesn't, we're heading for economic disaster.

We are not earning our living in the world. For every $1 of export revenue earned overseas, we spent $1.47 on imports. August's deficit was three times bigger than the 10-year trend.

The complacent and foolish reach for excuses the dollar is high; oil is expensive; exports have hit a weak patch but will rebound; imports included expensive one-offs like a new Cook Strait ferry.

But we're going broke because the vast majority of New Zealand businesses exist only to serve our tiny market of domestic consumers. And, boy, do we consume. Our growth has been driven largely by the home market for 15 years.

Meanwhile, New Zealand business has made little if any progress in building the skills it needs to compete internationally in trade and investment, as shown by the latest global competitiveness report from the World Economic Forum.

As a result, the deficits in trade and financial flows give us a current account deficit running at 8% of GDP, one of the highest in the OECD.

To fill the gap, we raise money from overseas investors either by borrowing ever more from them or by selling our businesses and land to them. When they cease to be willing lenders and buyers, we'll be in deep trouble.

Hopefully, though, last week's grim news on trade and capability will be a catalyst for change by business and government and in the relationship between them.

But this will happen only if business gets a grip on reality. Reading the competitiveness report is a good start. It measures two critical aspects of an economy the growth competitiveness index ranks a country's potential to grow, and the business competitiveness index ranks its capability for turning potential into reality.

The modestly good news is that we rose two places on the growth index, from 18th a year ago to 16th.

But much of the lift came from government measures such as the quality of public institutions, ranked first in the world from fourth last year. Our ranking was also boosted by factors such as the government running the 10th biggest budget surplus as a percentage of GDP among the 117 countries studied.

The seriously bad news is we were unchanged at 18th on the business index.

Worse, our businesses have barely budged for five years in capabilities critical to trading and investing well overseas. In some cases, they have declined significantly.

For example, sophistication of company operations and strategy ranked 21st, up one place since 2000; breadth of international markets 23rd, down from 21st; control of foreign distribution 32nd, down from 24th.

Our companies rank 20th on their ability to absorb technology and 33rd on the ability to attract foreign direct investment and technology.

And the weakness goes right to the heart of our competitive advantage. On a scale of one equals low-cost as the advantage to seven equalling unique products or processes, we scored 4.1 to rank 27th, down one place from 2000. Botswana is one place above and Spain one below.

As a result, we ranked 32nd on value chains, with Tunisia above and Costa Rica below. This means we make less profit selling products to distributors and retailers further up the value chain than they make selling them to consumers.

Taking all these factors together, exports account for only 29% of our GDP, ranking us 78th out of 117 countries, with Madagascar one above and Mozambique one below.

Only one thing can change this dismal export performance we need many more exporters than the meagre 4% of our companies now selling overseas.

That in turn requires a fundamental rethink by companies of their strategies and the skills needed to execute them.

For starters, they need an accurate fix on New Zealand's strengths and weaknesses. Too often, though, they lack it, as the competitiveness report shows. As a result, the low scores businesses gave in the survey resulted in

[zyreon]

hmm it occured to me the other day that if you purchase dual listed shares then that should be a way of participating in currency fluctuations also.

e.g. hypothetical company XYZ is listed on ASX and NZX, it's share price(Pa) is AUD 10
NZDAUD(NA) is 0.90
therefore (Pn) price on nzx =10/0.9=11.11
so price NZ: Pn=Pa/NA
So if NA increases Pn decreases
and if NA decreases Pn increases
for example if NZDAUD changed to 0.88
(assuming ASX shareprice remains constant)
Pn=10/0.88=11.36

of course the relationship will not be precise, there will be lags in the transmission of the currency change no doubt, and then there's all the other factors that usually affect share price.

overall however the NZX share price of shares listed on the ASX should increase on the basis of currency translation when the NZD depreciates relative to the AUD

[Dough Boy]

quote:Originally posted by willy the plunger


I have NZ dollars in short term NZD term deposit (after recently selling some property).

In forum members opinion, which currency should I convert it in to in order to obtain the maximum benefit from a falling NZ dollar?

I am currently living in NZ and will want to convert back to NZ dollar sometime in the future.

I would appreciate your thoughts

Cheers
WTP

Aussie dollars are probably a safe bet as the NZ economy expected to slow down under high dollar / high interest rates whilst Aussie economy expected to do opposite next year. Also current NZD/AUD forex rate is above long-term average.

[Dough Boy]

If the governement raises interest rates because of asset inflation they will be only feeding a dangerous cycle of higher interest rates => higher dollar => cheaper imports => more money to spend on assets =>less exports => higher deficits.

When property is going up 10% + p.a., a 0.25% or 0.50% rise in interest rates has no real effect at curbng property investment and maybe the government should look to do the opposite.

Rather raise interest rates, drop them. A drop would cause the currency to immediately drop, immediately cause consumerables to rise and reduce the money avaiable for spending on assets, improve terms of trade for exporters and tourism. A 0.25% drop in interest rates may have a quite profound effect but not cause a hard landing as the cost of money will be cheaper.

Just a thought as to how this dangerous inflationary cycle in NZ could be broken.

[Mr_Market]

Time to resurrect this thread. Looks like the chickens are coming home to roost as we all knew they would. Interesting to read back over the posts, esp about how the RB might have done things differently.

