Last Updated: March 2004
Survey of New Zealand's exporters in February 2004, by economic consultants Infometrics. The survey examined the impact the rising New Zealand dollar is having on exporters.
The survey showed that companies faring best were those exporting higher value products, that is high in the food chain. Conversely, those exporting products more at the commodity end of the market, or low in the food chain, were likely to be struggling. Companies with strategies to protect their margins - through hedging or reducing production costs - were also coping better than others.
>> Currency Impact on Exports (PDF, 133KB)
page top
The currency is a powerful and indiscriminate price setting mechanism. Changes in the currency have little or nothing to do with individual market conditions and they translate into higher or lower returns irrespective of the attributes of firms or their products.
In practice the transmission mechanism is that exporters and importers absorb the currency-induced price changes in their margins. Ultimately competition or survival will force them to either abandon unprofitable product lines, or alter final selling prices. The latter then produces the price signals that customers respond to (the demand response).
Over the short-term firms generally absorb currency fluctuations within their margins – they hold their selling prices stable for their customers and consequently there is little if any change in sales. Forward cover, as well as specific commercial contracts, assist or compel companies to keep selling prices constant in the short term. Furthermore, companies tend to “look through” currency movements either because they think the movements will be temporary, or because they do not want to jeopardise the investment they have made in establishing export markets.
Thus, in the short-term (at least a year) the macro-economic impacts of a rising currency appear to be confined to reduced incomes for exporters. This conclusion is consistent with the responses from the firms interviewed for this paper. In some cases the financial consequences are substantial, but the majority of firms have not changed their export volumes. In a number of cases volumes have continued to increase despite (possibly because of) thinner margins.
The longer and more substantial the rise in the currency is, the more likely the financial pressures faced by exporters will translate into changes in production, investment spending, employment and business strategy. These changes in business behaviour are the real threat to future export and economic growth.
Although there were few definite examples of firms making such fundamental changes to their businesses, a number were under pressure to do so. One manager conceded that his board wants him to shift production to China, another is contemplating laying off staff as a particular product line is likely to be abandoned, and others are reconsidering expansion plans.
The business case for investing in additional export capacity in New Zealand is now more difficult to make, but not impossible – one firm is still attracting activities from its US parent because they can still do the work more cost competitively in New Zealand than in the US.
The large and unpredictable cycles in the value of the $NZ increases the risk associated with investing in export market development. Exporting is already a formidable challenge for most New Zealand firms. The current surge in the value of the $NZ will dissuade more firms from investing in exports, and will persuade some to abandon recent attempts to establish export markets. The strength of the domestic economy and the increased competition from imports, as a result of the higher dollar, are also factors that undermine the case for exporting.
Our conclusion is that currency volatility is an important reason why New Zealand's unimpressive export performance is likely to persist over the medium term. That implies that the balance of payments current account will also remain a constraint to economic growth. The currency will eventually depreciate, but its level is probably less important to exporters than its stability. Some companies appear to be managing the volatile currency by focusing on differentiated, high margin products, shifting production to cheaper Asian manufacturers, or importing more of their inputs and final goods. There is a small group of exporters who have virtual control over their pricing and therefore are largely unaffected by currency movements.
newzealand.govt.nz - connecting you to New Zealand central & local government services
© 2003-2008 New Zealand Trade and Enterprise
