By Alex Tarrant
Rising demand from Asia-Pacific central banks for New Zealand government bonds is one factor keeping the New Zealand dollar at elevated levels, while also keeping the government's borrowing costs at record lows, Finance Minister Bill English says.
And while New Zealand, lumped in with Australia, was viewed as the least ugly in a lineup of developed nations, that demand was likely to stay, he said.
But asked whether the government was worried that diversification by these central banks into New Zealand dollar assets was keeping upward pressure on the currency, English said it was the government's need for debt that was allowing that to happen.
That meant the government needed to focus on getting its books back to surplus so it could slow and then decrease the amount of debt it issued.
Speaking to a Victoria University-Peking University Conference on Contemporary China, English noted how the Chinese government was investing in New Zealand government bonds, contributing to record low borrowing rates for the government.
"New Zealand is seen as a relatively safe haven in these difficult times and Chinese authorities want to diversify their international bond holdings," English said.
Asked after his speech whether the New Zealand government had discussed the issue with the Chinese government, and whether it was aware the Chinese government had a quota for its NZ government investments, English said discussions had only been held at a higher level about the soundness of the New Zealand economy.
“They have vast reserves and we’d be a very tiny proportion of their investment programme," English told media in Wellington.
“But increasingly Reserve Banks in the Asia-Pacific area have been interested in New Zealand government debt because we are seen as a stable, developed country with moderate economic prospects," he said. See Gareth Vaughan's May 2011 article: China's giant sovereign wealth fund ready to spend NZ$6 bln on NZ assets and government bonds.
Asked whether he thought that investment in New Zealand Government bonds was helping keep the New Zealand dollar elevated, English said:
“What keeps the dollar up is actually our need for debt. As we get closer to surplus, our rate of increase [in debt] will slow down; when we get to surplus we’ll stop growing our debt. That will help with the dollar.”
“[With respect to government bonds] it’s not the investors who keep the dollar up, it’s our need for debt. They only turn up because we are going out to borrow money. One thing we can do to take a bit of pressure off the dollar is to get to surplus so we don’t need to be out there borrowing more money," he said.
Asked about his thoughts on foreign central banks increasingly diversifying their assets, which would mean more demand for New Zealand dollars, English said:
“In general, with respect to government bonds, they can only demand as much as we are supplying. We intend to get to a position where we don’t need to be issuing new debt.”
The New Zealand dollar was driven by a lot of different forces, he said.
“They change week to week: Some weeks we’re seen as a safe haven, other weeks we’re seen as a risky investment. The markets can’t quite make up their mind. But in general the government can take some pressure off the dollar by getting to a position where it doesn’t need a whole lot more debt. That would help. But it doesn’t guarantee the dollar at any particular level," English said.
The government would "prefer that the New Zealand dollar was a bit lower so that we could get the rebalancing in our economy moving with a bit more momentum," he said.
“It is a continued challenge for exporters to be able to be profitable at 80 cents in the US dollar, and they need to be profitable so they can reinvest in export growth.”
The government had advice that New Zealand government bonds were seen as an attractive destination by foreign central banks looking to diversify their holdings, and New Zealand was often bundled with Australia.
“The market takes some pretty simplistic approaches to the world," English said.
“Australia and New Zealand are seen as a pretty positive economic story: Politically stable, got some reasonable prospects of economic growth. In the developed world that’s unusual. So as long as that is the case we’re going to be the least ugly in a beauty parade of developed economies, none of which look too good," he said.