What to do about the Currency?
October opinion and editorial contained megabytes of copy about our currency. Experts and pretenders of every persuasion – Governor, Prime Minister, other economists and politicians, business leaders, manufacturers, traders, journalists – all had a go at defining the scope of damage and untying the Gordian knot of an elevated foreign exchange. My pile of cut-out articles spills across my desk. Confusion reigned until, with your help, I began to unpick it all. Thank you for your thoughtful contributions.
The first untangle came from Graham Wheeler, our new Governor, who hosed down a perceived ability of the central bank to make much of a difference to the exchange rate. His stance was orthodox, reiterating his focus on price and financial stability rather than the exchange rate (though he did find its level “undesirable”), and holding that intervention via the OCR would have minimal and fleeting impact on the rate. More, he played down the efficacy of his supplementary macro-prudential tools, which he would deploy rarely and solely in order to reign in financial system excesses.
Little room for manufacturer optimism here! So, what to do?
Numerous experienced chairs and directors, one even a Reserve Bank director, made the effort to respond privately to my invitation. Much appreciated. I have here classified their suggestions into the macro and micro.
Non-monetary Remedies at Macro level
- Rebalance economy and investment away from property, with fiscal tools probably including Capital Gains tax.
- Compel savings – by fiscal carrot.
- Apply a levy on interest, so that inflows to fuel our property boom are stemmed, investment has to meet a higher WACC, and the NZD becomes less desirable.
- Motivate smarter investment choices throughout the economy, and quit duplicated infrastructure.
- Drive business growth through positive coherent policy.
- Tackle the intractable costs to generate more net taxpayers. (e.g. Super at 65, Working for Families, social welfare at the fringe).
- Stabilise and balance the fiscal books, to steer us away from the PIGS’ situation – Kiwis are no more prudent nor selfreliant than Mediterranean people, and face the same national danger.
- Go for a longer electoral cycle, and an electoral system that allows tough decisions.
None of these is a surprise – e.g. their essence was laid out in 2010 in the Catch Australia by 2025 Taskforce Report. As commentators have noted, each piece is hard-headed economic common sense, but incapable of implementation in a polldriven government set-up. That is what the Greeks and Spanish found too.
Tactical Remedies at Micro level
- Hedge heavily at opportune moments (e.g. when dollar sold off).
- Shift business model to higher margin activities.
- Lift R & D to generate new business at satisfactory margins.
- Do Lean – take out cost the client won’t pay for.
- Package the solution in a way that flummoxes competition – e.g. use working capital as a weapon.
- Refine targets on smaller markets (down to province or city level) within stronger, more stable currency blocs (Generally SE Asia, North Asia, Australia, Canada, UK, and some Latin).
- Niche, niche, niche.
- And don’t kid yourselves that yesterday will return.
However you foreign exchange earners manage to cope and survive, the whole commercial community supports you in your struggle.
Sincerely,