The O'Brien Column: Dr Cullen reads comics as English lights them

Friday 1st September 2000

It will be interesting to see whether cabinet ministers, including Finance Minister Michael Cullen, congratulate themselves on their coup in having the state of their economy and currency a major story on last Friday's BBC TV business news.

Perhaps Dr Cullen will dismiss the event as another example of a media beat-up, in similar fashion to his comment about "comic cut" economic commentators.

Apart from the point that Dr Cullen should have given up reading comics years ago, he seemed to have reverted to the smart-alec attempts at wise-cracking displayed earlier in the year when dealing with critics of the country's economic performance.

This time he took a swipe at the Employers' Federation, the Business Roundtable and commentators in statements National finance spokesman Bill English rightly described as shooting the messenger.

It is difficult to see how the fact of New Zealand's spending and borrowing from overseas more than it sends out, with the consequent impact on the dollar's value, can have anything to do with employers' opinion about the Employment Relations Bill.

A fall in the dollar is regarded as good news for exporters. That is a correct view in general terms but at the specific level of individual firms and trading organisations the benefits take time to work through. Most if not all exporters are in business to sell goods and services (such as tourism which can be classified as an "export" industry for the purpose of considering foreign exchange matters), not to play the currency markets.

That was seen last week in reports that some exporters would have to wait before they gained from the dollar's current value. People dealing in overseas markets hedge a lot of their currency exposure. Some hedge the lot, being prepared to opt for stability rather than take risks on the kiwi's ups and downs.

The Dairy Board last week said the 1USc drop in the value of the dollar represented about a $100 million gain for dairy exports in a year. The board had hedged a lot of its foreign exposure at higher than current market levels, so there would be a delay before farmers fully benefited from the dollar's latest slump.

All sections of agricultural exporting industries will see a reverse impact from the lower dollar in time as the prices of their imported inputs rise, although the inputs are a relatively low proportion of output receipts.

Investment activity and changes in investors' policies also affect the currency. NBR contributor Neville Bennett noted last week there had been good growth in managed funds but a high proportion of those funds were invested in international assets.

There are two reasons for that. Fund managers spread their risk profile across countries and asset classes. It follows that more New Zealand-sourced money has been finding its way into international assets.

Those assets are New Zealand- owned. But currency expenditure was incurred when they were bought. International fund managers seem to have reduced their exposure to New Zealand-based investments, preferring to concentrate on bigger markets where they have more industries and other options. They also reduce hassles involved in dealing with assets that form a low proportion of their total worldwide portfolios.

Inflationary pressure will be the next bogey to be faced if the dollar stays at or near current levels. Manufacturers and general importers have noted they cannot carry on forever absorbing price increases to keep up with the competitors. Rising oil prices, coupled with falling dollar, are a particular problem.

An increase in inflationary pressure has an impact on interest rates, as any comic-cut commentator can tell Dr Cullen. Higher interest rates flow through to other economic indicators and also affect share market prices.

Yet these outcomes are supposed to be the result of "hysteria" on the part of some apparent evil forces operating against the best interests of New Zealanders and the politicians charged with managing the economy.

Economic managers are powerless to influence some of the outcomes. People in other countries can be the initiators, whether reacting to economic developments in the US or taking a snitch to New Zealand.

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