Reserve Bank

Michael Cullen stands accused of sabre-rattling because he seeks solutions to the currency crisis which run counter to established orthodoxy.  Well good on him. That's what we pay the Finance Minister to do.

When the New Zealand dollar has been gamed so obviously by offshore speculators that even blue-chip investors like Warren Buffett's Berkshire Hathaway can boast in their annual reports of the multi-millions of dollars they make playing our small nation's currency, only a mug refuses to investigate options.  Unfortunately the body politic in this country has become so entrenched that rationality has flown out the window.

A lot of poppycock has been spouted since Cullen reminded financial markets of the reserve powers he has under section 12 of the Reserve Bank Act to override the central bank's sole focus on price stability. But it is unfathomable that a finance minister cannot float possible mechanisms such as a levy on fixed interest mortgages, or capital gains taxes. Or even expanding the Reserve Bank's monetary policy focus to include, as an objective, the stability of our currency, the maintenance of full employment here, or the maintenance of our economic prosperity and welfare of our people (as happens in Australia) without provoking an insular backlash.

We're not alone in facing such problems. There has been plenty of debate in international forums this year over how small countries can "escape" the US dollar effect, and, how they can protect their currencies from speculation by major investors armed with wads of dough from a world awash with cash.  Much of the debate is sophisticated. But any attempt to have a conversation which focuses on how realistic is it for a small country to continue to have a free-floating dollar, or continue to run an interest-rates policy that results in the cash sucked in from international speculators pushing our currency up simply runs into an ideological wall.

Unfortunately we have been conditioned too much by the doctrine of the current Reserve Bank Governor's predecessor to look outside the box and examine what may have changed since Don Brash made a virtue out of washing his smalls in hotel rooms to ram home his anti-inflation mantra.

The National Party - led by a former currency trader - is indulging in political point-scoring at the expense of New Zealand's prosperity.  It's hard to credit the cynicism which is displayed daily in Parliament. Just three months ago John Key went public warning this portending crisis required both main political parties to put their heads together and come up with a creative solution.  He wanted to stem the massive flows of hot money into New Zealand that were "pumping the exchange rate to crippling levels". He told me the New Zealand economy was particularly exposed because of the impact of Japanese retail investors and major currency speculation on the back of the US$1 trillion of hot money washing about in Asia.  "We're very happy to work with the Government on this - it's totally a capital markets and hot money issue."  Since then the currency has gone through the roof and shows no signs of abating.

Not surprising perhaps when some of the heat is due to a depreciating US dollar - some of it to speculation by offshore investors drawn to our currency by the usurious interest rates the central bank offers.  But the National Party leader is no bunny.  Key has managed international currency flows. He's speculated against other nations' currencies and no doubt New Zealand's. He knows all the tricks of his trade. He's skilled in picking the inflexion points on currency swings and knowing just when to capitalise by making a deal or quitting a position.

That's why he should be getting round the table with Cullen - as he previously offered - instead of allowing his party to impose a slow Chinese water torture on the Finance minister.  Two months ago, Key was more than willing to have that conversation with Cullen. In fact he was gagging for it. He had ideas - none of which he wanted to publicly disclose in case the market became prematurely alerted.  But these days he won't even play ball. Every time the Finance Minister floats a possible change to the status quo to try and bring an abrupt stop to the obvious gaming, Key falls in behind his deputy and Finance spokesman Bill English.

Do National's strategists seriously believe their prospects of tipping Labour out at next year's election will be enhanced if the currency crisis changes into a recession? That is exactly what Key feared two months ago.  This after all is a party that delighted in bloodying Labour's nose by refusing to support moves for a joint therapeutics agency with Australia. But voters won't - and shouldn't - thank National if it continues to play politics on a truly significant issue.

Time for Key to show some leadership and make good on that promise to get round the table with Cullen - this is much more important than photo-ops with Helen over anti-smacking legislation!

The Government has raised the prospect of stepping in to prevent another interest rate rise and stem the dollar's surge.

Finance Minister Michael Cullen yesterday went out of his way to repeatedly highlight a little-known section of the Reserve Bank Act allowing the Government to change the way interest rate decisions are made.

If triggered, section 12 of the act would allow the Government to order the Reserve Bank to base its interest rate decisions on other factors such as the level of the dollar rather than just on inflationary pressures.

