IMF says NZ$ overvalued

IMF says NZ$ overvalued

The New Zealand dollar may be overvalued by 10 percent to 25 percent and needs to fall to help narrow the country’s current account deficit, the International Monetary Fund said.

With the currency being such an important driver for returns for NZ exports and variability of income for the NZ farmer these two stories are worth a read.

“The exchange rate is overvalued from a medium-term perspective, while recognizing the uncertainty surrounding the estimates,” IMF directors concluded, according to staff report from the Washington-based lender yesterday in Bloomberg. The fund reached its findings after discussions with the country ended May 12. NZis weathering the worldwide financial crisis better than most advanced countries in part because of strong demand from Asia, the absence of a banking crisis and a flexible exchange rate, the IMF said. Its economy should grow by about 3 percent this year and next, according to the fund. New Zealand’s exchange rate has climbed more than 20 percent since early 2009, the IMF said.

The country’s medium-term budget outlook has worsened and challenges include reducing “vulnerabilities associated with a deteriorated fiscal position and high private external debt,” the IMF said. The budget picture has worsened because income-tax cuts and spending initiatives were permanent and revenue projections have been reduced, it said.“The exchange rate would need to be significantly lower for an extended period of time for New Zealand’s external liabilities position to be materially reduced,” the IMF said.Reserve Bank of New Zealand Governor Alan Bollard said May 19 that a gradual weakening in the currency is desirable to boost exports and curb demand for imports.
 

And the second story from an ex meat man's perspective was gleaned from Alan Barbers blog.

There has been a bit of comment recently about meat companies failing to take advantage of the high dollar for foreign exchange gains, as though it’s a guaranteed route to increasing profits which would of course be reflected in livestock payments. If only it were that simple!Like any export business, foreign exchange control is an important part of a meat company’s business activity, just as important as procurement, processing and marketing. Without it, financial performance would fluctuate wildly, causing both substantial gains and losses. But there seems to be confusion among at least some in the farming sector between foreign exchange cover as risk mitigation rather than currency speculation.

In the recent edition of Heartland Beef, Rob Kirk, Regional Chair of the Sheep and Beef Council, was quoted as suggesting meat companies should take advantage of the exchange rate when the NZ dollar is strong in relation to the currencies of our major trading partners, by buying foreign exchange as a hedge against a weaker dollar. Delegates at a recent Federated Farmers agribusiness seminar expressed much the same thought.

A chat to a couple of meat company senior executives confirmed this wasn’t a great idea and could quite probably mean they would breach their banking covenants. One tongue-in-cheek question was whether farmers would be prepared to wear the losses, as opposed to gains, when the exchange moved in the opposite direction to that expected. As a matter of interest, one meat company, long since absorbed by industry rationalisation, used to have a currency trading function within its treasury department which one year made virtually all its reported profit. That’s an example of speculation that worked, but it could just as easily have gone the other way.
 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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