Finance Mininster Bill English says the New Zealand dollar's current 'safe-haven' status is making the task of economic rebalancing difficult, although the status shows the rest of the world recognises New Zealand's in "pretty good shape," compared to most developed nations.
English also said that if the government was able to control the New Zealand dollar through interventionalist policies, it would, but New Zealand was too small to counter the financial forces which had created so much volatility in the global economy.
The Kiwi reached a new post-float high of 87.42 US cents overnight as debt ceiling talks in the US dragged on, with investors seeking alternative investments to the US dollar. That has seen demand for currencies like the New Zealand, Australian and Canadian dollars rise.
“It’s been interesting to watch events over the last two or three months, because we are now starting to be seen as something of a safe-haven, and that’s what’s been driving our New Zealand dollar higher against pretty-well all other currencies," English told Radio New Zealand.
"We’ve got a solid government that’s making good decisions, an economy with some positive prospects, and that is now almost unique in the developed world. It puts us alongside Germany, Australia, to some extent Canada, and that’s about it,” he said.
English had “given up guessing” how high the Kiwi dollar could go.
“It makes our job of rebalancing this economy more difficult, but it is an indication that relative to other developed economies we are seen by others as being in pretty good shape,” he said.
Asked about risks to New Zealand’s recovery, such as falling commodity prices, English said any negative scenario could be imagined.
“And there are combinations, such as a continually rising dollar and dropping commodity prices, which would be pretty negative for New Zealand. But we have been remarkably resilient through the last two or three years – it’s all been hard work up until now with the global recession, the earthquake, big debt problems from the last 10 or 15 years that we have to deal with. But we’ve dealt with it pretty well," English said.
"I’m confident that whatever the global economy throws at us, we’ll be able to deal with it even if it takes a while to come right again," he said.
'Invest in NZ and you're likely to get your money back'
Meanwhile speaking on Newstalk ZB this morning, English agreed the politics being played out currently in the US was ‘the worst kind of politics’.
“It’s something that’s occurring to some extent in Europe and it’s brinkmanship in the US where they just don’t seem to be able to get the political focus together to make some pretty obvious decisions," English said.
"It’s one of the advantages we have as one of a relatively small number of countries where we’ve got a solid government that’s well organised, that’s making good economic decisions. We’ve got our debt under control, we’ve got a toolkit sitting there ready if things go wrong as a result of the US standoff,” he said.
The government had to be ready for the worst these days, because the global economy was becoming so volatile.
“We’ve had 2008 - the Lehmans crash, then we’ve had the Greek crisis, we’ve had our own earthquake. Now we’ve got the US in trouble," English said.
“The way we’re seeing it is that as these events unfold, New Zealand, along with Australia, to some extent Canada, is seen increasingly as ‘safe-haven’. So it’s a place where the international financial markets can send their money knowing that the rules are clear, and they’re likely to get their money back," he said.
"That’s one of the things that’s driving our exchange rate so high against pretty much any other currency in the world.”
If commodity prices drop, so should the NZ$
The rising exchange rate, coupled with falling commodity prices was a problem.
“We’ve been concerned about the exchange rate for quite some time. I would imagine though that if things do go bad in the US, then commodity prices will come down, and the New Zealand dollar is likely to come down," English said on Newstalk ZB.
"So if things go badly, we do have a toolkit there to make sure that New Zealand has the capacity to get the credit that it needs. We went through all of this in 2008 when the markets froze up -the Reserve Bank and the Treasury did a good job of devising a toolkit," he said.
Asked if this meant credit lines from China, English said that would be a small part of the toolkit.
“The more important ones are the facilities the Reserve Bank have set up that would enable our local banks to borrow from the Reserve Bank. Now we see that as an unlikely event, but we’re ready for it," he said.
"What’s more likely to happen is that if the US gets in further difficulty, at least in the short-term, we won’t be affected by that directly. We would then have to wait and see what happens to commodity prices in particular, and whether that pulls our exchange rate back down.
"But one of the things this high exchange rate does demonstrate is, we’re in a relatively unique position in the developed world of having good economic prospects, with our debt under control. And there’s really one a handful of other countries in the same position, and that’s why we’re seen as a safe-haven,” English said.
Chch will help
A lift in rebuilding activity in Christchurch was approaching, which would add to growth prospects.
“And even on the commodity price side, those commodity prices could come down a bit, and they would still be at 20 and 30 year highs,” English said.
'If we could influence the NZ$, we would'
New Zealand was too small against the forces in the world economy to be able to intervene in currency markets to drive the dollar down, “when you have that much concern in the markets about the US dollar”.
“These are unprecedented events, and if we could influence them we certainly would, because a lower dollar would help our economy rebalance away from borrowing and consumption to savings and exports faster," English said.
“New Zealanders have been incredibly resilient. They’ve been saving money anyway, our exporters have kept exporting despite the fact that the dollar has been rising consistently now for quite a number of months. If we can maintain that kind of resilience, then I’m confident we can deal with whatever they throw at us,” he said.
(Updates with Newstalk ZB comments, correct punctuation in fifth par from "Australia to some extent, Canada," to "Australia, to some extent Canada,")