Such a move would be a jolt for financial markets and investors.

Dr Cullen's willingness to consider such a prospect is drawing heavy criticism from political rivals but there is major concern within the Beehive about the record high levels of the dollar.

It remained above US79c this morning and is putting immense pressure on exporters.  The currency is being supported by high interest rates and the Reserve Bank is expected to raise rates even further next week - potentially fuelling another spurt in the currency.  Dr Cullen said yesterday that while he had not given any "specific consideration" to entering the fray and invoking section 12, he would never rule out its potential use.

"Section 12 is clearly there for a good reason," Dr Cullen said.  "I would certainly not rule out its use."  Discussion of the mechanism was triggered by Dr Cullen on Tuesday, when he mentioned it - unprovoked - during Parliament's question time.

The comment came as New Zealand First leader Winston Peters sought support for a bill to amend the Reserve Bank Act to force it to take into account factors other than inflation when making interest rate decisions. Dr Cullen did not oppose Mr Peters' bid to introduce the bill, but National did.  Yesterday, Dr Cullen said he was "not afraid" to send Mr Peters' bill to a select committee for an "intelligent discussion".  He then worked in tandem with Associate Finance Minister Trevor Mallard to again draw specific attention to section 12 of the Reserve Bank Act.

It is not known if Dr Cullen would realistically consider taking the drastic action he has highlighted.  It appears most likely that he is simply trying to talk the currency down, by unnerving investors enough so that they sell.  But Dr Cullen's comments also carry a degree of risk - that overseas investors will see the country's monetary policy framework as less stable than thought - and steer clear of New Zealand in future.

National Party deputy leader Bill English climbed into the fray, saying Dr Cullen was inviting a "shambles".  "For 20 years, the Reserve Bank Act has been a cornerstone of the economic management of New Zealand," Mr English said.  "A cornerstone of the credibility of this country which means we can borrow hundreds of millions (of dollars) overseas at reasonable interest rates."

Mr English expected the idea of changing the Reserve Bank Act to "go down the drain" in much the same way Dr Cullen's open talk of a tax on mortgage rates and changes to landlord tax arrangements apparently had.  National leader John Key said that if the Government did step in, it would be a "significant and radical departure from monetary policy as we knowit".  He believed Dr Cullen was trying to talk the currency down.

Ten years ago this week, world markets entered a period of major volatility sparked by the Asian financial crisis.  It began in Thailand on July 2 1997, when the Thai baht plunged in reaction to an outflow of foreign funds, sparking recessions across Asia.  The turmoil revealed the weakness of some Asian financial systems, and affected markets as far away as Brazil and Russia.

The five countries most affected – Thailand, Indonesia, South Korea, Malaysia and the Philippines – have recovered to varying degrees, but nowhere near the growth rates of the new Asian tigers: China, Vietnam and India.

"What the crisis revealed was a financial structure that wasn't sustainable," Alexander Sundakov, a then director of the NZ Institute of Economic Research (NZIER), recalls.  "What everyone was doing was borrowing cheaply in US dollars, so there was a lot of debt throughout Asia that was tied to the US dollar, that to be sustainable was relying on continued credibility of the currencies."

As the currencies collapsed, he says, the value of the debt exploded. Economic production slowed down, incomes fell, and areas of investment, such as electricity generation, were hard hit.

In New Zealand and other parts of the West, the effects were more subtle. There was quick recognition that the crisis could have implications for our exports and tourism, but jitters were still present in 1998-1999, as the world realised just how interlinked with Asia it was.

New Zealand also stood to be corrected because of its high current account deficit and the chance there would be a run on its currency.  Fortunately, says Mr Sundakov, the world overlooked our indebtness – largely because the Reserve Bank refused to defend our dollar.  "A run on the currency is sort of a bet against what the central bank may be doing, and because (former bank governor Don) Brash was very strong, saying publicly that `I will let the currency go to wherever it goes, I don't care,' that itself stopped the speculative attacks."

Currency traders watched as the New Zealand dollar settled down from a pre-crisis peak of US71c to around US56c in 1999.

It wasn't until 2000 that the kiwi dollar dropped to US39c, and that, experts say, was due to other factors.  "That was a combination of the Reserve Bank raising interest rates 2 per cent when they shouldn't have from late 1999 to early 2000, and extreme discontent over the Government's policy platform for 2000," says Tony Alexander, who was then and still is the BNZ's chief economist.

