Riding a wave of unprecedented popularity the Govt is succeeding in maintaining a level of confidence the country can navigate the current downturn safely and without too many bruises. This is the upside of the popularity. But there are risks which grow higher the more John Key and his team are regarded as political super-heroes. It could induce a fatal sense of complacency among Ministers. So the Govt has to tread a fine line not to puncture the political euphoria, yet to inject a basic economic realism. The downside will be become all too visible if Ministers don’t take the hard decisions in getting spending under control. NZ’s vulnerability to external shocks has been exposed again in the wake of the US Govt’s decision to print billions of dollars of new money.

This sent the currency markets into a frenzy, with the US dollar falling against other main currencies. Instead of continuing to drift down well below the US50c market, the Kiwi dollar started climbing again and reached a 10-week high just above US57c on Tuesday. The move stymies the re-balancing essential between the export and import sectors and underlines the danger to the economy as the balance of payments deficit heads north of 9% of GDP. Finance Minister Bill English told Parliament this week the cumulative increase in the external deficit over the next three years could run as high as $42bn, which the Govt finds “uncomfortably large.” He says the Govt is determined to get on top of NZ’s debt problem.

Though it said NZ was better placed than most countries, the IMF team which visited this week to run the rule over the NZ economy says it is still at risk in terms of the size of its current account deficit and the need for external borrowing to cover the deficit. If overseas lenders see NZ in terms of another Iceland, it might have to pay a high price for the funds it needs. This means the Govt needs to be even more disciplined than so far in holding down the fiscal deficit. The question is whether Ministers have the stomach for the hard-edged choices which lie ahead.

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