Lower dollar is no magic bullet for exporters

Even if the dollar falls sharply and rapidly it is unlikely to provide immediate relief to exporters.

The kiwi is widely forecast to fall this year, but it could be a year or two before the export sector reaps the benefit and New Zealand's debt to the rest of the world starts to shrink, economists say.

UBS chief economist Robin Clements said even if the dollar did drop this year to a more competitive level - say around 60 on the Trade Weighted Index rather than 70 - benefits would be slow in coming.

World growth could slow this year and perhaps next, which would reduce demand for New Zealand's commodity exports, he said.

"Just as we've become more competitive, then demand growth isn't going to be conducive," Clements said.

Also, there would be lags between the time when the kiwi dropped and when the lower currency started helping exporters due to pre-existing contracts and currency hedging - where a company agrees to sell the currency at a pre-determined rate in the future.

Some companies might be locked into hedging contracts that will see them unable to take the benefits of fall in the kiwi as they'd agreed to a higher rate.

Others might have to renegotiate hedging contracts at less favourable rates if the kiwi drops only sightly.

For instance, exporter Fisher & Paykel Appliances has its exposure to the US dollar hedged around 55 cents US - meaning that for every US$1000 in income it earns it gets around $1800 in New Zealand dollars.

But after these contracts expire in March and even if the kiwi dropped 5 cents by then, each US$1000 would earn Fisher & Paykel just $1500 in the local currency.

"Unless the exchange rate falls into an absolute heap [exporters with hedging] are going to have to start to contend with what will in effect be a higher dollar," said BNZ senior economist Craig Ebert.

A lower currency eventually reduces the current account deficit as it makes imports more expensive and exports more competitive, but at the start the deficit is likely to get worse.

Only when exporters adjusted to the lower kiwi and started exporting more and New Zealanders started buying less would New Zealand's foreign debt start to shrink.

The current account deficit - now 8.5 per cent of gross domestic product - would rise over 10 per cent before it started improving, said Ebert.

Clements said "to get the sort of momentum that's required to turn the current account around significantly it may take a couple of years."