While the currency sagged, the sharemarket had lost about 20 per cent of its value by August 1998, as foreign investors pulled out of the Asia-Pacific sharemarkets.  Exporters with exposure to Asia also felt the pain.

At the time New Zealand sent 40 per cent of its exports to Asia, and 15 per cent to the five countries most in trouble.  Forestry took a big hit. Forestry exports to Japan, South Korea and Taiwan dropped from $1.2 billion in the year to June 1997 to $951 million in June 1999, recovering almost completely by June 2000.  In part this was due to a rebound in Asia, and also because exporters switched to alternative markets, aided by a weaker exchange rate.

An NZIER review estimated that between July 1997 and June 1999, the Asian crisis cost New Zealand $1.523 billion in exports and $2.9 billion in gross domestic product (GDP).  That's a loss of 3.4 per cent in exports during 1998 and 1999, and 1.4 to 1.5 per cent in GDP.  But relatively speaking, New Zealand came off fairly well, Mr Sundakov believes.  "Because the financial instability didn't spread to New Zealand and the other effects took much longer to work their way through – and by that time, Asia started recovering and stabilising itself – I think it was much more of a blip."

Plus there had been positive spin-offs: the slowdown in Asia made imports cheaper here, and Asian banking and financial sectors got a much needed shake-up.  Those reforms were put to the test last December when Thailand's currency surged, threatening to undermine Thai exports in foreign markets.  The Government imposed controls on short-term foreign investments to weaken the currency, but when the Thai stock market dropped 15 per cent, they were quickly lifted.  But history can always be repeated, and New Zealand's small open economy makes it vulnerable.

Arthur Lim, investment director at Macquarie Equities, believes there are parallels between New Zealand during the Asian crisis and today.  Then, as today, the country was enduring high interest rates, a strong currency and coming off a housing boom.  With floating interest rates above 10 per cent, businesses and consumers quickly began to feel the pinch when exports took a dive.  Mr Lim says other countries such as Australia loosened their monetary policies and were able to cushion the impact of Asia.  "It begs the question whether we've learned anything, doesn't it?" he says of today's hurting export sector.  Because we have a cushion of high commodity prices, the economy is not going to sink into recession but this combination of high interest rates, high exchange rates makes the economy very vulnerable to any external shocks that may come along."

However, Mr Alexander says it would be wrong to suggest that New Zealand is in any way in a similar position now.  For a start, he says, the Asian crisis only accelerated what was already in play.  Two years of drought in 1997-1998 were hurting the rural sector, and net migration figures had fallen from a net gain of 30,000 a year in 1998 to minus-11,000 in 2001.  Tourism was down, most people were on floating mortgages rather than fixed and there had been a 30 per cent decline in commodity prices.  Today world growth forecasts are rising, and high commodity prices show no sign of abating.

"Our average export commodity prices rising 21pc over the past year and they sit 45pc above their average level over the past decade, so no, we're well, well away from anything remotely resembling the Asian crisis situation."

If there were any lessons for New Zealand, Mr Alexander says, it was for the central bank.  "I think the main lesson for New Zealand was the Reserve Bank needs to recognise what sort of shocks are hitting their economy and at that time, we were being affected by more than just one thing.  That's probably the only lesson for us; the real lesson was for Asia and their financial management."

Rising interest rates and the spectre of a capital gains tax on property investments make Auckland landlord Karen Farrell shudder.  "It's all rather horrendous," says the residential investor, who provides housing accommodation for more than 20 tenants. "It's actually quite frightening."  This story starts about 10 years ago, when she and her husband, former All Black Colin Farrell, realised their children could never afford a house.  "So we began investing to give our kids a head-start. That was the first three houses. Then I realised I'd need one for our retirement."  So it went on.

The couple bought properties around the Te Atatu South area where they live, but have since branched out: a Henderson site drew them for its river appeal, so they had the house removed and plan to build two rental houses there.  They have also bought land further north at Mangawhai. They hope to carve up the existing four-section lot into eight lots and develop houses.  Already, they have a substantial investment portfolio: seven houses and the sections.

