Dollar's rise hurts

By Graeme Kennedy

Friday 11th June 2004

New Zealand's recent unimpressive export performance was likely to continue due mainly to currency volatility, economic consultant Infometrics has told Trade and Enterprise in a special report.

The firm said the rise in the New Zealand dollar had influenced the 8.6% fall in export earnings over the previous 12 months and threatened to slow future export and economic growth.

Infometrics interviewed a range of exporters for the report, to examine the impact of rising currency on exporters.

"The currency is a powerful and indiscriminate price-setting mechanism," it said.

"Changes in currency have little or nothing to do with individual market conditions and they translate into higher or lower returns irrespective of the attributes of firms or their products.

"Over the short term, firms generally absorb currency fluctuations within their margins they hold their selling prices stable for their customers and consequently there is little if any change in sales.

"Forward cover as well as specific commercial contracts assist or compel companies to keep selling prices constant in the short term.

"The longer and more substantial the rise in currency is, the more likely the financial pressures faced by exporters will translate into changes in production, investment spending, employment and business strategy.

"These changes in business behaviour are the real threat to future export and economic growth."

The report said large and unpredictable cycles in the dollar's value increased risks associated with investment in export market development with a surge in value dissuading more investors while others would abandon attempts to establish export markets.

"The strength of the domestic economy and increased competition from imports as a result of the higher dollar are also factors which undermine the case for exporting," it said.

The report said high-margin businesses had more ability to withstand the impacts of rising currency while more mature companies were also in a better position due to management and market experience, stronger relationships with customers and possible greater product and market diversification.

"It is generally recognised that getting started as an exporter is one of the biggest challenges a New Zealand business faces," it said.

"The rise in the currency is likely to convince a number of firms to delay any commitment to developing export sales and may well cause some new exporters to abandon their investments.

"Any actual or perceived increase in the risk of investing in export market development will discourage such investment and ultimately stunt export growth."

Currency stability, it said, was probably more important to exporters than the dollar's level.

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