N.Z. dollar fall relief for big companies

Press, 18 December 1985, Page 2

N.Z. dollar fall relief for big companies

By

SIMON LOUISSON

in Wellington

A huge sigh of relief has been the dominant reaction of leading corporates in the export sector as a result of the fall in the New Zealand dollar over last week.

A number of exporters had been holding on to overseas markets at cost or below so that the fall of the dollar, particularly against the Australian unit, has come just in time. Fletcher Challenge, with direct and indirect exports of $1 billion making up 10 per cent of New Zealand’s total, increases its bottom line profits by $2.4 million for every percentage the dollar drops. So the 10 per cent drop of the New Zealand dollar over the last week could mean an increase in profitability of $24 million.

. Corporate Affairs’ director, Mr Geoff Whitcher, says Fletcher Challenge is relieved over the easier dollar because it was concerned about the viability of some of its markets. He says Fletcher Challenge was not just “whingeing” when the dollar was high, but had been really hurting. “It was a question of hanging on and saying that economic reality has got to come on.” However, Mr Whitcher still expects a tightening of the domestic economy through reduced expenditure from farmers and others.

“Theoretically the pressure from domestic tightening would be relieved by exports, but that wasn’t happening because of the value of the dollar.”

Cable Price Downer’s chief executive, Mr Bill

Steele, says the dollar drop has caused his company to reassess plans on future staffing levels. While he says the company was not planning to lay staff off, the dollar level was affecting future employment growth prospects. His company had been holding its Australian markets at cost.

On the import side Mr Steele says the situation was “messy” depending on whether cover had been taken and the timing of shipments. Most of his company’s imports are in yen, Australian dollars and marks where the exchange rate has moved by up to 14 per cent in the last week. Mr Steele says this could cause some problems in the future for the importation of its Toyota and Daimler Benz cars and switchgear products. On the import side the classic thing will happen as a result of the fall of the dollar — it will increase prices — according to Steel and Tube’s managing director, Mr Doug Thurston. He says that his company is mainly an importer with few exports, but how much prices are affected depends on demand and world markets as much as exchange rates. Other companies such as car importers estimate that a 10 per cent drop in the value of the dollar will add 3 to 4 per cent to the price of cars.

Petrol prices will not increase until well into next year because there is a '“healthy” balance in the pricing pool at present, says the Ministry of Energy liquid fuels director, Mr Alan Jenkins. It will then depend on how world oil

demand is, but traditionally prices soften at the ending of the northern winter. If the New Zealand dollar slipped to 45US cents, motorists would be faced with an increase of about 5c a litre to pay for the refinery expansion loans and a few cents more to keep the pricing pool system in balance.

An economist, Ms Charlotte Williams, of FAS-Mac-Quarie, says that as a rule of thumb there is a 1:3 relationship between the exchange rate and prices so that a 15 per cent fall in the currency will add 5 per cent to the consumers’ price index.

However, in the present situation it will depend on whether the Government remains firm in its monetary policy stance, whether a weak domestic market can stand price rises, and how long the dollar remains at the lower level.

Mr Andrew Gawith, of the econometric forecaster, Infometrics, says that the 10 per cent drop in the value of the dollar will result in a 8 per cent increase in the CPI, but only if the value is sustained for about six months.

He says a big reason for the rapid slowdown in the C.P.I. in the September quarter was that the appreciation of the exchange rate was still feeding through. If the exchange rate fall is averaged over a longer period such as six months, the depreciation is likely to be closer to 5 per cent than 10 per cent. The lower exchange rate may soften the hard landing predicted by Infometrics and other forecasters, but it will depend on what the inflation rate will be. '

If inflation takes off, exporters will not be better off because their competitive position is worse than before the devaluation. Since then there has been 20 per cent inflation and by April, 1986, export incentives will be a quarter of what they were in July, 1984.

For exports to grow faster, exporters will have to have confidence in that the exchange rate will not rebound and that inflation will be held within reasonable bounds.

N.Z. dollar steadier, page 37