But like many landlords, Karen Farrell is beginning to feel the heat. Reserve Bank Governor Alan Bollard's official cash-rate rises are biting hard into her wallet.  Her biggest worry is a $500,000 mortgage she took out at an interest rate of 6.25 per cent in 2003.  She fixed it for five years and has enjoyed the benefits of repayments below the floating market rates since.  Soon, all that could change. The loan used to buy houses could well cost her double in interest payments when she has to renew next year.  "I've heard forecasts interest rates will be 12 per cent next year," she said.

That means a debt costing about $30,000 to service could cost her nearer $60,000 by this time next year.  Add to that the spectre of a capital gains tax and the loss of tax deductions and Karen Farrell and her ilk are being hit in the pocket.

This is precisely where the Reserve Bank, the Treasury and Finance Minister Michael Cullen are aiming.  Investors are their target in the war to dampen the superheated housing market. Landlords are being widely blamed for ramping up the sector and driving first-home buyers out.  The banks have acknowledged the influence of landlords.

ASB said this year that lending to existing homeowners had risen by a third in the past three years. Baby boomers aged 40 to 60 already have a family house and are buying "renters" as a means of saving for retirement.  They load that second property up with 100 per cent finance to claim the maximum tax deductions against their wages or salaries, clawing back large chunks of money.

Even with a mortgage at 10 per cent interest, the payback is huge: they reap the rental income plus the unrealised capital gain and can sell in a couple of years with a good profit - just as long as the market keeps rising.  But people are beginning to question this, saying a landlord bail-out from the sector could swamp the market with properties and force prices down.

Karen Farrell is planning to avoid that scenario. She wants to pass interest-rate rises on to her tenants, just as she has passed rates rises on. And she reckons she has prepared for this scenario already.  "I keep my rents just below par because I like long-term tenants." She hopes the deliberate strategy of under-renting will give her flexibility to push up rents if her costs rise fast.  But if push comes to shove, she admits, she might have to cash up. "That's the last resort. I hate selling. We're always acquiring more. We only sell as long as it allows us to do more, like subdivide."

Long-term property investors like Olly Newland - author of Climbing the Property Ladder and The Day the Bubble Bursts which predicts the demise of real estate's good fortunes - says he and others have accumulated vulture funds for landlords and others forced to sell. They are planning to pick up cheap houses in a crash that they feel certain is just around the corner.  Mike Pero, founder and a director of Mike Pero Mortgages, predicted this month that rising interest rates could force home owners - not just landlords - to sell because they would be unable to afford the price of borrowing.

Landlords are a somewhat unloved bunch.  A study by consultants DTZ for the Centre for Housing Research two years ago reached dim conclusions: a fifth were in the business a year or less; they expected significant capital gains but made little use of business structures to own or manage properties; they rarely used systematic property management systems and discriminated against some people in favour of others.

Andrew King, Property Investor Federation vice-president, was in Wellington this week to meet politicians and put the landlords' case.  He fears a capital gains tax (recommended in a Reserve Bank paper prepared for the parliamentary commerce committee's inquiry into housing affordability) and axing landlord tax breaks - which was suggested by Cullen on Tuesday - could damage his sector and push up rents by 40 per cent over two years.  "This would make a huge difference," King says. "People would sell. Definitely. It's already hard to make property work because the yields are so low."  Landlords would quit medium- to high-priced houses rather than cheaper places, he predicts.  Cheaper properties often have a higher return, allowing landlords to almost cover debt and costs.

But houses in the $300,000 to $500,000 band would be more likely to go on the market, King says. Landlords borrow so much to buy these places that any changes are more likely to force sales.  Tax breaks have helped landlords to cover their expenses, King says. He cites the example of a wage-earner getting $70,000 a year and entering the 39 per cent tax bracket. Buying a rental property and incurring a $10,000 annual loss (the difference between mortgage payments and rental income) could reduce that person's taxable income to $60,000, giving a $3900 tax break.  "But they're still making a loss of $6100, and it's costing them."  King says landlords are making little money because rents are so low.

Economists do not believe harder times with rising interest rates will cause any major fallout. Most landlords won't sell up and instead will push rents up first. Rents have been historically low and far beneath house prices rises, economists say.  Darren Gibbs, Deutsche Bank's chief economist, doubts a swag of landlords would stage any "wholesale bailout". Instead, they would be far more likely to hike rents, in turn fuelling inflation, having precisely the reverse effect to that intended.  Cameron Bagrie, ANZ economist, is picking rents to rise and thinks this will put pressure on households already hit by high petrol, electricity, rates and food bills.  "A lot of this economic cycle is built on debt and is unsustainable so there will be some pain," he said.

