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One of the world’s most desirable places to live achieving first world living standards and OECD status for such a small country for its 4.17 million citizens. Due to New Zealand’s relatively small size and geographical proximity, their national currency also referred to as the ‘kiwi dollar’ and as a ‘commodity currency’ has experienced volatility in valuation particularly over the last 20 years. In year 2000, the kiwi dollar was one of the world’s weakest currencies by depreciating over 30 percent after hitting a low of 38.5 US cents in mid-November 2000. The crash of the kiwi dollar from 1999 to 2001 resulted from a culmination of events including the socialist election victory (centre-left government) elected in November 1999, current account deficit, collapse of global commodity prices and an exceptionally strong US-dollar (‘USD’) during this time.
In the currency markets, exchange valuation dynamics can change dramatically and New Zealand is no exception as year 2002 recorded a complete reversal of fortunes with the kiwi dollar gaining 30 percent to the USD. The kiwi continued to appreciate from 2002 to spring 2008 reflecting a strong upward growth cycle for the country. Although currencies tend to overshoot their highs and lows as the low of 38.5 US cents was viewed as an anomaly. As a relatively small OECD economy with a volatile currency vulnerable to shift in investor sentiments and global commodity markets.
Since summer 2008, the world has witnessed a collapse in many commodity prices including oil, nickel, zinc, copper, agricultural products, etc. The New Zealand dollar has a strong correlation to this cyclical play in commodities as the kiwi has sold off tremendously over the last few months as the world economy deleverages. Since year 1999, the kiwi dollar has experienced a cycle of exchange valuation with a large crash followed by a massive appreciation and now a sell off again. The currency cycle is truly evident with the kiwi dollar following the commodity cycle sharply.
POLITICS: change of government with the centre-right National Party winning the election held recently on November 8, 2008. Prime Minister John Key has replaced long time serving PM Helen Clark. Key is viewed to be business friendly.
For further detailed analysis on New Zealand’s political framework, please contact us at BankINTRO.com.
ECONOMY: free market economy - currently in recession, declining home prices and rising unemployment. New Zealand has undergone significant economic restructuring over the last 15 years in order to compete globally; it is now mostly an unregulated economy that is highly dependent upon foreign direct investment. The New Zealand economy derives its foreign exchange earnings from exports of commodities, agriculture products (meat, dairy, etc.) and forestry with markets in Japan, Southeast Asia, United States and Australia. Agriculture represents 16.5 percent of GDP; New Zealand is home to 47 million sheep and 10 million cattle. The future for New Zealand will be an emphasis on information technology & communications, biotechnology, research & development. The economy is gradually shifting away from agriculture towards knowledge industries. The government also has in place to provide venture capital and allow for quick immigration of skilled workers to facilitate this economic advancement.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 112.4 billion USD (2007) with corresponding GDP/Capita at 27,200 USD. GDP growth for year 2008 projected at 0.65 percent, year 2009 estimated at 1.5 percent, year 2007 came in at 3.1 percent. Inflation quotes include year 2008 estimated at 4.25 percent, 2009 at 3.8 percent, year 2007 figure was 3.2 percent. Unemployment for 2007 came in at 3.6 percent. For the last 5 years, the current account deficit has ranged from 6.4 to 9.1 percent of GDP, year 2007 CA shortfall at 10.23 billion USD equivalents. Public debt stands at 20.7 percent of GDP (2007). External debt came in at 51.44 billion USD (December 31, 2007). Major trade partner: Australia. Exports include agriculture, forestry, and machinery. Imports are that of machinery, petroleum, cars, electronics, textiles, etc.
POSITIVES: one of the least corrupt countries, bio-security is taken very seriously to protect the agricultural industry from diseases such as foot & mouth - excellent track record in this regard, long haul tourism into New Zealand. CONCERN: economic structure risk is high - must find way to diversify economy as meat exports represent 50 percent of export revenues, drought at times, net energy importer – oil at 130,000 bpd.
ECONOMIC FORECAST: cyclical economy, uncertainty as recession is prolonged to continue longer than a traditional down turn cycle. Recovery of the Asian economies and the eventual diversification into ‘New Economy’ information-based industries although currently lagging other OECD countries.
BANKING SYSTEM: the Reserve Bank of New Zealand does manage the kiwi dollar competently. RBNZ has inflation targets of 0 to 3 percent range although it prefers annual inflation in the 2 to 3 percent area. Total foreign exchange reserves as of September 2008 are at 14.65 billion USD. On December 2, 2008 the central bank of Australia lowered their interest rates to 4.25 percent. The RBNZ followed shortly on December 4, 2008 by reducing the official cash rate from 6.5 to 5 percent following the global tide of world central banks slashing their rates. Similar to some other industrialized economies, New Zealand’s banking sector has some banks exposed to large mortgage debt within the residential segment, potential vulnerabilities remain. A large portion of New Zealand’s banking system remains in control of Australian hands.
