NZ dollar should be 15% lower to cut current account: IMF   8 Jun 2012

Paul McBeth

The New Zealand dollar needs to be 15 percent lower to bring the nation's current account deficit to a more sustainable level, according to the International Monetary Fund.

New Zealand's external vulnerability is cited as the key medium-term issue for the country, which will need a better national savings rate and reduced reliance by banks on foreign funding, according to the IMF's concluding statement on the economy. That reliance on global funding assumes the Canterbury rebuild gathers pace and global interest rates get back to more normal levels.

The global lending agency sees New Zealand's current account deficit rising to 7.1 percent of gross domestic product and net external liabilities to 84.8 percent of GDP by 2016. That's worse than the Treasury's latest forecasts for a 6.9 percent current account deficit and 80.8 percent net foreign liability deficit in the 2016 March year.

"Staff analysis suggests that the New Zealand dollar is currently stronger than is consistent with a level of the current account deficit that is more sustainable over the long term," the report said. To stabilise external liabilities at the 2009 level, "the New Zealand dollar would need to be about 15 percent weaker than its current level."

New Zealand's trade-weighted index fell to 69.83 this morning from 70.08 yesterday. The Budget economic forecasts project the TWI falling to 63.0 in 2016, the end of its forecast period.

In April, the IMF preliminary statement on New Zealand backed the government's plan to get its own books back in the black by 2014/15, which will unwind fiscal stimulus as the Canterbury rebuild gets under way and offer headroom in the event of another global meltdown.

The IMF held to the same line in its concluding statement, saying lower net government debt will help contain the current account deficit over the medium term and reduce external vulnerability by lifting the national saving rate.


However, it questioned whether New Zealand's unique position, in that most of its external debt is private rather than public, raises the question "whether this would limit the ability of budget deficit reduction in the case of New Zealand to bring about a reduction in foreign liabilities more broadly."

The IMF also backed the government-appointed Savings Working Group's recommendations to shift more of the tax base to consumption over the medium-term and to index tax on interest income to inflation.

It said New Zealand's economy continues to grow at a modest pace, with GDP forecast to expand 2.3 percent in 2012, rising to 3.2 percent in 2013, though the size and timing of the recovery is uncertain due to the delays in the Canterbury reconstruction.

Europe's financial woes and a slowdown in the Chinese and Australian economies are seen as the biggest risks, though New Zealand has space to respond to adverse shocks, the report said.

The IMF said there is a medium likelihood of declining export demand and deteriorating terms of trade, which would reduce GDP growth in New Zealand. That could lead to a fall in household income, which would lead to lower house prices sap consumer demand and growth, it said.

If that downside scenario occurred, the IMF estimates it will trim half a percentage point from 2012 GDP growth and 1 percentage point in 2013.

(BusinessDesk)

Add a comment

Bookmark and Share

News

Body found in London park believed to be missing Kiwi

30 Sep 2014 News
London police believe a body found in a southwest London park is that of missing New Zealand man Malcolm McKinlay. Mr McKinlay, who... more

Uncovering the secrets of NZ's discovery

30 Sep 2014 News
Two scientific papers have shed new light on how Polynesian explorers may have arrived in New Zealand, but the authors have... more

Business

NZ dollar drops after weak Australian retail sales

1 Oct 2014 Business News By Suze Metherell
  NZ dollar drops as weak Australian retail sales sap demand for trans-Tasman currencies Oct. 1 (BusinessDesk) - The New Zealand... more

NZ dollar heads for 11% slump in Sept quarter

30 Sep 2014 Business News
By Paul McBeth Sept. 30 (BusinessDesk) - The New Zealand dollar is heading for an 11 percent slump in the September quarter as... more

Living

Three first places at the national Young Designer Awards

1 Oct 2014 Arts
ACG Strathallan   By Kennedy Anderson from ACG Strathallan, winner of Photography section, Young... more

Sargeson Lecture to Feature Award-Winning Novelist

1 Oct 2014 Arts
For those who have friends and family living in Hamilton, this might be of interest. Taking an imaginary place and making it seem... more

Property

NZ building consents flatline in August

30 Sep 2014 Property
By Suze Metherell Sept. 30 (BusinessDesk) - New Zealand building consents held steady in August from a month earlier, underpinned... more

Australia's Quattro in talks to buy NZ properties

30 Sep 2014 Property
By Suze Metherell Sept. 30 (BusinessDesk) - Quattro Asset Management, an Australian fund manager, is in negotiations to buy two... more

Migration

UK Government: Indefinite Leave to Remain made simple

30 Sep 2014 Migration
There are thousands of expats living in the UK who are aiming for permanent residency status and, eventually, a British passport. But... more

Migration boom rolls on as fewer kiwis depart

30 Sep 2014 Migration
New Zealand's annual net migration rose to a record in August, exceeding Treasury's forecasts, and spurred by more migrant arrivals... more

Travel

Travel tidbits and deals of the week

30 Sep 2014 Travel & Tourism
Some of the best travel deals going - both in New Zealand and abroad. Bookmark this page and check back each week for all the latest ... more

Air NZ's Luxon defends domestic regional air fares

30 Sep 2014 Travel & Tourism
By Paul McBeth Sept. 30 (BusinessDesk) - Air New Zealand chief executive Christopher Luxon has defended its pricing on domestic... more

Sport

Historic 1972 BRM Formula One car to race in New Zealand

1 Oct 2014 Motor Sport
NZFMR Historic 1972 BRM Formula One car to race in New Zealand An historic Formula One racing car with a strong connection to a New... more

New Zealand's Top sporting rich list

30 Sep 2014 Sport
The Herald reveals who they believe are the highest-paid New Zealand sports people and look at how they make a living on and off the ... more

Columns

Gordon Campbell on the last rites for the TPP

1 Oct 2014 Opinion By Gordon Campbell
The Trans Pacific Partnership trade deal is one of those litmus issues that has always had more to do with one’s place on the... more

Time to debate proportional representation

30 Sep 2014 Opinion
Article - Sridhar Ekambaram   Time to debate proportional representation By Sridhar Ekambaram30 September 2014 With the... more

Kiwi Success

UCOL Chief Executive Appointment

1 Oct 2014 Appointments
UCOL Chief Executive Appointment Leeza Boyce has been appointed as UCOL’s new Chief Executive to succeed Paul McElroy upon ... more

Business leader honoured

1 Oct 2014 Appointments
One of New Zealand’s leading businessmen is to receive the University of Waikato’s most prestigious award of Honorary... more

Recruitment

NZ's top pay packet revealed: $4.1m

30 Sep 2014 Recruitment
With a total pay package worth $4.1 million, ANZ New Zealand's David Hisco is the top-paid boss in the Business Herald's executive pay... more

NZ job market expected to strengthen - survey

30 Sep 2014 Recruitment
The job market is expected to strengthen and potential employees are increasingly looking at staying in New Zealand for work instead... more