Impact of the Appreciation of the New Zealand Dollar on SMEs

APPRECIATION OF NZ$: ITS IMPACT ON SME’s

New Zealand has been considered as a distinguished economy. It is primarily because the economy faced the challenges of international economic depression and was victorious in the same. According to a report by Forbes in the year 2014, the country holds a strong rank among the safe-haven economies in the world. New Zealand’s economy has been a dynamic one (Colombo, 2014). It has experienced appreciation and depreciation of its dollar on a consequent basis. Even in the 1990s and early 2000s New Zealand’s economy acknowledged higher appreciation of its dollar due to higher interest rates which fascinated large number of capital investors (Brash, 2000; Fallow, 2013). But since 2009, the economy is emerged very strongly but this has resulted in rising level of concerns among varied sectors and industries in New Zealand (Fallow, 2013).

SME which implies “Small and Medium Enterprises” play a very crucial role in the economic development of any economy across the globe (Fink and Kraus, 2009). New Zealand is no different as its economy to a large extent is supported by performance of SMEs. But defining SME is a critical job because there is not universally accepted definition. Each economy has a different definition of a SME (Abdullah and Bakar, 2000). SMEs in New Zealand are defined by the New Zealand governing bodies as those organizational set ups which operate with 20 or less number of workers / employee (Ministry of Economic Development, 2011). Most of these units are generally controlled and handled by their owners themselves. One third of New Zealand’s GDP (gross domestic product) comprises of inputs from this sector (Waikato Times, 2014). This sector has also aided in provision of employment which is evident from the fact that one third of New Zealand’s entire population is absorbed for varied jobs (Waikato Times, 2014). Another startling fact about SME in New Zealand is that it comprises of approximately 97 % of trade and commerce through 460,000 SME set ups (Ministry of Economic Development, 2011; Waikato Times, 2014).

SMEs in New Zealand have resorted to extensive internationalization. These organizations are not supported by subsidies from New Zealand’s government. But yet they have undertaken this route to overcome competitive pressures created due to presence of cheap Chinese products in domestic markets (Jaeger, 2007). Thus to gain long term sustainability these organizations have internationalized their operations. Most of the SMEs who have opted to internationalize have resorted to a unique business strategy and model of their own. This is primarily because these SMEs aim to gain competitive advantage through internalization by optimally using various available and accessible opportunities (Jaeger, 2007). These SMEs mainly focus on geographic diversity of markets and effectively of distribution channels. The markets of chosen not on basis of any technical analysis but based on SME entrepreneur’s individual choices and their understanding of market feasibility. The internationalization adopted by SMEs in New Zealand is termed as Bricolage model. The model is depicted in diagram below.

Figure 1 The Bricolage Model

Source: Jaeger, 2007

USD that is United States Dollar is considered as a point of reference in the world economy (Bloomberg, 2013). No governing body or international organization has declared USD as a ruling currency (Amadeo, 2014). But yet the appreciation and depreciation of currency across world is measured against this dollar primarily because it is considered as a governing intercontinental currency in. As a matter of fact in many countries even outside America, USD is used as their formal currency. Further approximately 85 % of foreign exchange trading entail use of dollars (Amadeo, 2014). Currency depreciation against USD implies a stronger dollar which makes imports expensive for local organizations (Gwartney et al, 2014). This is mainly because dollar becomes more costly. This in turn implies more money draining out of a nation and thus negatively affecting domestic economy. Currency appreciation is a more favourable option for economies but only in the long run. Currency appreciation means deteriorating USD in comparison to domestic currency. It is mainly because domestic currency appreciation implies a stronger economy and making imports cheaper. But it also implies increased prices of exports which makes domestic economy’s products expensive in international markets. Alternatively, with cheaper imports, domestic products within local markets face stiff price competition.

Though a strong appreciation of currency indicates a stable and strong economy but its pitfalls cannot be negated.

In 2011-12, New Zealand’s economy experienced an augmentation of 7 % in NZ $ on a Trade Weighted Index (TWI) Basis (Tarrant, 2012). One of the major reasons behind this is economy’s potential to overcome financial spur created by varied banks across the globe (Tarrant, 2012). Some of the other reasons this currency appreciation are depreciation of US dollars, strong and optimistic credit ratings for New Zealand’s economy by international organizations, stability in international monetary markets, benevolent economic conditions, accelerating interest rates and a centre of attention for capital investments (PwC, 2014; Headey and Fan, 2008). Another reason put forward for this is slackening of economic and monetary policies by various economies (Bernanke, 2010). In this most of the central banks provide for quantitative leverage of either float newly produced currency which results in increased risk exposure at international forum (Tarrant, 2012).

The appreciation of NZ $ has benefitted the economy by helping the same to control its inflationary rates and trend thus enhancing economy’s stability. New Zealand with its far sighted strategic planning has been able to overcome negative impacts of such financial spur. But this too have had its side effects in form of raising medium term interest rates (International Monetary Fund, 2010). These rising rates have made it costly for SMEs to procure bank investments and thus discoursing entrepreneurs to a large extent. Out of all the negative impacts, the worst affected due to New Zealand’s money appreciation are trade sectors, exports business and import-competing manufacturers (Tarrant, 2012).

One of the major impacts of appreciation of NZ $ was evident from restricted export activities. Price responsive markets strongly reacted to such currency appreciation which was apparent in form of declining New Zealand exports (Deakins et al, 2013). As a result of this export earnings decline, many companies were forced to withdraw from international markets. This depicted a negative impact on New Zealand’s economy and SMEs. But interestingly companies having strategic approach which catered at developing strong associations with banks and providing adequate time and resources were seemed to be successful.

Another impact of appreciation of NZ $ was visible in form of declining product prices which affected manufacturers and traders to a large extent. Considering the case of dairy in New Zealand, the prices of dairy products fell steeply. Dairy farmers were affected to a large extent mainly because such a price decline meant lower income (Shanghai Daily, 2014). But the situation got managed due to high export demands of New Zealand’s dairy products in China, primarily at higher prices owing to its categorization as a lavish product (Teague, 2014).

With imports becoming cheap, the import-competing organizations are having a tough time in sustaining market pressures. A major chunk of New Zealand’s import is from China. Thus with currency appreciation, Chinese products which are as it is lower priced are easily spreading their tentacles within the economy. Domestic manufacturers are failing to perform primarily because people in New Zealand are offered with large number of cheaper substitutes. This has resulted in a change in disbursements pattern of its population. (Tarrant, 2012)

There has been a dearth of research related to appreciation of NZ $ and its impact on SMEs. In such a scenario it is essential to study such relationships between the two to understand the dynamics of New Zealand’s markets both at national and international frontier. Therefore this study will be interesting along with being useful. This study will provide with an insight to the various SME organizations with regards to sound strategic planning so that they can benefit from such NZ $ appreciation.

References

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