Speech to Asia Society

  • Doug Graham

Thank you for the opportunity to talk today about the Asian crisis, its impact on New Zealand, and the management of the risks that flow from it.

New Zealand is not a large country. Geographically, we are a long way from most of our main markets. But we are a trading nation, and exports play a critically important role in the health of the economy.

Because we very strongly favour an open, flexible economy, you may find it interesting to examine how the crisis is impacting on New Zealand, and how our present centre right minority Government has gone about handling it.

First, a few baseline figures. New Zealand exports about 22% of gross domestic product compared with the United States, exporting 8.1% of GDP, Japan on 8.8%, and Australia still well below us on 15.6%.

Some 40% of those New Zealand exports ordinarily go to Asia. That figure compares with 10% of exports or less in the case of the major European countries and 30% for the United States.

In short, New Zealand has, by average OECD standards, a relatively large exposure to trade risks of Asian origin.

A reasonably up-to-date picture of the extent of the fall in our sales to Asia in the last year or so is provided by the latest merchandise trade figures comparing the three months to July 1998 with the same period last year.

Declines range from 32.6% in the case of Malaysia and 31% for Korea through Thailand at 18% and Taiwan 11.3% to China, down by the somewhat more modest figure of 7.6%.

Twenty years ago, declines of that magnitude would have implied, for New Zealand, quite serious economic and social damage, including significant business failures, and some quite massive rises in unemployment.

Twenty years ago, New Zealand had one of the most excessively protected and, as a result, inflexible economies in the western world. That greatly limited our capacity to absorb serious international economic shocks.

Since mid-1980s, as you will know, strenuous action by successive Governments has transformed the character of the New Zealand economy.

Through the 1990s, Government policy has been driven consistently in line with five fundamentals: We have steadfastly pursued:

An open economy, deliberately exposed to international competition, with a floating exchange rate and deregulated financial markets, all designed to facilitate rapid but orderly economic adjustment.

Price stability, enshrined in statute, as the sole objective of Reserve Bank activity.

Responsible fiscal management. Transparency is now a statutory requirement.

Flexible labour markets. Our Employment Contracts Act focuses on enterprise bargaining and individual contracts.

And finally, a broad-based low-rate tax system. Our earlier top personal income tax rate of 66c was halved in the second half of the 1980s to 33c. We have now, in the past two years, also cut the effective middle rate by 25% to 21c.

In response to those policies:

Economic growth, which had averaged 1.2% a year from 1976 to 1991, has averaged 3.6% a year in the six years to March 1998.

Inflation, which averaged 12% a year from 1975 to 1991, has been averaging around 2% since then.

Unemployment, which had reached 10.9% in September 1991, was reduced within four years to 6%, in September 1995.

The Government's own accounts, after 15 consecutive years in deficit, returned to surplus in 1993-94, and have been in surplus ever since.

Those surpluses have helped the Government to reduce net public debt from 52% of GDP in 1991-92 to 24.4% in 1997-98. Net public foreign currency debt was entirely eliminated.

Those gains improved the buffer available to New Zealand as a safeguard against international shock, and our ability to manage them.

Our economy had already begun a normal cyclical economic slow down before the Asian crisis began to impact on international trade.

The Kiwi dollar had, between March 1994 and 1997, appreciated by 22%. Economic growth slowed, in that period, from an unsustainable 6.3% to 2.7%.

Then, late last year, with the cycle expected to bottom out during the first half of 1998 at better than 2%, we were suddenly hit by a drought said, in some areas, to be the worst for 150 years.

Immediately on top of that natural calamity came the Asian crisis.

The drought not only slashed primary and processing output short term. It also reduced the breeding stock available to as a launch padfor recovery for quite a number of years into the future.

The turmoil in Asia impacted with particular severity on forestryand tourism, the two sectors most exposed to the influence of the Asian crisis.

Those events and the finance market volatility accompanying them,led in combination with weak household and business spending, to a reduction in confidence.

