The New Zealand Economy is ranked in the early 50s in terms of size of GDP.
If there are more than 50 bigger economies, why is the New Zealand Dollar so heavily traded? While other currencies are not?
Let’s find out.
With a GDP of 173, 754 million USD (2016, World Bank), New Zealand is ranked 53 in terms of economy size.
In terms of GDP per capita, New Zealand doesn’t stray far: $37,100 for the 50th place on the list.
Population size? A mere 4.7 million people.
So back to our question of why on earth is the kiwi (NZD, New Zealand Dollar) traded so much?
article, an investment columnist for the New Zealand Herald
paper gives a few potential reasons.
Basically, among developed countries, the New Zealand Dollar has a high yield which is attractive to foreign investors.
Also, only 10% of NZD transactions happen within the borders of the country since many of its banks and corporations are foreign-owned.
With international trade being so prominent in New Zealand, all those NZD must be traded to USD and vice versa.
Another quoted reason, more relevant to speculators, was that the RBNZ, the Central Bank of New Zealand, doesn’t have the $$ to rail in the NZD too much.
Therefore, leaving the implication that manipulation-weary investors/traders see NZD as a fairer, safer bet.
But now we got that out of the way, tell me about the major industries in New Zealand.
The major industries driving the New Zealand economy are manufacturing, construction, and agriculture.
However, we can say the New Zealand economy is diversified since no one industry is too dominant, and the economy has become mostly a service-oriented one.
Historically, New Zealand has had a strong agricultural sector which includes dairy products (the main export of the country).
This agricultural sector, which gives New Zealand the image of a top food exporter (it is) accounts for almost 8% of GDP, and is 50% of exports (damn).
Such data is according to the New Zealand Treasury.
This is a nice segue way into international trade.
As percent of GDP, both exports and imports of New Zealand hover slightly below 30%
Which makes total trade as percent of GDP a whopping 54-55%.
This means New Zealand is a very open country. Not as much as Canada, but almost as much.
As previously mentioned, 50% of exports go to the agricultural sector.
Milk was pretty much 20% of total exports, and that’s not counting other derivates like cheese and butter.
Therefore, happenings in milk markets can impact the economy, and thus, the price of the New Zealand Dollar.
What about trade partners?
Due to its geographical location, New Zealand’s major partners are Australia and China. With Japan and the United States getting some action as well.
This shouldn’t be surprising though.
According to trading economics, New Zealand’s net government debt to GDP is a very conservative 24.6% (2016 data).
While that number is a decrease from the previous year (25.1%), net government debt (as % of GDP) has surged since 2009, when it was only 9%.
Is that bad?
Having low debt is good, but not if you could be doing better (by increasing government spending, hence promoting growth of the economy).
Growing debt to the mid 20s and keeping it in check for several years seems like a reasonable move.
Although it was likely caused by reasons other than “lets grow the economy”, it still was likely a result of “let’s finance government expenditure with foreign debt”.
Either way, they don’t seem to be doing bad at all.
Private, or household debt has grown steadily since 1991, according to the Reserve Bank of New Zealand.
And while it doesn’t seem to make many headlines (there’s less than 5 million people there), it’s starting to grab the attention of the media (high debt for few people).
That’s it for now.
See you soon,
The Forex Economist
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