COOK ISLANDS
One of the world’s most desireable places to live achieving first world living standards and OECD status for such a small country for its 3.9 million citizens. Due to New Zealand’s relatively small size and geographical proximity, their national currency also referred to as the ‘kiwi dollar’ has experienced volatility in valuation particularly over the last 20 years. More recently 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.
POLITICS: the government of Prime Minister Helen Clark when they first took office impacted the kiwi dollar negatively as some of their socialist agenda helped precipitate this exchange depreciation. Although currencies tend to overshoot their highs and lows as the low of 38.5 US cents was viewed as an anomaly. The national government has implemented higher top marginal tax rates to 39 percent for income starting at $60,000 NZD, nationalizing health care with exploding costs, re-introduced collective bargaining for unions, etc. After moving more towards the centre politically, Prime Minister Clark was re-elected in July 2002, fell short of an outright majority government but has formed a majority coalition government. The centre-right leaning National Party fell to a distant second place showing while the very right New Zealand First which supports anti-immigration policies saw a large gain in popularity by voters.
Prime Minister Clark is committed to various business friendly policies with a goal to change investors perceptions that New Zealand is strictly an old line commodity based economy. The government is taking course to divesify into higher paid knowledge industry jobs. Prime Minister Clark must be coignant to the fact that many investors regard the implementation of some socialist government policy as a step backwards - a relatively small OECD economy with a volatile currency vulnerable to shift in investor sentiments. Higher taxation levels particularly on high income earners may further promote the ‘brain drain’ and result in a lower savings rates. A key plus to New Zealand is that the overall government in world rankings is regarded as one of the most honest with very low corruption, an honest fair country!
ECONOMY: New Zealand has undergone significant economic restructuring over the last 15 years in order to compete globally. 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. Prime Minister Clark has an ambitious economic platform for future New Zealand with 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
GDP as measeured by purchasing power parity is at $75.4 billion USD (2001) equivalent to $19,500 USD (2001). GDP growh for year 2003 projected at 3.3 percent, 2002 was at 2.8 percent, 2001 at 2.4 percent. Year 2001 inflation at 2.0 percent. A significant reason for the crash of the kiwi dollar in 2000 was the prevalent difficulty of the current account deficit reaching where it peaked in 1996 at $5.9 billion USD and staying at high levels up an until year 2000 at 7.5 percent of GDP. The current account has corrected itself somewhat with 3 percent deficit estimated for 2003. The income deficit is also a serious problem reflecting New Zealand’s high external indebtedness with net foreign liabilities at around 100 percent of GDP when compared to New Zealand’s expenditure based GDP measured at $30.2 billion USD. On the plus side, gross public debt is modest to low at 30 percent of GDP. Great strides have been achieved on the fiscal account as New Zealand has an excellent track record of prudent fiscal management as 2002 recorded a budget surplus of $1.1 billion USD. Moreover, New Zealand has had a history of strong foreign direct investment monies.
POSITIVES: fiscal budget - operating surplus expecting to increase to 2.5 percent of GDP in 2003/04, bio-security is taken very seriously to protect the agricultural industry from diseases such as foot & mouth - excellent track record in this regard. CONCERN: inflation is moving higher, 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.
ECONOMIC FORECAST: is favorable with economic restructuring, greater efficiencies, higher world commodity prices, recovery of Asian economies and the eventual diversification into ‘New Economy’ information-based industries although currently lagging other OECD countries.
BANKING SYSTEM: monetary tightening during 2002 as the official cash interest rate is at 5.75 percent for February 2003. The Reserve Bank of New Zealand does manage the kiwi dollar competently and has inflation targets of 0 to 3 percent range although it prefers annual inflation in the 2 to 3 percent area. Total official reserves as of December 2002 are at $9.43 billion NZD.
REGIONAL: Australia, APEC
The stronger Australian economy has been performing quite well which has attracted young intelligent New Zealanders seeking work in Australia as the ‘brain drain’ resulted in a population drop of 11,000 for New Zeland during 1999 alone. Hong Kong and other Asian trading partner economies are garnering strength. Hong Kong is wanting a closer economic relationship with New Zealand. As of January 1, 2002, Singapore and New Zealand have enacted a free-trade deal. In addition to Asia, New Zealand is trying to get a trade deal with the United States.
KNOWLEDGE: 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 pecent of New Zealand’s exports and this figure will continue to climb with China’s growing need for resource commodities to help fuel its masive 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 crisis 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.
CURRENCY: ISO symbol ‘NZD’, New Zealand dollar also referred as the ‘kiwi’ dollar. At time of review on February 20, 2003, the kiwi dollar had an exchange value of 55.25 US cents. The New Zealand dollar floats in the currency markets. The kiwi dollar to a large degree mirrors movements in the Australian dollar of which the Auzzie dollar is also currently appreciating versus a weakening US-dollar (‘USD’). Year 2000 saw a big crash in the kiwi dollar as it fell 30 percent, year 2001 it was stable and year 2002 big gain reversing upwards 30 percent in value. As measured with the concept of purchasing power parity, the NZD as of February 14, 2003 is 18 percent undervalued when compared to the USD. Therefore, over the very long term, it is expected that the NZD will appreciate to the USD to correct this misalignment in exchange valuation.
CURRENCY HISTORY: in 1985 the kiwi dollar also hit a low of 45 US cents and by 1988 hitting a high of 72.5 US cents. Again, during the 1990’s, history repeats itself. In year 1992 at 55 US cents, 1997 high of 70.4 US cents and by November 1999 the exchange was at 50 US cents. More recently, in January 2000 at 50 US cents, November 2000 low at 38.5 US cents, rebounding in late November/December 2000 to 40 US cents. This exchange history reveals the volatility of the kiwi dollar with the 15 year average exchange at approximately 57 US cents. Historical valuations for the kiwi dollar include: January 1991 at 59.88 US cents, Janaury 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 42.55, December 2002 at 51.28 US cents. Historical currency crisis dates include August 1975, July 1984, December 1985, October 1987, November 2000.
CURRENCY FORECAST: modest appreciation for the kiwi dollar in relation to the USD for year 2003 projected with a strengthening New Zealand economy. 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 high of 60 US cents for the NZD. With respect to interest rate differentials, New Zealand presently has higher rates than the euro zone and the United States which will further continue to attract capital inflows into New Zealand. The government is also entertaining 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. Otherwise, the long-term potential for official dollarization with the Australian dollar as new national currency for New Zealand is the most likely scenario. New Zealand corporations and government to continue the trend to issue debt in New Zealand dollars rather than in foreign currencies. As time marches forward, BI.C 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. UPDATED: February 20, 2003.
