Cheaper Kiwi Jetboat Rides Beckon as Economy Sours on Milk

The New Zealand dollar’s plunge to a six- year low may lure more tourists to the South Pacific nation, helping soften the blow of slumping dairy incomes.

As local consumers and firms brace for higher import prices and weaker farmer spending, tourist operators are welcoming the reduced cost to visitors of everything from backpacker accommodation to luxury lodges, bungy jumps and Lord of the Rings movie-set tours. Spending by overseas visitors surged 21 percent in the 12 months ended March 31.

“The exchange rate dropping will absolutely help in pushing those who are considering a number of destinations to choose New Zealand,” said Quinton Hall, chief executive at Ngai Tahu Tourism Ltd., whose businesses include seat-of-the-pants jetboat rides down raging rivers. “We would also expect to see visitors choosing to do more and spending more on the experiences they choose.”

Tourism is becoming one of the few bright spots on a darkening economic landscape as farm incomes crash by an estimated NZ$7 billion ($4.6 billion) and analysts forecast the central bank will return interest rates to a record low. Economic growth is expected to slow to about 2 percent this year from 3.5 percent in 2014.

“The plunging New Zealand dollar is a reflection of plunging prospects in our key export industries,” said Dominick Stephens, chief New Zealand economist at Westpac in Auckland. “The drop in the dairy price is really hammering business and consumer confidence. Very clearly, this is negative for growth.”

Second-Worst

The local dollar plummeted 25 percent against the greenback in the past year, the worst performing major currency after Brazil’s real. The kiwi, named for an image of the flightless bird on the NZ$1 coin, fell below 65 U.S. cents last week for the first time since July 2009.

The decline accelerated as Reserve Bank Governor Graeme Wheeler signaled lower interest rates on April 30 and then cut them in June, and as it became clearer that a long-awaited recovery in milk prices wasn’t eventuating. The price of dairy products, New Zealand’s biggest export, slumped to a 12-year low last week.

“As dairy incomes continue to deteriorate, it’s going to have a downstream impact as farmers rein in spending and that flows through to the wider economy,” said Christina Leung, senior economist at the New Zealand Institute of Economic Research. “That said, lower interest rates and a lower dollar are providing some buffer, and we do have pretty solid activity in some other sectors, like construction and tourism.”

Hobbits, Golf

The weaker kiwi has reduced the cost of popular tourist activities such as tours of the Hobbiton movie set, where Peter Jackson filmed scenes for his Lord of the Rings and Hobbit trilogies. The NZ$75 cost of an adult tour in U.S. dollars is $49 today compared with $66 a year ago.

A nine-night golfing package staying at three luxury lodges owned by hedge-fund billionaire Julian Robertson will cost $6,660 today, down from almost $9,000 in July last year, while an adult ride on Ngai Tahu’s Shotover Jet in Queenstown has dropped to $84 from $113.

“We would see more of our customers in Queenstown potentially choosing Shotover Jet and our Funyak experience at Dart River, whereas previously they may have only experienced one of these,” said Hall, referring to kayak trips through picturesque South Island landscapes.

‘Further and Faster’

Prime Minister John Key said today that the kiwi has fallen “further and faster than anticipated,” helping to support export industries including tourism.

“Tourism demand out of China is growing really rapidly,” Key told a press conference in Wellington. “They’re here for longer and spending a hell of a lot more.”

The currency climbed 1 percent to 65.93 U.S. cents as of 8:08 a.m. in London, amid speculation traders were closing out some of their record bets on declines in the kiwi.

“The comment’s giving traders license to take some profit from what is a very overstretched position,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne. Weston said the kiwi may struggle to sustain Monday’s gains.

Overseas visitor spending rose to NZ$8.16 billion in the year through March 2015, according to government figures. A broader measure that includes foreigners studying in New Zealand shows tourism was the largest export earner outside dairy in the year through March 2014.

“Short-term visitor arrivals have been booming this year,” said Craig Ebert, economist at Bank of New Zealand in Wellington. “The job-intensive tourism sector might soon be overtaking dairy as New Zealand’s top foreign-exchange earner.”

Income Halved

New Zealand is still an agriculture-based economy that placed a large bet on the global appetite for milk, reducing traditional sheep farming in favor of cows. Dairy exports fell 21 percent to NZ$12.36 billion in the year through May amid a global milk glut and waning Chinese demand.

Economists at Westpac and BNZ predict Fonterra Cooperative Group, the world’s largest dairy exporter, will pay its 10,000 farmer shareholders NZ$4.30 per kilogram of milksolids in the season through May 2016, almost half the record NZ$8.40 they got in 2014. The estimated hit to incomes has pushed farmer confidence to the lowest since 2006.

Shares in Skellerup Holdings, which makes rubber tubes and pumps used in the dairy industry, have dropped 10 percent in the past three months.

At the same time, meat exports are holding up and other industries such as wine, seafood and horticulture will benefit from a weaker currency.

“As much as the dairy sector is facing very tough times, the slumping New Zealand dollar promises to substantially boost the broader export base, including tourism,” said Ebert. “There is still much to sustain a reasonable rate of GDP growth for the foreseeable future.”