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It May Be Too Late to Send Money Offshore

By David McEwen

Saturday 16th September 2000

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Many people have responded to the collapse in the New Zealand dollar by sending their money offshore. This is a bit like selling shares after they have gone down in value and investors run the risk of locking in losses.

There is no doubt that the recent decline in the kiwi currency to a 15 year-low is shocking but investors need to consider what stand to gain or losing by buying what now are highly expensive overseas assets. If the dollar continues to go down, then they would gain some benefit. However, there are equally good reasons for thinking the dollar may go up again, in which case they will lose.

Some forecasts suggest the New Zealand dollar could rise by 20% over the next few months and it has already recovered from the low point that attracted all the headlines.

One of the reasons given for the loss of confidence in our currency is New Zealand's large current account deficit - we spend more than we earn. The gap has to be made up by borrowing and as our debts get larger, international investors get more nervous. With an annual shortfall of 8% of gross domestic product (gdp), New Zealand has the largest deficit in the developed world.

In some ways, a low dollar will be good for us because it will make imports more expensive and deter unnecessary spending. Combined with higher prices for our exports, this may help shrink our deficit.

Another reason for the weakness in our currency and many others including the Australian dollar and the Euro is the strength of the US currency.

Ironically, America is also running a large deficit. However, the US economy is booming so investors don't seem to mind its structural imbalances. Recent figures show the US deficit grew to $US106 billion in the second quarter to June 30 from $101.5 billion in the first three months of the year. The total for the year is forecast to be more than $US400 billion - or around 4% of gdp.

Some economists believe this gap cannot be sustained without affecting the economy, in much the same way that a large deficit has hurt New Zealand.

Harvard University professor Ken Rogoff is quoted this week as saying that the deficit is the "Achilles' heel of the economy" and that if foreign investors lose confidence, they could drive down the value of the US dollar by 50%.

Imagine what that would do the value of US dollar denominated assets, especially those purchased now with a weak New Zealand dollar.

Such volatility in exchange rates may be helped slightly if a transtasman currency is introduced. Although a combined Australian-New Zealand dollar has been discussed by academics and businesspeople for some time, it now appears to be receiving support, or at least not outright rejection, by politicians.

So assuming it is not the right time to be sending your money offshore, where should it go? While the dollar remains low investors can benefit from any asset that earns foreign currency. It could also prove rewarding to buy into assets that are likely to appeal to foreign investors, such as forests. These must be in bargain basement territory for anyone with US dollars to spend and someone is bound to take advantage of this before long.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. He is commissioned by the New Zealand Stock Exchange to write an independent personal investment column. He can be reached by email at davidm@mcewen.co.nz.

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