Eugene Coyle wrote:
>
> What are the recent developments that have contributed to the currency
> meltdown in New Zealand and Australia?
>
> They are two commodity-dependent states selling into markets with weak
> prices. But that has been known -- is anything new happen to explain
> the dollar values melting like an ice-cream cone in July. (Northern
> Hemisphere.)
The first answer is that I'm not sure that there is a meltdown, at least in
recent months, unless you call the Euro's fall (for example) a meltdown too.
Certainly the value of both currencies have dropped considerably. You might like
to read a recent speech by the Governor of the Reserve Bank of NZ, Donald Brash
(http://www.rbnz.govt.nz/speeches/0097094.html) which, apart from showing some
bewilderment at the movement of the New Zealand dollar, makes some interesting
observations, including:
"Between the beginning of 1999 and the end of September this year, for example,
the Australian dollar and British pound depreciated by about 12 per cent against
the US dollar, the Swedish and Norwegian currencies by about 16 per cent, the
Swiss franc by about 21 per cent, the New Zealand dollar by about 23 per cent,
and the euro by almost 25 per cent. Clearly, the fall in our currency is not
just the
result of the New Zealand dollar being the currency of a small economy: the
currencies of much larger economies have also fallen significantly against the
US dollar in recent times."
So the largest part of the "fall" is simply the strength of the US dollar. But
there definitely has been a fall in the medium term, a fall which began with the
financial crisis in Asia. Brash again:
"Between its peak of more than 71 US cents in November 1996 and its trough of
just over 40 US cents
at present, the New Zealand dollar depreciated by some 44 per cent against the
US dollar, a substantial depreciation over less than four years in anybody's
language. Measured against the Reserve Bank's trade-weighted index (TWI), which
measures the New Zealand dollar against a basket of five currencies, the fall
was somewhat less dramatic, from 69 in late April 1997 to around 47 at present,
but that still represented a depreciation of 32 per cent. Whether measured
against the US dollar or against the TWI, the New Zealand dollar is currently
close to its lowest level in history."
It would be convenient to attribute the fall to the election of the centre-left
Labour/Alliance government in Nov 1999, but as you can see, the fall began well
before that - though perhaps the growing political senility of the previous
government and the inevitability of a change could have caused pre-emptive
capital flight, and there is evidance of that. Though capital flight is
occurring, it is mostly not yet a massive movement. Rather, it is taking the
form of moving investment to more liquid forms (debt securities to deposits
etc), and in withdrawal of large foreign portfolio investors from the share
market. Short term foreign debt (private plus official) has risen from 43% of
the total in March 1999 to 50% in March 2000.
I'd attribute the fall so far mainly to the huge current account deficit (7% of
GDP, 22% of G&S exports) and debt (105% of GDP and 329% of G&S exports). It
would have happened eventually whatever government was in power. But it is
undoubtedly reinforced by the furious reaction by most business leaders here to
the mild reforms the new government is putting in place. They of course pretend
the dollar's fall to be a sign of the inadequate financial management of the new
government. In fact, without it, there was no hope that the economy would reduce
its import addiction and increase its exports sufficiently ever to bring the
current account into balance. It is unlikely even at the current exchange rate,
because the current account deficit is almost entirely due to a deficit on
investment income ($6.6b of the March 2000 $7.3b deficit), and the destruction
of many potential import substitution industries after 15 years of trade and
investment "liberalisation".
But capital flight could happen at any time. The Labour majority of the
government is currently forcing through Parliament (in alliance with the
right-wing parties just ousted from government, because its coalition partners
oppose it) a free trade agreement with Singapore, which it wants to be the
forerunner of a much wider free trade area. This is a political statement as
much as a real change, given New Zealand's almost tariff-free and unrestricted
investment regime. It says to the "markets" - don't be scared, don't run away,
underneath all our social democrat veneer, we're still with you.
Bill
