By Roger J Kerr
The events and forces that were expected to turn the Kiwi dollar out of the 0.8000’s and drive it downwards have prevailed and delivered the lower currency value.
The list is long and constructive - lower global growth, weaker US sharemarkets, interest rates lower for longer, lower commodity prices (particularly WMP), a weaker Euro currency value on no credible solution to the European debt crisis and finally the “coup de gràce” hitting the screens early Friday morning as Fitch downgraded NZ’s sovereign credit rating.
No-one was really expecting the rating agencies to suddenly mark New Zealand down at this time, however given the high external debt levels and Current Account deficit the prospect of lower commodity prices and higher internal budget deficits going forward on top, was enough to turn Fitch’s and S & P’s measurement metrics.
However, it did seem that Fitch suddenly realised that New Zealand’s external debt to GDP ratio was above other AA rated countries and it was an outlier that could not be allowed.
Our total external debt ratio to GDP has actually reduced over the last three years; however what has changed is the investment world has become much less tolerant of high debt levels as a result of the European debt crisis.
Our ability to service and repay debt has not materially changed, the world’s sensitivity to debt has changed and a lower sovereign rating is the result.
The pressure is now firmly on the National Government to meet their forecasted return to budget surplus by 2014/2015.
The task is much harder than a few months ago due to higher Christchurch earthquake costs and slower GDP growth reducing tax revenues into the Government.
The Government needs the economy to grow and, as always, that can only come from the engine room of the export sector.
Thankfully, the now lower NZ dollar value will be a boost to exporter’s confidence, output and profitability.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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