Budget ‘gambled’ on exchange rate stability

Press, 1 August 1989, Page 7

Budget ‘gambled’ on exchange rate stability

By

PATTRICK SMELLIE

in Wellington Key elements in this year’s Budget are based on a gamble that the exchange rate will not fall in the year ahead. The gamble is part of the attack on high interest rates. This emerged yesterday amid arguments over whether the Budget decision to switch from repaying foreign debt to repaying domestic debt was a wise one. It also followed revelations that the head of the Treasury’s Debt Mangement Office, Mr John Zohrab, tendered his resignation on the strength of the decision, which appears to have conflicted with his advice to the Minister of Finance, Mr Caygill. Sources at the Reserve Bank said there had been a policy battle over the issue, which the banks had won.

The Governor of the Reserve Bank, Dr Don Brash, explained this after the Budget saying repaying foreign. debt with a 9 per cent interest rate while paying 13 per cent on internal borrowing “had a strange ring to it.” But some economists yesterday questioned the move, saying New Zealand’s foreign debt was high by world standards, while domestic debt ws within internationally acceptable limits. By allowing New Zealand’s foreign debt levels to stay the same, •the Government was doing nothing to reduce the risk to the economy if the exchange rate fell. A lower dollar would increase New Zealand’s debt servicing costs, and increase the foreign debt total. Exchange rate movements had cost the county $599 million last year, economists pointed out.

And by failing to keep to its foreign debt repayment policy, international credit rating agencies might downgrade New Zealand’s creditworthiness, forcing higher interest rates. The managing director of the Australian Ratings Agency, Mr Jeff Paterson, said it was a calculated risk whether domestic or foreign debt should be repaid. While it was probably preferable to repay overseas debt, a general rule was to repay the most expensive debt first. Others agreed, saying the rating agencies would be looking at more than just whether foreign or local debt was being repatriated. Deficits, inflation, competitiveness, and political stability were all taken into account when judging the Government.