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New Zealand: Growing Economy, Falling Currency

New Zealand has been humming along, with last year’s economic growth coming in at 3.3%. The government has predicted this year’s growth to top 3% again, although there are some downward pressures that arose since the forecast originally appeared in May that could hinder the target.

One of the problems is the dairy sector, which is the largest of New Zealand’s exports. Investors can thank China for at least part of the problem, since China took great pains to begin building up a stockpile of milk powder at the very time that its economy began to slow. As a result China has bought considerably less dairy from New Zealand—69% less, in fact, than in 2014.

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New Zealand’s dairy products satisfy 17% of the global dairy market, and its whole milk powder fills two thirds of world demand. But prices on dairy have fallen so much that not only are its farmers expected to lose money this year, the country’s currency has fallen substantially—it’s become the second-worst performing major currency so far this year. That’s led the central bank to cut interest rates twice in a six-week period, and could lead to more pressure on the kiwi dollar.

To add insult to injury, Russia’s ban on imports of foreign dairy products—its response to sanctions imposed over its actions in Ukraine—has also cost New Zealand business, since the country was a major customer. Both couldn’t come at a worse time, since dairy farmers—not just in New Zealand, but in the U.S. and Europe as well—had been increasing yields after dairy prices doubled between 2009 and 2013. Just as production reached record highs, the bottom fell out of the market.

New Zealand has been a force to reckon with globally in the dairy sector, but it’s been trying to win concessions in the negotiations for the Trans-Pacific Partnership, held in Hawaii in late July. Its dairy sector amounts to 30% of the market share among the 12 nations that make up the TPP network, and it’s determined to stand firm. As a result, it’s been one of the holdups in pushing through the TPP.

New Zealand and neighbor Australia have been pushing for a greater share of U.S., Canadian and Japanese markets, while milk producers in the U.S. have been considering how they might expand their own market share in Japan and Canada to try to make up for any inroads New Zealand might make on their turf. The New Zealand agricultural trade envoy had said in reports during the negotiations, held in Hawaii, that the U.S., Canada and Japan had to give ground in the dairy sector before talks could further advance.

But New Zealand is not just about dairy, and if there’s a bright spot it’s construction. Rebuilding in the wake of earthquakes that have struck over the past few years has kept the sector busy, and in Auckland and surrounding areas, housing goes at a premium, when buyers can find any—in July it was up 18.8% compared to July 2014. In fact, house prices are increasing at the fastest pace seen in seven years, causing the Reserve Bank of New Zealand to impose controls on loans for real estate investors as well as to boost deposits required for such loans.

That may not be a problem for the high-net-worth, many of whom are immigrating to the country under its “New Zealand Investment Attraction Strategy.” Since 2009, New Zealand has attracted $3.5 billion from HNW foreigners, who have come to enjoy the country and invest their money in exchange for residency. The Investor Plus residency category requires applicants to invest $10 million (among Investor Plus arrivals is James Cameron, of Avatar and Titanic fame), while the Investor category is a relative bargain at a $1.5 million investment and another $1 million of settlement money.

Now New Zealand is kicking it up a notch, hoping its strategy can attract as much money again over the next three years as outsiders come in to live, work and play. That goal may be somewhat ambitious, considering that $500 million entered the country that way in the past year. But it’s not unreachable, particularly since a study from the Ministry of Business, Innovation and Employment showed that 85% of wealthy migrants said they expected to be able to make a “significant contribution” to their new homeland.

Then there’s tourism, the country’s second largest sector, which saw a 50% increase after the original Lord of the Rings trilogy hit theatrical screens and got another boost after The Hobbit trilogy. It’s still steadily on the increase, thanks to visitors from a broad range of countries. China is the country’s second-largest source, after neighbor Australia, growing 30.3% over the last five years. Despite China’s slowing economy that doesn’t look likely to change much—particularly since both China Southern Airlines and Air New Zealand, offering direct flights between the two countries, expanded air capacity and two new carriers, Air China and China Eastern, established year-round service just this year.

Beyond tourism, New Zealand is extending its business reach to go where few have gone before. Later this year South Island will become the home of the first commercial space launch site in the world, which could lead to any number of opportunities for economic growth as companies seek out a faster and more affordable alternative to launch high-tech payloads into space for a variety of purposes—everything from crop and weather observations to management of natural disaster responses.

U.S. company Rocket Lab, which expects the launch site to become operational in the fourth quarter, said in reports that it already has some 30 companies signed up to take advantage of the new facility. The commercial launch business globally is worth some $6 billion, but companies must sometimes wait years to get their payloads space borne despite the cost—which can run to $200 million. Rocket Lab is looking at launches at a fraction of that price: less than $5 million. With New Zealand considered a prime launch location by no less than NASA, growth could literally take off.

Despite the downward pressure exerted on its banks’ asset quality by continuing low dairy prices, Fitch Ratings affirmed the country’s rating at AA, with a positive outlook. There are a number of factors that could lead to trouble—such as a collapse in the housing market, seen as unlikely because of continuing net immigration as well as ongoing rebuilding in Christchurch to repair earthquake damage, or a prolonged period of lower dairy prices—but Fitch believes them to be unlikely and still “expects the economy to expand 2.8% in 2015.”

All told, New Zealand looks likely to continue to offer the almost mystical lure of Middle Earth to investors for some time to come.

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