As for Karen Farrell, she's counting on the general population appreciating landlords a little more and wants the political blow-torch taken away from the sector's head.  Her final point: "Where would people be without us?"

Alan Bollard's attempt to push the kiwi lower has not deterred Japanese investors, who yesterday stepped up their buying of the currency after the Reserve Bank's invervention in the foreign exchange market.  Japanese retail investors - whose buying of the New Zealand dollar in recent years has helped push the currency to record highs - are also expected to buy more of the kiwi in the coming months as the improving Japanese economy increases their appetite for risk.

Masafumi Yamamoto, currency economist at Nikko Citigroup in Tokyo, said many saw the intervention as an opportunity to get more kiwi for their yen, despite the currency still being near record highs.  "They wanted to buy the high-yielding currency, but the level has been elevated so they were kind of hesitant to enter into the market, but thanks to the authority in New Zealand they found an attractive level to buy the kiwi," Yamamoto told the Business Herald.  "Japanese retail investors were buying the New Zealand dollar just after the intervention, so they were not discouraged by the intervention."

After the Reserve Bank chief intervened in the foreign exchange market by selling an unspecified amount of New Zealand dollars on Monday, the kiwi dropped to US74.81c by early evening, from US76.19c earlier that day. But by yesterday it had recovered somewhat, trading between US75.02c and US75.37c.  Despite the kiwi regaining some ground, Bank of New Zealand currency strategist Danica Hampton said, "On the day you'd have to argue it [the intervention] was effective".  She said the Reserve Bank was responding to the kiwi's sharp rise on Friday night in New York trade, when it hit a 22-year high of US76.40c.  Intervention "was about signalling that when the kiwi dollar rallies without the support of global markets and for seemingly unjustified reasons that was inappropriate".  "Whether or not intervention can ever bring any long-term relief to exports or people who are hurt by the currency is another question, but I don't think that's what it was about," she said. "They have definitely given the market pause and people are really thinking before they jump into buying the kiwi dollar."  But Hampton said demand from Japanese investors would continue, particularly as Japan was in the middle of the June "bonus season".

Ryousei Ishida, senior vice-president of foreign-exchange options at Mizuho Corporate Bank in Tokyo, also expects intervention to have a limited effectiveness - unless Bollard decides to intervene again.  "The topside looks limited at the moment, but on the other hand the central bank is considering another rate hike because of New Zealand's very strong economic situation," he said. "So I think maybe after another corrective move the New Zealand dollar may go up again."  Yamamoto said New Zealand's high interest rates would remain the focus for Japanese investors and intervention was unlikely to dent their appetite for the currency.

New Zealand-dollar uridashi bonds, for instance, carry an interest rate of more than 7 per cent, compared with a deposit rate of 0.21 per cent at Japan's Post Office Bank.  "The New Zealand economy is very strong and yields are very high in New Zealand so people think that there's no strong reason to believe that the depreciation of the Kiwi will continue," he said. "Intervention will not be enough to change people's minds."

Yamamoto said Japanese investors would likely increase their buying of kiwi investments - uridashi bonds, funds investing in New Zealand and speculative currency instruments - thanks to the stronger local economy. 

Stable wages and a stable unemployment rate are prompting investors to put the money into higher-risk investments, such as equities and foreign currency assets.

Cabinet ministers reacted like headless chooks to news that major NZ exporters are upping sticks to Asia.  Instead of lashing out at political opponents ("Just take a cold shower please, Trevor Mallard"), they would have been better off calling a summit to find a common accord on how to avert a looming exchange-rate crisis.

There's no need to subject National to another round of wedge politicking, as Mallard is obviously attempting by focusing on his opponents instead of a rather serious problem. Ministers and their National counterparts tried to do just that at a secret meeting with the heads of the Reserve Bank and Treasury last year.

They got together to study a range of supplementary stabilisation instruments devised by Reserve Bank and Treasury officials. The secrecy was blown in February after some politicking from both sides.

On the agenda this time should be an investigation into non-politically correct options: These could include currency controls under study in much of Asia; Reserve Bank intervention in the dollar; pegging the NZ dollar to its Australian counterpart, and dropping interest rates to spark an outflow of hot money.

