Downgrade set to dent tourism

16:00, Jan 16 2012

The downgrade of several European economies' credit ratings, including France and Austria, is unwelcome news for New Zealand's exporters and tourism operators.

Standard & Poor's downgrade of France and Austria's AAA credit ratings to AA+ after the markets closed on Friday, along with downgrades of seven other European countries, was not unexpected, which limited the impact on markets.

However, the news weighed on the euro with the Kiwi dollar still near new record levels buying around 0.6274 yesterday afternoon.

For local exporters it made trading conditions even harder at a time when demand for New Zealand exports of goods and services was likely waning, UBS senior economist Robin Clements said.

"Certainly those firms exporting directly to Europe are at the front line of pain, both in terms of some slower growth in Europe and the exchange rate.

"Often what happens when you have an event like this is it then moves into concerns about global growth and commodity prices, which then hurt currencies like the New Zealand dollar.


"That link doesn't seem to be occurring so all we're seeing is Europe's worse, New Zealand's OK, so cross-rates go up, which is not helpful if you're an exporter."

However, only 12 per cent of New Zealand's exports were destined for Europe. For Canterbury and the South Island that proportion would be even lower because "we tend to have a greater orientation towards Australia."

While New Zealand would not be immune to the knock-on effects of the eurozone crisis, there were worse places to be, Clements said.

Australian and New Zealand banks were likely to find the cost of funds would be higher than previously as the downgrades were likely to raise the cost of borrowing in credit markets, which which could potentially have an impact on lending rates, Clements said.

A weaker euro and less confidence in European markets meant local exporters would earn less from every unit sold, and with fewer sales it meant exporters' margins would be squeezed, New Zealand Manufacturers' and Exporters' Association John Walley said.

Christchurch & Canterbury Tourism chief executive Tim Hunter said the weaker euro was not good news for local tourism as it meant Europe became a more attractive destination for Australian travellers, who might opt to spend their strong Australian holiday dollars in Europe rather than New Zealand.

"Definitely the stronger Australian dollar and weaker European currencies have hurt us this year in terms of not getting the sort of arrivals out of Australia that we perhaps enjoyed in the past."

The weaker euro was not the only "headwind" for visitors from Europe, others included the rising price of jetfuel and escalating aviation taxes on airlines travelling from Europe to New Zealand and Australia.

However, there had been quite big fluctuations in the currency for the last few years and for the most part demand out of Europe had remained quite strong, he said.

"Even with our earthquake scenario here in Christchurch we've only seen a modest decline out of those European countries in here.

"So we've fared reasonably well, even with a continuing weakening European currency."

Fortunately rising numbers of visitors from Asia were starting to compensate for the weakness of Europe, Hunter said.

Meanwhile Canterbury Employers' Chamber of Commerce chief executive Peter Townsend said the credit ratings downgrades in Europe would make overseas markets more volatile, but earthquake recovery work would serve as a buffer for Canterbury businesses.

Townsend said he was unsure to what extent the downgrade would affect Canterbury exporters, but believed most would be cushioned by the need for materials at home. The increased volatility would present opportunities and handicaps to businesses.

"We were always expecting 2012 to be a year of extreme international volatility and that is exactly what's starting to play out."