Australia May Need 40% Currency Slump to Compete, Garnaut Says

Australia’s dollar, the world’s best-performing major currency of the past decade, may need to slump 40 percent to restore economic competitiveness as a local mining boom ends, said former government adviser Ross Garnaut.

Export industries in Australia unrelated to resources, such as services, tourism and manufacturing, will only recover if the currency weakens between 20 percent and 40 percent, Garnaut, who is now an academic, said on Channel Nine’s “Financial Review Sunday” program yesterday.

The Aussie fell 7.7 percent in May as the nation’s central bank cut interest rates to record lows to soothe exporters and retailers hammered by currency gains. That’s only the start of a transition that will also make travel, fuel and foreign electronics costlier for Australians, said Garnaut, who advised former Prime Minister Bob Hawke during a 1980s economic overhaul.

“We need the reduction in the real exchange rate as soon as possible,” Garnaut said on the program. “Once it starts to fall a lot, with a lag, we’ll start getting investment into non-resource export industries again.”

Australia’s government said May 22 that the country’s resources-investment boom may be at its peak after A$150 billion ($144 billion) of projects were scrapped or delayed. Demand for commodities, led by China, had sent the Australian currency soaring, undermining some industries’ ability to compete.

Ford Motor Co. said last month it will stop making cars in Australia, nine decades after founder Henry Ford first began building Model Ts in the country.

‘Hit Badly’

“We need to put resources into export industries, especially the export industries that have been hit so badly by the resources boom and the high exchange rate,” Garnaut said in the interview.

Australia’s dollar has still surged 47 percent against the U.S. dollar in the past 10 years, more than any other major rival. It fetched 95.71 U.S. cents on May 31 in New York. Last month’s decline was the biggest for the currency since a 9.8 percent plunge in September 2011.

China’s resources boom “will soon end,” Garnaut said in a speech in Melbourne last month. The Aussie may have to reach 70 U.S. cents before the economy can make the transition, he said yesterday.

“It does require a pretty wide understanding among Australians that we’ve got a problem,” said Garnaut, who was ambassador to China from 1985 to 1988. “We’re only at the start of understanding that.”

Reserve Bank of Australia Governor Glenn Stevens, who has slashed benchmark borrowing costs by 2 percentage points over the past 19 months to 2.75 percent, should take further steps to weaken the currency, according to Garnaut.

“The best way to do that would be just to continue with reductions in interest rates,” he said.