None of these are particularly palatable. They could all fail - and might attract another judgment from Bollard that they simply won't work.

What should go onto the agenda are the elements over which the politicians do have control. Primarily lavish government spending levels, which are increasing the pressure on monetary policy, as Bollard notes.

We are all paying for the 2005 electoral auction. Labour offered interest-free student loans and expanded its Working for Families tax credits. National countered with wide-ranging tax cuts.  Irrespective of the ideological differences between the respective policy stances, the impact is obvious.

The OECD suggests that, while supplementary stablisation instruments should be pursued, adjustments to fiscal settings provide an obvious alternative. It noted that the Treasury forecasts a significant fiscal impulse in the current and next two fiscal years, which is helping to underpin domestic demand. If the stance was neutral, the burden on monetary policy would be easier and interest rates could be lower.

It suggested there is limited ability to scale back spending plans. But there should be greater flexibility around 2008-09, which happens to be smack in the middle of the 2008 election bidding cycle.

The OECD doesn't say so outright, but if Labour and National could reach an accommodation for 2008-09 - or, better still, allow Labour to reduce committed spend in 2007-08 in return for a National ceasefire on opportunistic political attacks - much economic heartache may be avoided.

The outlook for exporters is not great. If the NZ dollar remains high, squeezed profits in the tradeables sector will spread via slower wage growth, job losses and postponed or forgone business investment.

The OECD notes three potential possibilities over where the burden of adjustment might fall:

* On exporters and import-competing producers;
* Through households deciding to cut back their consumption in response to the impact of higher interest rates; and
* The risk of a less benign scenario triggered by a sharp shift in foreign investor sentiment.

If investors decided to pull out of NZ dollar denominated assets, this could lead to a large, potentially disorderly fall in the exchange rate, which would restore the external balance and boost exporters' competitiveness.  This, in turn, would place households under renewed stress as the Reserve Bank would have to increase the interest rate premium to attract investors back into the currency.

Given the potential variables, we should not be surprised at the decisions by some of our leading exporters to shift production offshore.

Fisher & Paykel's plant move to Thailand had been widely telegraphed among the Auckland business community. But the forthcoming departure of this iconic company has touched many New Zealanders, as F&P had defied the odds by keeping its Auckland plant going for so long.

The decision to move closer to markets is a rational one. The alternative is to stay at home, be punished by crippling exchange and interest rates - and still be left without sufficient critical mass to achieve the economies of scale to stay competitive.

Other competitive pressures will emerge as we slip further behind Australia. The New Zealand Institute's number-crunchers released a graphic report at last week's Australia New Zealand Leadership Forum in Sydney.

Australia's GDP per capita (A$47,181) is about 30 per cent higher than New Zealand's (A$33,682), with NZ well below the OECD average. NZ's figure is now lower than all Australian states, including Tasmania.  Top performers are resource-rich Northern Territory (A$59,649) and Western Australia (A$58,688). The lowest is Tasmania at A$35,253 - but even that state heads off New Zealand on A$33,682.

Those low incomes are driven off the low wages are paid here, which have acted as an incentive to keep manufacturing exporters here.  But there's problems ahead. Each week, about 700 Kiwis join the exodus to Australia.

If companies want to stay here and develop high-growth technologically advanced industries to replace the departing manufacturing base, they will be hard-pressed to compete for highly-skilled labour.

Other figures presented to the forum suggest that a million New Zealanders now live offshore - roughly 20 per cent of our population.

Australia, with a population of 20 million, has just 800,000 offshore.  While Australia turns to our highly-skilled people to fill gaps, New Zealand's ethnic mix is changing as we turn to the rest of the world to cover shortages. The business implications from this are profound.

Prime Minister Helen Clark says the closure of a Fisher & Paykel plant in Auckland is the "way of the world" and that the future of manufacturing in New Zealand lies in design, research development and niche products.

Kiwi whiteware maker Fisher & Paykel announced last week it was moving production of its washing machines and clothes dryers to Thailand, at the cost of 350 jobs in the next year.

The company said many of its competitors were already making machines in low-cost Asian countries. It expects the move will deliver annual benefits of $10 -$15 million.

Clark said yesterday: "It's the way of the world... For a long time, processing work like the type Fisher & Paykel does has been migrating from western centres to low-cost centres..."The key for [New Zealand] is where the company is based, and where the high-value design R&D work is done, where it's branded, where the export revenue comes."