The New Zealand economy contracted by 1.0% in the March quarter of 1998 and, as expected, March quarter figures released about a weekago showed a further contraction in the June quarter of 0.8%.

The economy is now forecast to return to growth in the second half of 1998, but quite possibly not fast enough to deliver a positive annual figure, for the full year to March 1999.

Beyond that, moving into 1999-2000, Treasury's latest central forecast shows progressive pick-up to 2.8% for that year, rising beyond that to 4% in 2000-01. Those are high figures. What is the rational sustaining them?

Talking numbers of any kind about global growth is a risky business at the moment. Consensus Forecasts figures for the growth of our top 10 trading partners in 1998 have reduced month by month from 2.6% last February to 1.3% by September.

Clearly, Moody's, to take one example, isn't totally happy aboutthe prospects they see for us. They lowered our rating one notch last week from Aa1 down to Aa2.

That puts New Zealand now on the same level as Australia, Swedenand Canada, which is not, as company goes, really too bad.

Moody's express concern that domestic conditions and a sharp deterioration in our external environment have led, in the last 18 months, to quite a sharp increase in our current account deficit.

They expect that deficit to narrow significantly in coming years,but constrained by adverse and maybe worsening external environment.

The New Zealand Government is more optimistic than Moody's, and I think with good reason, in anything short of a quite substantial collapse in the major US and European markets.

The New Zealand Government is not a contributor to the current account deficit. We have no net public foreign-currency debt. The deficit substantially reflects private sector use of foreign savings to fund future economic growth.

In our view, the strength and flexibility of our current economic policy framework has given New Zealand greatly improved adjustment potential.

That capacity has been evident for some time now.

From January 1991 to April 1997, when the Kiwi dollar appreciated on a trade-weighted basis by 28%, continuous effort was required from exporters to remain internationally competitive.

Since then, a falling Kiwi dollar has moved the TWI 17% in favour of exporters since April ?97. The Reserve Bank, responding to reduced inflationary pressure, has sanctioning a major easing of monetary conditions.

The bank's nominal monetary conditions index, having risen from minus 422 in September 1992 to plus 1000 at the end of 1996, has eased rapidly. It stood in fact at minus 289 on Monday, 28 September, just before I left New Zealand.

The tradeables sector is in a position now to capitalise on both efficiency gains made while the dollar was rising, and currency gains from its more recent fall.

The monetary policy framework and flexibility of labour markets should operate to ensure that these competitiveness gains are not eroded over time.

Initial evidence of resource-switching in response to those market and exchange rate signals is already apparent.

Primary producers are clearly limited by the drought-induced run-down in their breeding stock and current low world prices for commodities.

The contribution of total manufacturing to GDP in the June quarter was down 3.8%, reflecting conditions in both Asia and the domestic market.

But non-commodity manufactured export values, 3-monthly year on year, which were negative in mid-1997, have been showing a very strong 10.5% average gain throughout the last 12 months.

Non-commodity manufactures, a highly diversified sector, now represent 25% of total New Zealand goods exports. Those manufacturers , moving to capitalise on improved competitiveness, are delivering growth in both value and volume.

In the year to August, the value of exports to Korea and Thailandwas down by $190 million and $54 million respectively.

Simultaneously, however, exports to the US rose by $540 million, to Belgium by $175 million, Italy $133 million and Germany $115 million.

A similar switch is evident in tourist earnings. Large falls in Asian short-term arrivals have been offset by robust growth in non-Asian visitors.

Initially, the upturn in exports is unlikely to be broad- based,but the New Zealand Treasury expects a gradual pickup during the nextfew quarters.

As the forecast upswing in both export and domestic sectors eventually puts pressure on existing capacity, business confidence will improve. Investment deferred earlier will come back on stream.

That is the analysis which underpins the Treasury's central forecast last month that the growth rate will rise to 3% in 1999-2000, with a broader- based 4% to follow in the year to March 2001.

Treasury seems that process driving a gradual but continuous improvement in the current account deficit from 7.7% in December 1997 to 5