Financial Risks and Currency Need Continued Focus

Financial Risks and Currency Need Continued Focus - 21 September

Looking towards the Reserve Bank of New Zealand’s (RBNZ) OCR decisiontomorrow, the exchange rate remains at a level that is putting a lot of pressure on manufacturers and exporters. Building financial stability issues, here and abroad also present a significant future risk, say the New Zealand Manufacturers and Exporters Association (NZMEA).

NZMEA Chief Executive Dieter Adam says, “The exchange rate remains overvalued, adding significant pressure to manufacturing and exporting businesses, hitting margins and competitiveness, both in our vital export markets such as Australia, and for those competing against imports in New Zealand.

“We need to see the downward correction of our currency restart. The longer it remains significantly overvalued, the bigger its effect will be on manufacturers and exporting businesses, hitting their ability to invest in the future, through R&D, new equipment and staff. New Zealand manufacturers operate against global competitors, and this investment is vital to ensure we remain competitive and productive into the future.

“We would encourage the RBNZ to continue moving the OCR downward and closer to rates seen in the rest of the world, to spur inflation to the target range and help our currency move along a downward path.

“However, we face a potentially much bigger threat from growing financial stability risks, both in New Zealand and globally. New Zealand’s debt-to-income ratio has now reached levels higher than before the GFC – sitting at 165%, which is significantly higher than a year ago at 159%. This build-up of private debt leaves New Zealand more exposed to global risks, as well as increasing the potential for disturbance in our housing market. This is not an abstract threat to our economy, it is a tangible threat to many New Zealand households exposed to debts they may no longer be able to service if economic conditions change, be that a loss of an income, or an increase in interest rates on their debt.

“We know from experience during the GFC, the large effect such crisis can have on all parts of our economy, especially our manufacturing sector where many rely on export income. In our NZMEA survey, export sales made up 60% of sales for respondents in July.

“The RBNZ should continue their work on shoring up our financial system against potential stability threats and expand their tool-set of macro-prudential tools, including exploring debt-to-income limits on property lending.

“It is worth remembering that RBNZ’s responsibilities currently are inflation management and financial stability. The responsibility for rising housing costs lies with the Government.

“It is important that the work on housing continues, to give the RBNZ the freedom to deal with inflation, stability and the resulting exchange rate. There has been progress on the supply side, with the Auckland Unitary Plan, however, there are still additional measures that could be undertaken on the demand side of the equation. “Says Dieter.

© Scoop Media