The F&P news triggered a warning from Sleepyhead that manufacturers were being squeezed out of New Zealand by interest-rate hikes and the high dollar. It said others would be forced to move offshore if conditions didn't improve. Clark said: "That's a business decision for them."

The Green Party and the Engineering, Printing and Manufacturing Union both say the Government's sole reliance on the official cash rate as a brake on inflation is hurting exporters.

Clark yesterday conceded the official cash rate was a "blunt instrument". But she said there was no cross-party consensus on workable alternatives. She also dismissed suggestions Government spending was driving the dollar upward.

Labour was isolated yesterday as two coalition partners and the National Party called for cross-party talks to solve New Zealand's manufacturing crisis.

It follows the announcement by iconic New Zealand manufacturer and exporter Fisher & Paykel that a significant portion of its manufacturing sector would be sent overseas, costing 350 jobs.

As New Zealand First, the Greens and National said they were prepared to talk and find a solution, Prime Minister Helen Clark had a stark message for the sector: "All western economies have seen manufacturers migrate to lower cost centres. It's been the way of the world for a long time."

Manufacturing employs 235,000 people, accounts for more than 65 per cent of our exports, and 15 per cent of GDP.

Last night, National deputy leader and finance spokesman Bill English said National would consider cross-party talks but only if they led to actual policy change.

"We would need to see an indication that the Government was willing to change its policies to make these industries more competitive and stop treating them as a cash machine for Labour to spend their money."

English said current policy had been of no benefit to manufacturers, despite the industry providing a strategy to the Government. He said flexible labour law, less red tape and competitive ACC are essential to making the industry more competitive. He also said if the Government hauled back their spending programme it would take pressure off interest rates and lower the dollar, easing pressure on exporters.

English said he believed there was a future for manufacturing in this country. "New Zealand manufacturing has proven to be very resilient. They've had a decade where they haven't had any protection at all and they've changed enormously in that time. I don't believe they're doomed. I don't think it's the end for New Zealand manufacturing.

"They're getting good at finding their niche and they don't have to be high-tech. As Fisher and Paykel proved being more sophisticated doesn't get you out of China's grasp. There's no doubt that a US75-cent dollar is a crisis for some manufacturers and they need all the help they can get."

The Green Party's Sue Bradford, who's driven the Buy New Zealand Made campaign, said manufacturing would be saved by addressing big-picture issues - especially how we tweak the value of our dollar through monetary policy. Bradford agreed that New Zealand needed to focus on the high-skilled, high-value elements of manufacturing - design, research and development - and niche products. She said the low-tech end was also important - specialising in the brainy stuff won't be enough as the Asian economies, with their bigger populations and good universities, become more sophisticated and move in on this territory.

Although global economic forces were beyond our control, New Zealand needed to retain the ability to manufacture here to avoid becoming more open to those external forces.

Fisher & Paykel bowed out with reasons that were an echo of those from other major New Zealand manufacturers - it was tired of trying to keep up with competitors who had already taken advantage of the cheap labour and other savings offered by China and other developing Asian economies. At home, high interest rates and the high dollar have also squeezed profit margins.

Bedmaker Sleepyhead has come out saying Fisher & Paykel's departure shows the sector has reached tipping point. Unless things change, expect more firms, including the bedmaker, to shift their factories - and jobs - offshore. "Manufacturers are not asking for hand-outs," says Sleepyhead's Graeme Turner. "They are asking for economic policy that assists them to be globally competitive."

The sentiment was echoed by the Engineering, Printing and Manufacturing Union (EPMU), which estimates that in the past 12 months the high dollar was behind 1200 redundancies, either through cheap importers pushing local firms out of the domestic market or exporting costs becoming too high. The smaller manufacturing businesses tended to simply shut rather than outsource overseas.

The Government says it has the right mix of policies for exporters, despite Fisher & Paykel citing the deteriorating environment for manufacturers as a key reason for moving 350 jobs offshore.

Fisher & Paykel's managing director, John Bongard, on Thursday announced the decision to move washing machine production to Thailand and said the company's other lines of business could follow.  The New Zealand company employs about 2000 local staff.

Bed maker Sleepyhead has said it is considering a similar move.

