English Says N.Z. Powerless to Curb Kiwi’s Bond-Fueled Gain
New Zealand Finance Minister Bill English said the nation’s growth outlook is attracting foreign bond investors, helping propel the year’s strongest-performing Group of 10 currency and leaving the government powerless to steer it to lower levels.
“Other people seem to see our prospects as reasonable and therefore they’re buying the currency,” English said in an interview yesterday in Wellington. New Zealand’s dollar has gained 7.7 percent against the U.S. currency this year.
English is betting that rebuilding in earthquake-damaged Christchurch city will stoke job growth and consumer spending, delivering a faster economic expansion in 2013 after a sluggish recovery from the 2007-08 recession. The outlook for exports, which makes up 30 percent of the economy, is clouded by a rising currency which the Treasury Department earlier this week said may stay near current levels until the first half of 2014.
The finance minister’s remarks align him with the views of central bank Governor Graeme Wheeler, who cited the currency gains as a “significant headwind, restricting export earnings” in the Dec. 6 monetary policy statement. Wheeler this month left the official cash rate at a record-low 2.5 percent, where it’s been since March 2011.
The local dollar bought 83.34 U.S. cents at 11:28 a.m. in Wellington and is up about 1.6 percent this month. The Treasury forecasts it will average 82 cents throughout 2013 before declining to 79 cents by late 2014.
New Zealand’s sovereign bonds have handed investors a 16 percent return in U.S. dollar terms over the past 12 months, the best performer among nations with at least one AAA rating tracked by Bloomberg and the European Federation of Financial Analyst Societies.
“I am pretty happy about the state of demand for our bonds,” English said, adding that buying from Asian central banks and Chinese investors was continuing.
Annual economic growth is projected to accelerate to 3.2 percent in 2013, the fastest pace since 2005, from an estimated 2.3 percent this year, the Treasury said in a fiscal and economic update two days ago.
In an Oct. 26 speech, Wheeler said he didn’t favor cutting interest rates simply to target the exchange rate, citing evidence that past reductions had failed to quell currency demand. All 16 economists surveyed by Bloomberg News expect his next move will be to raise rates, most likely in the second half of 2013.
Last month, Wheeler said the high currency and weak domestic demand resulting from a slump in home building had harmed the manufacturing industry.
“It’s been tough for those guys,” English said yesterday, referring to manufacturers. “A number have found it really hard.”
The government hasn’t been presented with any “persuasive” means of curbing the currency’s gains, which also reflects the weak U.S. dollar amid near-zero interest rates, English said.
“There’s plenty of unconventional management going on around the world but not anything we’ve seen that would be beneficial in our circumstances,” he said.
The government doesn’t have a preferred level for the currency “because we don’t have the tools to drive it to a particular level,” English said. Its policy is to reduce costs and make local companies more competitive so they can cope with an elevated exchange rate, he said.
“Our export community has become more productive and efficient,” he said. “When I ask them, they talk about numbers like 75 cents and tell us they’d be sufficiently profitable at that level to encourage further investment. Five years ago they would have said 65 cents.”
New Zealand’s economic recovery has slowed in the second half of 2012 as a global slowdown hurt exports, curbed manufacturing and pushed the unemployment rate to a 13-year high of 7.3 percent in the third quarter.
“Those countries that survived the global crisis are now having to deal with countries that haven’t,” said Annette Beacher, head of Asia-Pacific research for TD Securities Inc. in Singapore. “Those sectors that are currency sensitive need to adapt and need productivity and they need efficiency rather than just waiting for the currency to rescue them again.”
A government report today showed third-quarter growth of 0.2 percent from three months earlier, after a revised 0.3 percent expansion in the three months through June. The result was half the 0.4 percent growth pace economists predicted, according to the median forecast of 13 estimates in a Bloomberg survey.
“We are disappointed with what looks like a softer labor market because that’s the measure for a lot of people of sustainable growth,” English said.
Christchurch, New Zealand’s third-biggest city, was hit by a series of temblors in 2010-11, including a Feb. 22, 2011 quake that killed 185 people and shut the central business district. The reconstruction cost is estimated at NZ$30 billion ($25.2 billion), the Treasury said this week.
Milk powder prices fell to a three-month low yesterday, according to auction results from Auckland-based Fonterra Cooperative Group Ltd. (FCG), the world’s biggest dairy exporter. Prices have gained 23 percent since mid-July, prompting the company earlier this month to raise its forecast payment to New Zealand farmers.
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