London banker predicts flood of foreign capital

By Chris Hutching

Friday 21st June 2002

A flood of foreign capital into New Zealand and Australia followed by rapid flight is likely over the next 12 months or so, London-based Dresdner Bank economist Andrew Hunt predicts.

"Australia and New Zealand are going to be the only countries in the world offering a decent yield to people putting money on deposit at rates between 5% and 7%," he said during a brief visit to New Zealand.

"A lot of hedge funds and foreign investors will consider these currencies undervalued. If US money arrives here I'm concerned the currency will appreciate more than the Reserve Bank wants but it will be powerless to do anything about it."

"If [the Reserve Bank is] not careful the country could be flooded with foreign capital and a housing boom will take off.

"Overseas investors would put the money into the banks, which would become extremely liquid and be looking for asset growth through mortgages.

"The only way the Reserve Bank can fight that is to allow the currency to appreciate to a point where foreigners think it's too expensive and even though interest rates offer a positive differential they decide not to buy."

Ultimately, higher interest rates, a drop in farm incomes, and fewer tourists would slow the economy down, the Reserve Bank would bring rates down and the foreigners would go home, Mr Hunt said.

But at the moment there are advertisements in Hong Kong newspapers for kiwi dollar deposits.

"The big hedge funds looking for global opportunities definitely have New Zealand and Australia on their radar screens, if not in their gun sights, right now. I know quite a few of the hedge fund people and many of them have properties in the South Island. I bought a house myself in Queenstown five years. It's cheap, the people are friendly and you probably won't get blown up."

Mr Hunt said the effect of external influences such as Osama bin Laden on the Queenstown property scene meant New Zealand might do well to emulate the foreign investment ownership rules in Guernsey, Switzerland and Jersey, where some properties were only available for sale to residents.

Such rules were justified when "builders are charging $60 an hour and you have to get one from Dunedin and the people who live in the region can't afford Queenstown prices any more."

"It's interfering in the free market but it would do something to prevent the country ending up with a chronic balance of payments surplus [of the sort] Malaysia experienced."

Mr Hunt said Asia-Pacific was recovering, thanks to its own domestic-led resurgence rather than reliance on the US economy, which remains flat though in recovery mode.

Japan appeared to be staging a recovery through a combination of renewed consumer confidence and high fiscal spending by the government to reduce the effects of unemployment.

The Koreans were enjoying a feast of credit when just 10 years ago it was impossible to obtain consumer loans or mortgages and Koreans are making up for lost time, Mr Hunt said.

Thailand was also recovering from the late 1990s collapse, repaying debt and showing signs of pent-up consumer demand.

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