BusinessDesk: IMF backs NZ government path to surplus as ‘ambitious’ but not ‘dramatic’; Outlook for NZ good, but not great

BusinessDesk: IMF backs NZ government path to surplus as ‘ambitious’ but not ‘dramatic’; Outlook for NZ good, but not great

By Paul McBeth

The International Monetary Fund is backing the government’s plan to return the budget to surplus by 2014/15 in what it calls an “ambitious” plan, but one that’s not overly “dramatic”.

IMF mission chief to New Zealand Brian Aitken told reporters in Wellington yesterday the global lending agency supports the National-led administration’s plan to get the books back in surplus as an appropriate balance between constraining public debt and protecting the economy.

“I don’t think we would want to see anything dramatic, but I don’t think the government needs to take dramatic action,” Aitken said. “It is a kind of ambitious deficit reduction plan.”

The IMF today released its preliminary concluding statement on New Zealand’s economy after a week-long mission, and Aitken said the “outlook for New Zealand looks good though it’s not great.”

The benefits of the government’s plan lay in withdrawing fiscal stimulus ahead of the earthquake reconstruction and private sector recovery, giving the government room to act in the event of another global shock, limiting pressure on interest rates to rise and helping contain an increase in the nation’s net foreign liabilities, the IMF said.

Prime Minister John Key yesterday said the government is searching for further savings in the public sector amid fears it might miss the surplus target, which are under threat from a weaker tax take and softer economic activity.

The IMF said the major risks to New Zealand’s economy are external ones, particularly how the European debt crisis plays out.

Aitken said the Reserve Bank has scope to cut the official cash rate, currently at 2.5 percent, in response to any major external shocks, and benign inflation expectations means rates won’t have to rise as much as they may have in the past.

That should lead to a lower exchange rate if it follows international experience, which needs to be weaker to bring the nation’s projected current account deficit to a more sustainable level.

The statement said the central bank’s accommodative monetary policy stance is appropriate, and given the high level of mortgages on floating rates, it will be able to remove stimulus quickly when necessary.

Aitken said the Christchurch rebuild probably won’t lead to major inflationary pressures as it will likely be a slowly phased project rather than a rapid explosion of activity. Any rising prices will likely be localised to Canterbury and the construction sectors rather seep throughout the nation.

The Christchurch rebuild is the major uncertainty, but because of New Zealand’s high level of reinsurance, the economic impact wasn’t as bad as it could have been, Aitken said.

Elevated house prices were also cited as a potential risk, though a sudden price correction was unlikely.

Aitken said it was unclear if the recent deleveraging by households was a change in behaviour, or if it was merely a symptom from people ramping up too much debt during the house price boom of the past decade.

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Mr Aitken makes an observation that not having to raise interest rates as fast as we have in the past, should bring the exchange rate down to help the current account to a more sustainable level. He is right to observe that the current account deficit is unsustainable, but all the evidence suggests the exchange rate will not come down without active management. He either knows this, but is acting on behalf of other country paymasters; or he is still working in the failed paradigm of free exchange rates, free capital movements somehow balancing themselves, even though most other major countries are actively managing their exchange rates down, either by printing money, or capital controls, or both.
Our interest rates are already historically low, and have been for some time, but the current account gets predictably worse. Merely maintaining interest rates will not help this at all (and if it was going to, it would have by now). Money will still move if it can, where there is a return, and where the rule of law and ease of doing business supports those moves. New Zealand is a prime example, and the government in fact has a big welcome mat out, and applauds upwards moves in the NZD. 
The asset sales, for example, on which the IMF appear silent (again to appease their foreign paymasters?) will actively increase the exchange rate. Suppose half of Mighty River Power sells for say $4 billion (and I would happily expand separately on why anything less would be a fire sale); and suppose that $4 billion comes from overseas over a year or two (understanding there will be a facade of pretense that it won't).  That $4 billion has to buy NZ dollars to pay for the purchase. That foreign exchange must raise the exchange rate; meaning that our exporters/ import substituters, and tourist industry yet again take the hit. So we lose the dividends from Mighty River Power, and we lose the benefit of yet more lost industry. 
In summary our current account is not going anywhere (meaning a constant loss of ownership and sovereignty) with the current Reserve Bank inflation/ interest rate paradigm. The asset sales will make it worse on steroids.
An alternative, just to use Mighty River Power as a small example, would be to recapitalise it by buying out its foreign creditors (over a $billion worth) by some NZ Quantitative Easing. This would sell NZDs and buy foreign currencies, so reducing the exchange rate, and would have a double current account win. We would save on interest costs, and the exchange rate would be better aligned, helping our export, import substitution, and tourist industries.
Only the lower exchange rate would be inflationary- but that is a necessary small step in rebalancing the current account, as the IMF notes. The recapitalisation would not be inflationary, as the extra money would flow offshore.

