Forum Archive Index - May 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Lindley,
 
>
> 
>I know there must be stats out there somewhere about prices, but
>I've only been able to find the combined ANZ commodity index which
>doesn't look too bad. Is there a long-term trend downwards in
>commodity prices for NZ goods? Would it then be safe to assume the
>NZD will follow this trend unless we suddenly all turn into
>bio-tech/IT gurus.
> 
> 


Coming in late to this discussion, but the ANZ New Zealand Economic 
Focus March 2002 edition has just risen to the top of my reading 
list.  You can look at it yourself here:

http://www.anz.com/nz/tools/library/EF/ef20020306.pdf

In there you will find an article 'Capital Flows and the New Zealand 
Dollar', where you will find an ANZ economist has written a piece 
on why economists have been so poor at estimating in which direction 
the $NZ will go in the last few years.

In essence the argument goes like this.

If a country (NZ) has a current account deficit (buys more overseas 
than it sells) then there are two ways to balance this equation.  NZ 
can either borrow money overseas, or alternatively some big overseas 
corporation can throw money NZ's way by investing capital in NZ.   

Borrowing money, or getting a lump sum capital investment 
from overseas: Whichever happens the guard at the border just sees 
money coming in.   He neither knows nor can distinguish what is 
borrowed money and what is overseas investment by a foreign 
corporation.  So if the guard can't tell the difference, why does it 
make a difference?  It makes a difference because there is a 
different behaviour associated with a New Zealand bank borrowing 
money overseas to fund the NZ consumer, and an overseas corporation 
investing a large lump of capital in NZ.

A foreign equity investor, for example a foreign multinational taking 
over a New Zealand company, tends to see their investment in NZ as
permanent, so any form of currency hedging to 'spread the risk' is 
not feasible.  This means such lump sum investments require the 
overseas multinational to buy New Zealand dollars to complete the 
purchase (so the $NZ goes up).

By contrast a New Zealand bank, or company, borrowing overseas sees 
such debt as something that will eventually be repaid, and 
temporary.  Because they can see an end to the loan they usually 
hedge it, which means they will have fixed instalments of interest 
to pay in the future without having to worry about what the currency 
is doing.  Seen in $NZ terms, the borrowing is cancelled out by the 
hedging and so whatever happens to the $NZ in the future is of no 
interest to the New Zealand company, or the hedger, as the deal has 
been already sealed.

According to this new theory as I understand it, the amount of debt a 
company /country is in, thanks to the rise of hedging, or even our 
export trade receipts which are also largely hedged these days, now 
makes very little difference to the direction the New Zealand dollar 
will move.  The way the dollar will go is going to be largely 
dependent on large movements of capital.   Because the average New 
Zealand investor is now being encouraged to move their capital 
offshore into 'overseas share funds', and I guess unhedged profits 
from overseas corporations are being remitted overseas; then this 
means that the $NZ will remain on a long term downtrend.  In other 
words the current rise in the $NZ, without overseas interest in the 
NZ sharemarket or individual NZ assets,  is just a blip of hot money 
coming in to take advantage of our higher interest rates.

The conclusion seems to be that if 'the guard' was more vigilant in 
distinguishing capital flows and debt flows they would be a lot 
better at picking which way the $NZ will go.

One thing puzzles me with this explanation though.  *Why* do the New 
Zealand companies hedge their sales and debt cash flows, but the 
overseas corporations that invest in New Zealand seemingly do not?  
Can anyone out there offer an explanation? 

SNOOPY


 


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