Liquidity “crisis”?

Press, 27 February 1980, Page 24

Liquidity “crisis”?

The sale of Government stock at prices which will return the purchasers 13 per cent, on redemption, would certainly have signalled a liquidity crisis until quite recently. Interest rates have been around this level for some months now, which may lend credence to’ the term “crisis” applied to the current liquidity of the economy by five influential organisations last week. The term was used in a joint statement from the New Zealand Manufacturers’ Federation, Federated Farmers, the Retailers’ Federation, the Chambers of Commerce and the Employers’ Federation. The president of the Manufacturers’ Federation, Mr F. Turnovsky, who issued the statement, said that unless urgent action- was taken to deal with the “current liquidity crisis” New Zealand’s domestic and export business would suffer.

But if a crisis is a “turning-point or decisive moment . . . time of acute danger or suspense” the description is not especially apt. Interest rates on Government stock are marginally higher than they were before Christmas, but the other indicators of business liquidity do not all point in the same ' direction; share prices, for instance, are 5 per cent higher than in early. December. A widespread reduction ip liquidity would have forced many holders of shares , to convert their shares into, cash, thus forcing the share, price index down.

• Undoubtedly some firms—even, 'perhaps, the majority of firms in one or two industries —are short of cash;

that is why the Government has to offer high rates of interest to attract investors. Part of the reason is seasonal: income tax payments are due on March 7, and this year’s March tax flow may well be a record (in real terms, as well as in current values). Paradoxically, the present high prices for meat and wool after an exceptional growing season have imposed a liquidity strain on farmers,* stock and station agencies and other institutions providing farm finance. A revival of farm confidence encourages farmers to build up flocks and herds, which requires them to reduce their offerings to the meatworks and hence to forgo some income.

To the extent that farm liquidity is tight at a time of buoyant prices for livestock and farm exports, this is a good augury for the short term. There are signs, too, of preparation for expansion of exports in other categories—notably manufactured goods—which may cause temporary liquidity difficulties. Nor can the import substitution in the field of energy sources be overlooked: investment in the conversion of vehicles from motor spirits to compressed natural gas or liquefied petroleum gas will save imports in the years ahead, but the costs of conversion will not be recouped for several years.

The sharemarket, evidently, is prepared to look beyond todays liquidity difficulties (rather than “crisis”) to the brighter future promised by the Prime Minister in his Christchurch speech last Friday.