quote:N.Z. Dollar May See `Significant' Demand on Taxes, Westpac Says

May 27 (Bloomberg) -- The New Zealand dollar may attract ``significant'' demand in the next two years on repatriation by fund managers before proposed tax changes that favor domestic over overseas share investments, Westpac Banking Corp. said.

Finance Minister Michael Cullen in the May 19 budget proposed scrapping a so-called grey-list of seven countries, including the U.S., U.K. and Australia, where New Zealanders can invest in stocks without paying tax on any capital gains. He also proposed abolishing capital gains tax on domestic equity investment, with the changes slated for 2007.

``Clearly, the proposed changes would provide investors with an incentive to repatriate some or all of their grey-list investment ahead of the legislation,'' Wellington-based Johnathan Bayley, a senior currency strategist at Westpac, wrote in a note to clients, which he confirmed by telephone. ``There's general agreement that there is potential for a substantial shift in investor allocation.''

New Zealanders' investments in overseas equities total NZ$24.5 billion ($17.4 billion) said Bayley, citing balance of payments figures, with about 80 percent invested in the seven grey-list countries, also including Canada, Norway, Germany and Japan.

Bayley said by assuming 25 percent of equity investments in the seven countries are repatriated to avoid the capital gains tax, it would bring about NZ$5 billion of funds back to New Zealand. This would result in around $NZ3.4 billion of extra demand for the currency because some funds hedge against appreciation of the New Zealand dollar to protect the value of their overseas equities, he said.

`Significant Flow'

``In terms of underlying currency supply and demand this is a fairly significant flow,'' Bayley said.

New Zealand's deficit in its current account, which measures flows of goods, services and investments, widened to a record NZ$9.39 billion in 2004.

The New Zealand dollar has gained 12 percent in the past year to buy 71.14 U.S. cents as of 2:40 p.m. in Wellington. The currency will drop to 64 cents by year-end, Westpac predicts.

Any reallocation of funds back into New Zealand won't be made until investors are made aware of the details of the tax changes and it is passed into law, Bayley said.
I just came across this in regards to proposed changes in the new budget and thought it could be relevant to this thread.

Does anyone think this has the potential to significantly impact the anticipated drop in the NZ Dollar in the coming year or two?