The sharp decline in the New Zealand dollar is due to one simple fact: more people are selling than buying our currency.
The sellers have been dominant for reasons including the large trade and balance of payments deficits and negative investment and migration flows. Speculators are also selling because they believe that the kiwi will continue to fall.
Although exporters receive short-term benefits from a weak dollar, it has negative implications for the rest of us. The cost of imported goods will rise and our personal incomes will continue to fall compared with the rest of the world's.
Based on the average wage, a New Zealander has to work 40 hours to buy a cheap seat at the opening ceremony of the Sydney Olympics. By comparison, an Australian has to work 33 hours and an American just 20 hours.
What will it cost us to buy a ticket for the opening ceremony of the 2004 Athens Games?
Between 1991 and 1997, the kiwi rose strongly as measured by the trade weighted index (TWI). It peaked at 68.9 in April 1997, although this was still well below its June 1979 base of 100. Back then buyers of the kiwi outnumbered sellers, and:
The country had a merchandise trade surplus until the year ended March 1996.
The balance of payments deficit remained below 3 per cent of gross national product until the March 1995 year.
A large inflow of capital was associated with the sale of Government-owned enterprises to foreign interests.
Overseas ownership of the sharemarket climbed from 23 per cent in 1991 to 61 per cent in 1996.
Overseas fixed-interest investors were attracted by our high interest rates, and foreign ownership of the NZ Government bond market rose from 17 per cent in January 1993 to 70 per cent in September 1997.
Private sector offshore borrowing rose from $33 billion in 1990 to $79.4 billion in 1998.
The New Zealand dollar received considerable support from the large-scale issue of Eurokiwi bonds in the 1996 to 1998 period.
Net migration into New Zealand was large until the March 1997 year and many of the new arrivals brought in money.
New Zealand was fashionable because our economic policies appealed to international investors and it was widely believed that New Zealand business people could take advantage of those policies.
In the past few years, all these influences have dramatically reversed.
The investment flows have turned around because of the poor performance of our business sector.
Overseas investors have received a low return on their money, they have lost confidence in New Zealand and they want their money back.
The country's four-largest listed companies at the end of 1995 were Telecom, Fletcher Challenge, Carter Holt Harvey and Brierley Investments. All are worth less today than five years ago. Their combined market value has fallen from $28.3 billion in December 1995 to $21.1 billion, even though Fletcher Paper was taken over at a big premium to its market price.
Why have these companies performed so badly when many of the country's top business people have sat on their boards?
In the 1990s, the private sector borrowed $59.7 billion from offshore sources yet our total exports increased by only $10.8 billion over the same period.
What did we do with the additional $59.7 billion?
Trade figures released on Thursday confirm that little of it was invested in the export sector. Export growth has improved but the long-term growth rate is extremely poor. The provisional trade deficit for the July 2000 year was $3.4 billion, compared with $1.7 billion for the previous year, even though commodity markets are relatively buoyant.
The negative trade figures will continue to fuel the balance of payments deficit. The deficit has also been adversely affected by domestic companies that are now overseas owned. The sale of these companies had a positive short-term impact on the kiwi, but this influence is now negative because of the outflow of dividends.
Domestic and overseas portfolio investors are losing interest in the sharemarket because of the poor performance of our companies. Since the end of 1996, just over 87 per cent of new money attracted by the domestic managed funds industry has gone offshore and overseas investors are continuing to reduce their holdings.
Now that Telecom's long-term growth prospects are uncertain, we have no large domestic company to attract offshore investors.
Interest in the Government bond market has also diminished and foreigners have reduced their holdings from 70 per cent to 37 per cent of the total market.
An estimated $5.5 billion of Eurokiwis mature this year with the three months ending September 30 being the busiest period. As only a small proportion of these issues are expected to be rolled over, the Eurokiwi market is having a negative influence on the dollar.
Finally, the private sector's ability to increase its offshore borrowings is limited and many individuals leaving New Zealand long-term are in the middle to high-income bracket and they are taking their money with them, again placing downward pressure on the currency.
Investors have suggested that the New Zealand economy resembles the Russian Navy and the New Zealand dollar is our Kursk.
The comparisons are grossly exaggerated but some similarities can be seen.
The Russian submarine fleet has dropped behind its rivals because of limited investment in new technology, making the fleet extremely vulnerable to an external shock or an unexpected event.
When the Kursk sank to the seabed, the onshore Navy chiefs buried their heads in the sand. It was only when the severity of the problem was realised that they called for outside assistance.
If our previous National Government had responsibility for the Russian Navy, it would put the admirals in charge of fleet modernisation and argue that the Government had no role in the process. Our current Administration would concentrate on redistributing income from the submarine commanders to the ordinary seamen.
The long-term success and competitiveness of a navy and an economy is dependent on investment in new and productive technology. The dollar did not go into a tailspin this week because of a reduction in Germany of business confidence, or the outcome of the Federal Reserve Board meeting in the United States.
The kiwi has fallen steadily over the past few years because overseas investors have poured money into New Zealand and only a limited amount of it has gone into modernising and expanding the productive sector. Disappointed, they are selling their kiwi dollars and leaving.
The exceptions are overseas corporates acquiring our companies at rock-bottom prices because of the depressed state of the sharemarket. These purchases will have a further negative impact on the dollar over the longer term.
In the short term, the kiwi dollar is expected to rally. But medium to long term it will remain weak until the severity of the economic problems is recognised and a greater focus put on investing in productive enterprises that generate overseas earnings.
We pay the price of poorly using invested money
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