Sold all my US shares this week. Now sitting on a bunch of USD waiting to bring back to NZ. Under normal circumstances I wouldn't be comfortable with this, but the greater risk lies with NZD. The question now for NZD is how far and how fast it will go down? Will it take a breather now, or will it dive into the 50's? I'm prepared to wait for a while to see how it plays out.

[belgarion]

MM, a prudent course of action might be to convert to Yuan while you're waiting ;)

[Mr_Market]

That might be profitable Belg, but maybe not prudent. I trust the Chinese even less than I do the Yanks.

[belgarion]

Cap,

Ive been in China since about '95 starting small and growing to my current wieghting by about 2001. Since 2000 talk has constantly been about how undervalued the yuan is. Frequently people throw numbers between 20 and 40%. I'd have to go for the former.

About 9 months ago, the Yuan was allowed to move. First by about 2% and then by 0.02%(?) per day. See the graph ... Chinese Yuan to U.S. Dollar Exchange Rate (http://finance.yahoo.com/currency/convert?amt=1&from=CNY&to=USD&submit=Convert)

I feel pretty safe. My reluctance to go anywhere near the USD is fairly evident and the reasons, I hope, are clear. Could you bullet your reasons for being fearful of the yuan. TIA, Belgarion.

[srotherh]

Well seems this aint that important as no one else has mentioned it.(unless I missed it)

The rising fuel bill and the nationwide splurge on housing and consumer goods have pushed the annual current account deficit to a record $14.5 billion...

Guess I will ignore this as it must be OK even if it is "the third highest in the OECD behind Iceland and Portugal and ahead of market and Reserve Bank forecasts."

And the fact "The average daily total owed by all New Zealanders on credit cards in April was $4.29 billion, up 7 per cent on the same month a year ago." does not even matter gives me peace of mind.

Does anyone care???

[srotherh]

Three months on from last time

and everything is fine folks

New Zealand's annual current account deficit ballooned to another record high in the second quarter, data showed on Thursday.

New Zealand's current account gap was a wider-than-expected $3.08 billion in the June quarter, taking the annual deficit to $15.15 billion, although the blow-out in the annual figure was partly due to revisions to previous figures.

Statistics New Zealand did not release the deficit-to-gross domestic product ratio but one economist estimated the annual deficit at about 9.7 percent of GDP.

The market had expected an annual shortfall of $14.47 billion, equating to 9.3 percent of GDP.

Look at the first post in this thread exactly one year ago
"The $11.89 billion annual deficit was the worst in dollar terms, Statistics New Zealand said today.
Economists estimate the deficit equates to 8 per cent of GDP – the second worst behind a 9.0 per cent deficit during the first oil shock in 1975."

Therefore we now must have the worst deficit in history in all terms.

But it does not seem to matter to investors.
Wake up. Fundamentals will kick in at some stage
Do not be standing in the way when it happens?

[winner69]

Even Muldoon didn't do this bad

[trackers]

Too much debt in the property market, its all good [}:)]

[Base Trader]

I read one report stating that this was expected to be the trough of the deficit. However, as we finish the 3Q the NZD is stronger, property investment and price growth has not peeled back in any material way and reatils sales remain robust. In addition, 67% of all NZ Issued Bonds are held by foreigners with their appetite unsatiated due to the carry fundamentals - hence, interest payments are flowing out. Hmmmmmmm.

The Economist this week has a special report on emerging economies and that some OECD economies are getting left behind (although they are not really aware of it yet) - could one of those ecomonies be NZ.

The Chinese and Indians and most other emerging economy participants continue to save/invest because they do not have social security/pensions. But what happens when they begin to spend and reduce saving as wealth is accumulated? Probably they stop buying as many foreign bonds and deficit economies will begin to ache under the strain of higher interest costs.

Structurally NZ needs to address its deficit economics.

[rmbbrave]

WHOPPER SHOCKER


NZ produces trade deficit shocker
26 September 2006

New Zealand's trade deficit in August almost hit a billion dollars, Statistics New Zealand reported today.


The deficit came in at $961 million, well worse than the $780m economists had forecast.

The monthly shortfall pushed the August year deficit up to $6.547 billion, slightly down from $6.735 billion in the July year but again worse than economists' forecasts of $6.4 billion.

New Zealand is again smarting from the rise in crude oil prices.

The largest contributor to the increase in imports was petroleum and products. Despite the irregular nature of petroleum shipments, this was the seventh month in the last eight when petroleum and products had the highest value for any import commodity.

The deficit in August 2005 was slightly worse than this year at $1.1 billion. However, this year's deficit equated to 35.3 per cent of exports and was the second largest on record for an August month. It compares with an average deficit of $484m (20.9 per cent of exports) over the past decade.

The annual trade balance equated to a deficit of 19.6 per cent of exports. As a per centage of exports, this is the lowest annual deficit since September 2005, but the highest for an August year since 1976.

The monthly deficit was despite a 15.4 per cent rise in exports in August to $2.723 billion.

Imports rose 6.4 per cent to $3.685 billion.

A drop in the New Zealand dollar has an upward influence on prices for both imports and exports. The New Zealand dollar Trade Weighted Index was 9.6 per cent lower in August 2006 than in the previous August and was likely to have influenced values for all import and export commodities, SNZ said.

The rise in both exports and imports was broadly based with 32 of the top 40 import commodity groups and 34 of the export groups showing increases over August 2005.

http://www.stuff.co.nz/stuff/0,2106,3809600a13,00.html