RESERVE ADEQUACY: much short term debt denominated in foreign currencies.
REGIONAL: Australia, APEC
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KNOWLEDGE: Future Wealth and Residential Mortgages
Future prosperity for New Zealand will continue to rely on its traditional overseas exports of commodities and agricultural products. Historically, the United Kingdom has bought a large percentage of New Zealand’s products although a major transition is underway to markets in Asia away from Europe. Of particular importance is China’s membership into the World Trade Organization ‘WTO’. At present, Asia accepts 50 percent of New Zealand’s exports and this figure will continue to climb with China’s growing need for resource commodities to help fuel its massive economic growth in the years ahead. Both China and India are two massive markets for New Zealand to sell its goods. Accordingly, the New Zealand dollar is becoming more integrated into the Asian economies performance as noticed with the 1997-98 Asian financial crises where the kiwi dollar was impacted negatively. Finally, it is interesting to note that tourism is growing immensely in New Zealand with many new tourist arrivals from Japan.
Residential mortgages within New Zealand: Achilles heel for economy?
CURRENCY: ISO symbol ‘NZD’, New Zealand dollar also referred as the ‘kiwi’ dollar. At time of review on December 5, 2008, the kiwi dollar had an exchange value of 52.42 US cents and or 2.4156 NZD to 1 Euroland euro (EUR). The New Zealand dollar follows that of a floating currency exchange rate regime since March 5, 1985. The kiwi dollar to a large degree mirrors movements in the Australian dollar of which the Auzzie dollar is also currently depreciating versus a basket of currencies. As measured with the concept of purchasing power parity, the NZD as of December 2, 2008 was 18 percent undervalued when compared to the USD and 24 percent undervalued when compared to the EUR.
CURRENCY HISTORY: currency inception for the New Zealand dollar occurred on July 10, 1967 when it replaced the New Zealand pound at 2 NZD to 1 pound. In May 1985 the kiwi dollar also hit a low of 45.2 US cents and by 1988 hitting a high of 72.5 US cents. Again, during the 1990’s, history repeats itself. In year 1992, the kiwi traded at 55 US cents, 1997 high of 70.4 US cents. In January 2000 at 50 US cents, November 22, 2000 low at 39.22 US cents, rebounding in late November - December 2000 to 40 US cents. This exchange history reveals the volatility of the kiwi dollar. Over the last 15 years, the approximate average exchange valuation is 62 US cents for the NZD.
Historical valuations for the kiwi dollar include: January 1991 at 59.88 US cents, January 1992 at 54.34, January 1993 at 51.28, January 1994 at 56.49, January 1995 at 64.1, January 1996 at 66.22, January 1997 at 70.42, January 1998 at 58.13, August 1998 at 50.25, January 1999 54.05, January 2000 at 51.28, November 2000 at 40, January 2001 at 44.44, September 2001 low at 39.75 US cents, January 2002 at 42.48, December 2002 at 51.28 US cents, January 2003 at 54.05, January 2004 at 67.34, January 2005 at 70.52, January 2006 at 68.55, March 2008 at 80 US cents (high at 82.13 US cents – February 27, 2008), August 2008 at 70.78 US cents. Historical currency crisis dates include August 1975, July 1984, December 1985, October 1987, and November 2000.
CURRENCY FORECAST: modest depreciation to continue during 2009 for the kiwi dollar in relation to a trade weighted basket of industrial currencies as the global recession unfolds with continued decreased demand for commodities. The kiwi dollar is also known as a ‘commodity currency’ of which they tend to outperform at the beginning of an economic recovery as commodity prices are projected to move higher over the next few years. The 12 month forecast has a low of 45 US cents for the NZD.
Deleveraging and unwinding of the Japanese carry trade, the kiwi has accordingly fallen over the last 6 months. Investors were borrowing in Japanese yen at 1 percent and investing the proceeds into the kiwi where rates realized in the 8 percent range. Now with New Zealand lowering rates and the kiwi falling in valuation with a rising yen (JPY), the carry trade has diminished significantly.
With respect to interest rate differentials, New Zealand presently has higher rates than the Eurozone and the United States which will further continue to attract capital inflows into New Zealand. Depreciation pressures will continue to amount for New Zealand as its current account deficit at 8 percent of GDP coupled with net foreign liabilities at 90 percent of GDP expose risk to the currency.
The idea for a potential monetary union with Australia for the creation of a common currency that would better hold itself amongst international capital flow movements has been discussed. The long-term potential for official dollarization with the Australian dollar as new national currency for New Zealand is a possible scenario. As time marches forward, BankINTRO.com predicts that the kiwi dollar will stabilize with less exchange volatility with new markets in China & India providing for steady cash flow. The overall ranking for the New Zealand dollar is positive as the economic & political risk rankings are sound.
