Treasury Concerned About Volatile Kiwi
July 31st, 2009
Treasury is increasingly concerned about the strength of the NZ dollar, which it says is one of the big potential spoilers both for economic recovery by the end of this year and for a sustained reduction in the current account deficit. It says if the currency stays high effecting export growth, the ratio of the current account deficit to GDP would be unlikely to improve beyond 7%.
This is a significant change from Budget forecasts in May, which showed the current account falling to 6.9% of GDP in 2009 and then sustainably to around 5.5% from 2010 to 2012. NZ’s high current account deficit is regarded as the country’s economic Achilles heel, being substantially higher than the OECD average. Treasury is warning “substantial headwinds in the form of a rising currency, rises in oil prices and in international interest rates caution against expectations of… a larger gain (than 7%).” In addition, the import-driven nature of the reduction raises questions about the sustainability of the contraction in the deficit. It is expecting more dollar volatility in the near term.
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