Fisher & Paykel's announcement came of the same day as Reserve Bank Governor Alan Bollard lifted the Official Cash Rate (OCR) to 7.75 per cent – one of the highest rates in the developed world.

The move prompted a collective groan from exporters, which said they were being sacrificed – through higher loan rates and a higher dollar – for the Reserve Bank's moves to quash the overheated housing market.

Political parties of all colour joined the fray, calling on the Government to do more to develop alternative tools to rein in domestic inflation that did not hit exporters.

But Economic Development Minister Trevor Mallard yesterday said the Government's economic strategy was sound and would help exporters deal with the challenges of a global economy.  Both he and Prime Minister Helen Clark said the weak United States dollar was mostly to blame for the strong New Zealand dollar, which is trading at record highs.

Mr Mallard said the Government was developing incentives for exporters, which would be included in its expected billion dollar budget business tax-cut package, and was also exploring alternatives to the OCR for controlling inflation.

But he said National had repeatedly attacked its planned tax breaks for exporters and had also appeared unlikely to support alternative measures to control inflation, such as a levy on fixed rate mortgages.

Any introduction of such policies would need a broad political consensus to succeed, he said.

Miss Clark said Fisher & Paykel's move was part of a long-standing international trend.  "Our own country, right through Europe, North America – we have lost manufacturing and continue to, to where ever the low cost centre is. It used to be Mexico. Now Mexico is getting expensive so it's gone out to China. . . South East Asia," she said on Radio New Zealand.

But Miss Clark said there was a future for local manufacturing, but it would be different from the nuts and bolts kind of the past.  "It's not the manufacturing we knew 30 years ago before tariffs and import controls went. It will be high value, produced by very skilled workers, with a lot of research and development and science behind it and it will look for niches, small areas in global markets where we can excel and sell for a high price."

Manukau mayor Sir Barry Curtis yesterday said the loss of the 350 jobs to Thailand is disappointing, but he hoped the affected workers will find jobs elsewhere in the city.

Maori Party co-leader Pita Sharples said the move would have a massive impact on local Maori and Pacific Islanders and the Government needed to give more incentives for exporters.

Fisher & Paykel Appliances is moving part of its laundry manufacturing to Thailand, with the loss of 350 positions, as the company battles competition and pressure on margins.

Production facilities for the Smart Drive and AquaSmart washing machines and clothes dryers, both currently in Auckland, are to be moved to a purpose-built facility in Thailand.  The move, which will take about 12 months, is expected to produce benefits of between $10 million and $15 million a year, at a one-off cost of about $20m to $25m, before tax.

The job losses were unlikely to occur before December 2007, and the company would try to accommodate as many staff as possible as vacancies arose, managing director John Bongard said.

"The decision to move the laundry plant out of New Zealand wasn't one that was taken lightly," Mr Bongard said.

Competition and pressure on margins for laundry products were factors behind the decision, the fourth time F&P Appliances has moved production offshore.  "Most of our competitors supplying the Australasian market do so from facilities in low cost Asian countries which offer generous manufacturing incentives," he said.

Margins for laundry products had also been under increasing pressure for a number of years.  F&P Appliances was also hoping to cut costs by sourcing some raw materials and parts from local vendors in Thailand.

The ongoing research and development for laundry products will continue to be based in New Zealand, Mr Bongard said.

"If we don't continue to innovate, we won't survive, but in order to do this, we also need competitive manufacturing facilities. This is what this move is addressing."

The Engineering, Printing and Manufacturing Union (EPMU) national secretary Andrew Little said the closure is a wake up call to the government to start taking manufacturing in this country seriously.

"Fisher & Paykel is one of New Zealand's premier brands with a strong commitment to manufacturing in New Zealand, so when they decide manufacturing is no longer viable in this country it's clear there is something seriously wrong.  A good start would be for the government to stop relying solely on manipulating interest rates to control inflation and instead look at more targeted policies that don't put New Zealand manufacturing and the jobs it provides at risk," Little said.

In recent years, F&P has bought DCS in the United States and Elba SpA in Italy, and relocated the in-house laundry and motor production facility to the US.  Shares in F&P Appliances rose 19c, or 5 per cent, to $3.71.

The manufacturing sector employs 235,000 New Zealanders and accounts for more than 60 per cent of New Zealand's exports.
- NZPA, NZ HERALD STAFF