New Zealand is “like Ireland in 2007” and it’s only a matter of time before its currency enters a meaningful depreciation, according to Stephen Jen, a partner at London-based hedge fund SLJ Macro Partners LLP.
While “the case for kiwi seems compelling,” the reality is “quite different,” Jen, a former International Monetary Fund official, and colleague Fatih Yilmaz wrote in a note to clients yesterday. “New Zealand has severe structural weaknesses that are very similar to those of crisis-hit Southern European and Southern emerging-market economies. Kiwi may be 20 percent overvalued.”
At 83.42 U.S. cents yesterday, the New Zealand dollar is trading about 5 cents below a post-float record against the greenback and reached an eight-year high of 95.3 Australian cents last month. The central bank has signaled it will become one of the first in the developed world to start raising rates this year as the economy gathers pace and inflation pressures mount, with economists and investors forecasting a hike as soon as next month.
Economic growth will accelerate to 4.2 percent this year, Westpac Banking Corp. predicted this week, propelled by the NZ$40 billion ($33 billion) rebuild of earthquake-damaged Christchurch and record-high terms of trade. Westpac expects the currency to stay above 80 U.S. cents and 93 Australian cents this year.
“It’s easy to tell a good story for kiwi,” Jen and Yilmaz wrote. “The economy has high growth, high terms of trade, and the currency is high-yielding. However, the case for kiwi is, in our view, much less persuasive.”
They said New Zealand’s economy resembles those in Europe and the emerging market just before they were engulfed by crisis -- “a growth model based on debt and credit, low savings rates, and current-account deficits.”
Ireland went from Celtic tiger to European debt-crisis victim, requesting a 67.5 billion-euro bailout in November 2010 when the near-collapse of its banks meant bond markets were shut to the country.
New Zealand runs a relatively high current-account deficit and its economy has a “fragile core,” making it susceptible to external shocks such as slowing growth in China and the Federal Reserve’s withdrawal of monetary stimulus, the analysts wrote.
The impact of improved terms of trade on the kiwi has been “grossly exaggerated,” Jen and Yilmaz said. “New Zealand’s terms of trade improvement is significantly lower and less impressive than that seen in Australia.”
The analysts also said facts don’t support the image of New Zealand as an agriculture-based economy dominated by dairy, with agriculture accounting for only 5 percent of the country’s total gross domestic product.
“In sum, while there may be some temporary cyclical factors that may be supportive of the kiwi, there are serious structural demerits that will one day weigh on the kiwi,” they said. “From a medium-term perspective, we see considerable downside to the kiwi dollar, in contrast to the overwhelmingly positive prevailing view in the markets.”