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Bernard Hickey from interest.co.nz on personal finance trends, mortgages, homeloan affordability, credit cards and more

Bernard Hickey: How to avoid going Dutch

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New Zealand is facing a horrible bonanza. The Christchurch earthquake has unleashed a flood of US dollars into New Zealand that is helping to push up our currency.

Estimates vary, but most think reinsurance payments from Switzerland, Bermuda and Britain will total more than US$12 billion ($13.8 billion) over the next couple of years.

Statistics New Zealand has already recorded $11.1 billion worth of reinsurance claims in the September and December quarters.

This is enough to lift the pressure on a currency that also has to handle $50 billion worth of export receipts every year. Those export receipts are benefiting from record high commodity prices as strong demand from China and India adds to the effects of inflation-causing money printing in America and China.

America's debt crisis is further weakening the US dollar against the kiwi, which set fresh post-float highs over 87 US cents this week.

This is a perfect storm for the kiwi which threatens to wipe out any non-commodity exporters trying to add value.

Other countries have thought about, and planned for, just such currency bonanzas to avoid a phenomenon widely referred to as the "Dutch Disease".

The name comes from the problems faced by the Netherlands in the 1960s after a flood of foreign currency followed its discovery of natural gas in the North Sea. The sharply rising guilder slashed manufacturing jobs, turning what should have been an economic positive into a negative.

When Norway discovered oil in the North Sea it set up a stabilisation fund which parked the US dollars it was earning from the oil in assets held offshore.

It is now worth more than US$500 billion and owns 1 per cent of all the world's stocks.

Chile has created its own stabilisation fund to deal with a surge of copper revenues. It used money from the fund to help rebuild after its own earthquake.

New Zealand needs just such a fund to park the currency bonanza from the reinsurance funds surge and the commodities price shock.

It would be much harder for New Zealand to create such a fund than it was for Norway and Chile, where the government owns the mines and oil fields that generated the income.

But the Government does need to look at ways to soften the effects of the milk-price bonanza and reinsurance flood.

It certainly should be trying to save for a rainy day using the proceeds from such a bonanza. Instead, it is just being spent on yet more imports and living for today. Meanwhile the job-creating export sectors, where value is added and high wages produced, are withering on the vine.

Doing nothing is not an option in the long term.

Otherwise we are just sleepwalking to poverty.

- Herald on Sunday

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