Opinion: Reserve Bank and high dollar put more communities to the sword

By Simon Louisson of NZPA

Friday 2nd February 2007

Few people know the town of Otauhau in Southland but news this week its main employer is to close brought home the harsh realities of New Zealand's floating exchange rate.

Bright Wood, an American-owned timber mill, largely blamed the high kiwi dollar for its impending closure. The loss of 99 jobs in a town of 753 is like a chainsaw hacking into the town's heart.

Bright Wood president Kevin Stovall blamed the strong kiwi dollar, saying "aggressive" tactics by the Reserve Bank to curb consumer spending, were hurting the export sector.

"The Reserve Bank's inflation-fighting strategies will continue to put significant pressure on the New Zealand dollar to continue to strengthen relative to the US dollar," Stovall said.

The United States-owned mill exports most of its production of housing materials to the American market.

Stovall said the rising cost of doing business, particularly rising electricity prices and government measures such as giving workers an extra week's annual holiday had contributed.

The Wood Processors Association said three other major mills are on the brink of closure due mainly to the high exchange rate making them uneconomic.

"We have been profoundly hit by the very high New Zealand dollar for a very long period," association chairman Dave Anderson said.
Other exporters are no doubt experiencing similar pain.

On Wednesday, publicly listed fishing company Sanford outlined to shareholders at its 125th annual meeting how the exchange rate had made last year and this year "exceedingly difficult".

Sanford, which exports the bulk of its catch, has done just about everything right in terms of trying to manage the exchange rate. When the kiwi dollar fell under US50c five years ago it took out forward cover for three years ahead. That, however, inevitably ran out.

Taking the advice of just about every economist in the country, Sanford expected the exchange rate to fall last year. It did for a while -- to US60c in June. But then it rescaled its heights as the Reserve Bank reneged on a mid-year signal to cut interest rates as it grappled with inflation of 4%.

Sanford chief executive Eric Barratt pointed out that consensus forecasts regarding the currency had never been so wayward. Every analyst logically reckoned that with a current account deficit running at $14 billion -- a mind boggling 10% of GDP -- and economic growth at a paltry 1.5%, the kiwi was heading for a fall.

No such luck. Those interest rates -- the highest in the developed world -- meant every foreign investor wanted a piece of the kiwi.

Barratt mistakenly took the expert's advice, held Sanford's US dollar export earnings in the hope of a currency fall, and consequently took a $4m forex hit in the first quarter.

Sanford chairman Bruce Cole launched into the Reserve Bank.
"I find it questionable that the Reserve Bank's policies... treat inflation as almost the only economic evil."

He pointed out that the so-called investors in New Zealand -- speculators -- added costs rather than value.

"They do not lead to the creation of new and productive assets and community welfare, economic security and wealth, but instead contribute ultimately to balance of payments deficit woes."

Anderson said the key initiative the wood industry needed to have addressed was a more stable currency.

"This overvalued situation we are in at the moment is just unsustainable for ourselves and for many sectors in the New Zealand economy that are exporting. This is not just a forestry problem."

Some chance.

The Reserve Bank refused to comment, referring inquiries to its December Monetary Policy Statement.

What we find there is the bank assumes interest rates will rise in the first half of this year and stay that way until the second half of 2008. Higher interest rates usually mean a higher currency.

Bank Governor Alan Bollard revealed just how isolated he is when he said then: "We are not hearing a series of serial stress problems in the export sector."

Even though New Zealand had negative inflation in the December quarter, and is likely to get another very low quarter this period thanks to falling petrol prices, Bollard signalled last month he is likely to put interest rates up again in March.

The economic data coming in mostly confirms just how weak the economy is -- figures this week showed building consents fell for the third consecutive month with a 5% slump in December.

But the data that will sway Bollard was yesterday's housing investor confidence survey showing New Zealanders' confidence in house price appreciation has jumped to its highest point since the peak of the housing boom in 2003.

The ASB Housing Confidence Survey said a net 43% of respondents thought house prices would rise further, up from a net 20% three months before.

This is despite the fact that another survey showed the median New Zealand house price was around six times median incomes, double the ratio of around five years ago.

High house prices make us feel wealthy, so we spend more and that pushes up inflation.

The likely scenario is that Bollard will push up interest rates, which will push up the dollar and that will tip more companies out of business and exacerbate the chronic current account deficit.

It is an absurd cycle which no one in power seems prepared to talk about, let alone offer a solution.

Finance Minister Michael Cullen shrugs off debate about such things as a capital gains tax as political suicide.

Bollard sees no evil, hears no evil and speaks no evil. He simply won't engage in debate about policy options and says his only job is to control inflation.

National Party leader John Key made his fortune as a currency speculator so there is likely to be no sympathy from that quarter.

When you look at the success of economies such as China which do not have floating exchange rates, it raises inadequately answered questions about what is so great about having a wildly fluctuating currency.

However, in the absence of any leadership or debate on the issue, the people of Otauhau and other similar communities can expect no relief and will simply have to suffer their fate.

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