Deal­ing with un­cer­tainty

What does the rest of 2015 have in store for ex­porters? John Wal­ley con­sults the crys­tal ball.

Exporter - - VIEWPOINT - John Wal­ley is CEO of the New Zealand Man­u­fac­tur­ers and Ex­porters As­so­ci­a­tion.

The at­trac­tive parts of be­ing an ex­porter, such as greater scale and more op­por­tu­ni­ties, also come with greater ex­po­sure to ex­ter­nal risks: ex­change rate vari­a­tions, chang­ing de­mand from eco­nomic cy­cles in des­ti­na­tion mar­kets and even ten­sions in geopol­i­tics all im­pact any ex­port busi­ness. Manag­ing risk be­comes a key skill for ex­porters.

Such fluc­tu­a­tions can go ei­ther way; some­times pro­vid­ing new op­por­tu­ni­ties, higher de­mand or greater mar­gins – other times the op­po­site, putting firms un­der pres­sure.

Un­for­tu­nately, many of the events are hard to pre­dict and the con­se­quences of any given event de­pend as much on the pre­vail­ing con­di­tions as the event it­self. At this point a year ago who would have pre­dicted oil close to $50.00 a bar­rel, a dairy pay-out po­ten­tially be­low $4.50 or even the Swiss Na­tional Bank break­ing their Euro peg as the Euro­pean Cen­tral Bank moves to mas­sive Quan­ti­tive Eas­ing?

Over the last half of 2014 un­cer­tainty pretty well in­creased ev­ery­where, mean­ing volatil­ity will be a big­ger fac­tor look­ing for­ward than this time a year ago. Ex­actly how this will play out for ex­porters in 2015 de­pends on in­di­vid­ual cir­cum­stances – volatile times bring risks and op­por­tu­ni­ties for those who con­tinue to adapt and in­no­vate.

To­wards the end of 2014 our own sur­vey re­ported im­prov­ing sen­ti­ment within the manufacturing and ex­port­ing sec­tors, with many re­port­ing bet­ter con­di­tions and more pos­i­tive fu­ture ex­pec­ta­tions. Af­ter an ex­tended pe­riod of a very over­val­ued cur­rency, par­tic­u­larly against the US$, the fall-back late 2014 helped ex­porters.

Since then it has re­mained volatile and we have the weaker AU$ to deal with. Our sur­vey showed strong ex­port sales growth in the first half of 2014, then slow­ing and reach­ing neg­a­tive territory in the last two months of 2014.

Look­ing to 2015, do­mes­tic ac­tiv­ity re­mains rea­son­ably ro­bust for most, with the Christchurch re­build still hold­ing up ac­tiv­ity in the build­ing sup­ply sec­tor. How­ever, eco­nomic risks re­main, par­tic­u­larly in the hous­ing mar­ket and dairy sec­tor. The lower dairy pay­out along with lower vol­umes and po­ten­tial drought is es­ti­mated to cut $6 bil­lion off GDP, and those man­u­fac­tur­ers and en­gi­neers sup­ply­ing the dairy in­dus­try may strug­gle as lower ru­ral cash­flows slow in­vest­ment and spend­ing.

In in­ter­na­tional mar­kets, the US is the main bright spot of growth; parts of their econ­omy are bounc­ing back. We can hope that lasts and it is en­cour­ag­ing for ex­porters who have hung onto US busi­ness, now look­ing for­ward to growth and a de­cent re­turn from US$ sales.

While the US cross [rate] has im­proved there is still the prospect of more. The RBNZ said in a re­cent speech that the ex­change rate re­mains at ex­cep­tional lev­els com­pared with his­tory – list­ing the TWI, Yen, Euro and AU$ as ex­am­ples, and con­tin­u­ing to say it is “unjustified and un­sus­tain­able”. Most are ex­pect­ing the cur­rency to fall, but the ex­tent and tim­ing of this is hard to judge, and re­lies on global mar­kets bounc­ing back as well as the de­ci­sions of the world’s big cen­tral banks.

The RBNZ held the OCR at 3.5 per­cent in Fe­bru­ary, but did change their lan­guage to open up the pos­si­bil­ity of cut­ting in fu­ture. Re­cent in­fla­tion num­bers came in low at 0.8 per­cent for the year ended De­cem­ber; how­ever house price in­fla­tion re­mains high and a risk go­ing for­ward that will need to be ad­dressed.

I think the RBNZ will move on macro­pru­den­tial reg­u­la­tion of as­set mar­kets and may look to cut the OCR in the first half of this year and po­ten­tially

a sec­ond cut be­fore the end of the year. I’ve been of the view that the last two 0.25 per­cent OCR in­creases in June and July would not have hap­pened had they been de­layed to Septem­ber. These should be re­versed and the RBNZ could do more than just talk about an over­val­ued cur­rency.

Euro woes

The Euro-zone con­tin­ues to have is­sues and the Euro­pean Cen­tral Bank have an­nounced a 60 bil­lion Euro a month stim­u­lus pro­gramme to boost the econ­omy out of stag­na­tion. This will hurt ex­porters sell­ing into Europe, as the NZ$ is likely to ap­pre­ci­ate sig­nif­i­cantly against the Euro, but could have benefits if it suc­ceeds in kick-start­ing growth.

Two of our ma­jor ex­port mar­kets, Aus­tralia and China, have both had weaker growth out­looks of late, with China’s re­duced de­mand for iron ore and other min­er­als hit­ting the Aus­tralian econ­omy. China’s lower de­mand for dairy was also one of the driv­ing fac­tors be­hind a plunge in dairy prices – how­ever this is tem­po­rary due to over stock­ing, and de­mand is ex­pected to bounce back be­yond the sec­ond quar­ter of 2015.

Greater un­cer­tainty brings risks and op­por­tu­ni­ties: fo­cus­ing on build­ing brands, staff ca­pa­bil­ity, sales and sup­ply chan­nels and get­ting closer to cus­tomers to sup­port and im­prove in­no­va­tion helps lever­age op­por­tu­ni­ties.

As for deal­ing with risks, delever­ag­ing and gen­eral at­ten­tion to bal­ance sheet strength is al­ways pru­dent.

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