25/08/2014 - 14:24

Dollar dive a case of when, not if

25/08/2014 - 14:24

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The political standoff in Canberra will put a spotlight on the value of the $A, and the uncompetitive nature of large segments of Australia’s economy.

Dollar dive a case of when, not if
CAN’T COMPETE: The Australian manufacturing sector has all-but collapsed in the face of imports made cheaper by the high dollar and high wages. Photo: iStockphoto

If Australian unemployment at 6.4 per cent is now at its highest level in more than a decade, capital investment is declining and sovereign risk is rising – why is the Australian dollar still trading above US93 cents?

One answer to that question is that the economy is not in bad shape, thanks to the mining boom moving from its construction phase to its cash-generation phase; and there’s more to come as big gas projects on both sides of the country start exporting over the next 12 months.

The problem with the rise of LNG as an industry to rival iron ore and coal is that it will create very few jobs during its export phase.

There might be more money coming into the country from gas sales, but we’ll need it to pay unemployment benefits in those regions not enjoying any direct benefits.

Knowing which way a currency will move is always tricky because there are so many factors in play; and even if the dollar looks to be significantly overvalued, it has been that way for several years.

In a way the Australian dollar is a prime example of a warning from John Maynard Keynes, one of the great economic brains, who famously said that: “markets can remain irrational longer than you can remain solvent”.

At US93c or thereabouts, the value of the Australian dollar certainly looks to be irrational, though tipping a fall has made fools of many forecasters over the past few years – but perhaps not for much longer.

Until now, the major negative force on the dollar has been the end of the mine development phase of the resources boom, which has been widely attributed to slowing demand for raw materials in China.

However layered on top of the China factor is a new threat in the form of paralysis in the Australian government, which is struggling to get its budget through an unmanageable Senate, potentially forcing an increase in borrowings to pay for the pet projects of particular senators.

In time, and perhaps sooner than anyone expects, Australia could slip into a genuine political crisis, which could be the icing on the cake of uncertainty and enough to finally knock the dollar of its high-price pedestal.

Trade Minister Andrew Robb delivered the first warning last week about the failure to pass the budget becoming a sovereign risk. The longer the budget negotiating process lasts, the greater the risk to Australia’s reputation as a safe place for international investment, he said.

What would really tip the scales towards a substantial devaluation of the dollar, which would not be a bad thing for exporters, is evidence of Australia experiencing its first recession in more than 20 years.

Perhaps something lucky will pop up as it has in the past to save the ironically named ‘lucky country’ from recession, but that’s not something you can bank on.

What the looming political crisis in Canberra is likely to do is put a spotlight on the stretched value of the dollar and the remarkably uncompetitive nature of large segments of the country’s economy.

Manufacturing has all-but collapsed under the weight of imports made cheaper by the high dollar and by excessively generous wage rates.

Just how out of step Australia is with the rest of the world can be seen on a scale measuring unit labour costs and hourly wage rates in manufacturing jobs.

When those cost-tests are applied, Australia almost disappears off the top of the list, leaving behind other high-cost countries such as Norway – and yes, we really are more expensive than oil-rich Norway.

It’s the cost of doing business in Australia, compounded by the end of the job-creating phase of the mining boom, and now the political impasse in Canberra that will eventually bear down on the value of the dollar.

How low will the currency go once pressure builds to an escape velocity that permits it to defy the irrational behaviour test of Keynes?

A value of US80c would be more comfortable for industry, but it could go much lower once the world takes a closer look at a country that has effectively priced itself out of world markets.

After all, it is only three years since the dollar was trading at US86c, and five years since it was valued at less than US60c.

What goes up that quickly can come down even faster.

Cellar sales

ONE industry desperate for a decline in the dollar is wine, a one-time boom business that sucked money into the South West of Western Australia, but which is now spitting money out as fast as it can.

The latest planned escape from the profit-free zone that is grape growing and wine production is John Horgan, a man who flew high in the 1980s as a close friend of then premier, Brian Burke.

Much of the fortune Horgan made in a variety of businesses and government positions were ploughed into his Salitage winery near Pemberton.

Praised as a showcase for the region, Salitage was a near-replica of another showcase wine business, Leeuwin Estate, run by his brother, Denis, in Margaret River.

Neither man has had a particularly happy time in the wine business over the past few years with cheap imports satisfying domestic demand, and a worldwide glut of high-quality plonk filling the shelves of grog shops from Berlin to Beijing.

Unfortunately for John, now is not a particularly good time to be trying to sell a winery, particularly at the premium asking price of $7.9 million.

The problem is that tough times in wine has sparked a stampede for the exits, and while there will always be a lifestyle factor in growing grapes and making wine, there are hundreds of wineries around Australia with owners desperate to quit.

Bell not tolling

AS the saying goes, justice delayed is justice denied; and never in Australian corporate history has there been a longer delay in justice than the liquidation of the Bell Group.

The latest leg in the 25 year-old saga is that agreement on dispensing $1.7 billion awarded in a long-running court case can take up to another five years – and only then if everyone agrees and if fresh legal actions are not started.

An amusingly dark thought is how many of the creditors, or the people doing the liquidating, will still be alive in the year 2019 when some of the players will be well over 70 years old (having started the game in their 40s)?

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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