To the annals of highly misleading correspondence must be added a recent letter to clients by two hedge fund managers at London's SLJ Macro Partners. In their message, the two state that New Zealand's currency is overvalued by 20% and likely to collapse next year. They draw these conclusions by wrongly comparing New Zealand to Ireland and southern Europe, which is not supported by the facts.
To start with, the writers claim that New Zealand suffers from structural weaknesses that make it vulnerable to economic collapse. They claim that New Zealand's growth model is based on too much debt and too much credit, with low savings rates and current account deficits. While it's true that our savings rates are lower, the private debt to GDP ratio for New Zealand has been substantially lower than our counterparts in southern Europe over the same period.
In 2010, Ireland had a private debt to GDP ratio of 395 per cent, which led to the collapse of the Irish economy. Several southern European nations had similar ratios: France was at 224 per cent and Spain at 288 per cent, and Portugal led the way with a whopping 325 per cent. At the same time, there were significant wage increases in these countries, causing huge comparative price disadvantages in competitiveness.
By way of contrast, during that same period, Germany maintained a private debt to GDP ratio of 142 per cent, and New Zealand's own ratio was 12 per cent lower than that. Many would agree that emulating the performance of the German economy, the strongest in Europe, is a good thing.
I was in Dublin in 2009 and spoke with several high-ranking managers at Anglo-Irish Bank, which was severely exposed to the property bubble through what were referred to as 'hidden loans', prompting a scandal that forced the resignation of its chief executive.
Like many countries, the explosive growth of the 'Celtic Tiger', as Ireland was known, precipitated an enormous property boom and eventual collapse. The ensuing housing bubble contributed heavily to rising private mortgage debt.
Here's the difference: the basic fundamentals of New Zealand's economy do not match those of the Irish and southern European economies. Our banking sector is dominated by large Australian-owned banks, which were largely insulated from the GFC by their limited exposure to mortgage-backed securities.
Additionally, New Zealand's economy has experienced continued growth due to the Christchurch rebuild effort and the drought recovery, and primary industries have in fact been the largest contributor to growth over the last couple of years.
While it's true that New Zealand's fortunes appear to be tied to growth in the Chinese economy, the same can be said of most countries in this region. Contrary to what might be expected, New Zealand's growth has continued in spite of the rising Kiwi dollar, which would tend to make our goods less competitive on foreign markets.
I am inclined to agree with the majority of economists that the outlook for this country looks considerably brighter than a few detractors would have us believe.
Donald Blair is the Managing Partner of Paradigm Strategy Partners, a New Zealand-based corporate advisory firm. An American-born economist, he has over 28 years of experience in global markets across the public sector and in a diverse portfolio of private-sector firms.