Stephen - by what means do you think the Govt  or RBNZ should actively bring down the currency ?  Maybe using the mechanisms that the Swiss have in the past couple of years that have to date produced losses to the tax payer amounting to tens of billions of Swiss Franc ?  Or maybe you have invesnted somethijng we don't know about ?

The fact you point out that the Swiss are one of the countries working extremely hard to keep their exchange rate down- even though they still have a current account surplus, and are one of the richest countries in the world- I believe strongly supports my argument that managing the exchange rate, current account, and industry competitiveness is being undertaken on a massive scale elsewhere, and if we don't we will certainly be the losers.
The Swiss are of course among the best financial managers on the planet, so to think they are wrong and we are right is naively arrogant in the extreme. (I'm not saying you do think this)
My understanding (and from your question, you no doubt know the details better than I do) is that the Swiss have been buying foreign currencies on a very large scale to keep their currency down. Their currency has stayed highish, but must be lower than it otherwise would have been. They also have interest rates at zero or close to it. The paper  losses you talk of are because the foreign currencies are still lower than the purchase price they paid for them, and so they have a book loss. They are though getting some return from the foreign countries for their money; and if they have printed it with quantitative easing then they are not real losses at all.
Because they still have a significant current account surplus, they will battle to resist their exchange rate rising. The fact we don't should help our cause.
In our case, the practical example I used of recapitalising MRP by paying off its debts would help; and would also send a strong signal to the markets that we have changed the rules, even modestly. In that particular case there is no risk of even the paper loss, as the debts are denominated in NZ$, or hedged to effectively be so.(although MRP managed to lose $100 million last half on the hedging- yet another reason not to have the debt in the first place) There may be more efficient ways to manage the rate down, but do so we really need to. 
NZ, for better or worse, is a cork in the ocean, even compared to Switzerland, although our currency is used as a plaything by much larger countries and companies. The Swiss have clearly made the point that exchange rate and industry competitiveness is more important than short term inflation. And I don't think they are dumb.
Why don't we even debate whether our current paradigm is the right one?

Come on, we have a currency trader/speculator as our PM. If anyone knows what it takes to spook investment banks and hedge funds out of the kiwi its him. He just doesn't want to do it. He thinks they give markets liquidity. I've said before the RB just needs to get unpredictable with small random OCR moves and they'd go play with someone elses currency. A currency can't go up and down 10-20% a month as it does on a regular basis on fundementals - its pure speculation. Guess the banks can't afford for foreigners to stop buying their bonds either

At a recent meeting with my Bank Manager (the top local Commercial Manager) we were both complainig about the exchange rate.  Turned out he thought it was to Low! LOL

put in a tiny tobin tax......really easy....but no we wont do that...not yet anyway.

The IMFarce is backing the government’s plan to return the budget to surplus by 2014/15...
IMF mission chief to New Zealand Brian Aitken told 'the media' yesterday the global lending agency supports the National-led administration’s plan to get the books back in surplus as an appropriate balance between constraining public debt and protecting the economy.
“I don’t think we would want to see anything dramatic, but I don’t think the government needs to take dramatic action,” Aitken said. “It is a kind of ambitious deficit reduction plan.”
Oh isn't that jolly good of him...and just by chance he comes out to pat John and bill on the back at a time when Joe Public can see National have nothing on beneath their kilt. Just pure good luck right John!.....bollocks.

Im not sure what you are saying here wolly...seems confusing.....aiming for a surplus is laudable....but then they should have been running one in the good times and they wouldnt do that they wanted to give tax they have to borrow, funny that...

Use your noggin steven....the statement was orchestrated to benefit the puppet dance!

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