DISTILLERY: Swiss baloney

Scribes scrutinise the Reserve Bank's attempts to tackle the high Australian dollar, with one arguing a Swiss cure is far too lofty.

Reserve Bank Governor Glenn Stevens has come under pressure from various corners to bring that dollar down. Not just because it’s hurting our manufacturing industry, but it’s also reducing the amount of revenue from the minerals resource rent tax – although, lower commodity prices are doing most of the work there.

Also in this morning’s seriously heavy shot from The Distillery, an experienced resources columnist delivers a seriously good piece on the relationship between gas companies, electricity retailers, customers and government policy, plus we also make just a little fun of AGL doorknockers.

But first, Fairfax’s Malcolm Maiden got his hands on the speech delivered by Reserve Bank assistant governor Guy Debelle to the University of Adelaide, specifically addressing the question whether the central bank could ‘do a Swiss’ and depreciate the currency with forex purchases. The answer is almost certainly no, says Maiden, and here’s why.

"The Swiss operation has been massive. Its foreign currency reserves rose by 62 billion francs to 314 billion francs in 2011, and by another 113 billion francs to to 427 billion francs last year. Its foreign reserves have also risen from below 10 per cent of Switzerland's annual gross domestic product ahead of the financial crisis to about 75 per cent of GDP. As Debelle remarked this week, a Reserve Bank intervention that had similar economic weight in this economy would top $1 trillion. As Debelle also observed, the Swiss central bank was facing more extreme conditions in 2011 than the ones the Reserve faces today (or for that matter, faced in 2011).”

The Reserve Bank has the reserves to mount a devaluation campaign and indeed our export industries are hurting. But Switzerland faced a much more onerous currency surge, we are still exporting stuff and our economy, despite the high dollar, is still growing… quite well as a matter of fact.

Just look at the other OECD nations. We’ve got it good Down Under boys and girls. If you’ve got some spare coin, take a holiday.

Unfortunately, as Fairfax’s Elizabeth Knight points out, that’s what Australian are doing, which is taking a little more wind out of one section of the economy – retail. However, there’s a surprise in store.

"In the immediate aftermath of the global financial crisis the Australian dollar rapidly appreciated, making offshore travel a far better value proposition. We are now pretty accustomed to this and despite a number of fundamental reasons, economists said it would fall, but our currency has remained stubbornly high. This might explain some of our reasons for offshore travel. But it doesn't account for why incoming travel to Australia is also pretty strong. A Deloitte Access Economics report shows international visitor arrivals during the second half of 2012 accelerated strongly. International arrivals were up 5.8 per cent in December and 4.6 per up on the year. And it is expecting growth to continue at this annual rate over the next three years.”

And these travellers aren’t coming from the United States or Europe, they’re coming from Asia. Anyone doubting the significance of Australia in the Asian Century should shot a glass of sake – this is The Distillery after all.

Of course much of the confusion surrounding the uninitiated is why the Australia dollar remains so damn high despite the pullback in commodity prices. The latter has obviously compromised the returns for the minerals resource rent tax, which is something Business Spectator’s Stephen Bartholomeusz can’t quite believe how flummoxed the government and the Treasury advisers got the numbers so wrong.

This is currently the subject of a Senate inquiry.

"Unlike the RSPT, which had elements of retrospectivity and expropriation as well as some fundamental conflicts between its untried theory and the impacts it would have had in practice, the MRRT is a genuine super profits tax. If there are no super profits, there is no tax. As it happens, the collapse in iron ore and coal prices during its first six months meant that the big miners’ profits weren’t that super – hence the meagre $126 million of revenue raised. You don’t need an inquiry to explain that outcome – just look at Rio Tinto and BHP Billiton’s results for the December half-year. With commodity prices stronger so far this year the MRRT should, of course, do better in the second half but the basic premise of the tax is that it only applies to super profitability.”

Elsewhere, The Australian’s John Durie brings fantastic news from the Australian entities that were caught up in the spectacularly terrifying collapse of Lehman Brothers.

"Australian councils, charities and other investors have scored a major victory in their fight to reclaim money lost when US investment bank Lehman Brothers collapsed in 2008 and now stand to recover as much as 98c in the dollar on their investments. Final settlement on the so-called Dante program of collateralised debt obligations has just come through, paying on average 98c in the dollar but on some tranches as much as $1.07. The settlement has cut the damages claim against Lehman Brothers from $190 million to $150 million, according to IMF chief John Walker, who is running the class action against Lehman Brothers Australia."

98 cents in the dollar… That’s a bloody good return, people.

Meanwhile, The Australian’s Matthew Stevens says AGL Energy’s entry into arbitration with Santos and Esso-BHP Billiton highlights the utter failure of the New South Wales government to rid the state of its vulnerability to high levels of Bass Strait gas, due to Premier Barry O'Farrell’s new restrictions on coal seam gas exploration.

"Every three years those long-term arrangements come up for price review. Inevitably the producers seize the moment to ask for more than that and this is resisted by the wholesale customer. At one level, this stand-off is not particularly unusual. What is different this time, however, is that the past three years of seismic change in the gas marketplace has probably left the arbitrage between contract and market prices at an historically high mark. In simple terms then, the producers are likely to have demanded a serious increase in price to reflect the shifting plates of gas demand and supply, and that effort is being understandably resisted by AGL.”

What Stevens argues is this highlights the failure of the New South Wales government to grab the unconventional gas opportunities before it, which will become readily apparent when the current arrangements between producer and wholesale buyer runs out in 2016. It’s a clinic on how pieces on energy and government should be delivered.

The Australian’s Tim Boreham heralds the cessation of the religious proselytising style practice of door knocking on behalf of the electricity company AGL.

"Until now, AGL had derived about 20 per cent of its new business from pavement pounding – an all the more vital channel given the introduction of the Do Not Call register for phone canvassers. ‘The reality is our customers don't like doorknocking,’ admits AGL chief executive Michael Fraser. ‘Seventy per cent (of householders) surveyed had a negative view about it. I expect to see others in the market cease doorknocking in the not too distant future.’ AGL emulates Energy Australia in banishing the spruikers. Our mail suggests Origin Energy, AGL's biggest rival, is not in a hurry to follow suit.”

Meanwhile, The Australian’s Adam Creighton delivers a pretty stinging critique of Australia’s middle-income welfare system and has the self-respect to mention that the Family Tax Benenfit B program, which costs $4.5 billion to encourage secondary earners – mostly women – to ignore their careers and stay at home, was a Howard government policy.

Given the debate about paid parental leave, sparked by Howard’s political love-child Tony Abbott, we need a serious discussion about just what benefits a family should generate from a parent staying at home, while at the same time a proper discussion about how to get women back to work, without succumbing to the debate about boardroom quotas – a debate that also isn’t over.

The Herald Sun’s interest rate-watching doyen Terry McCrann says that it’s entirely likely that the Reserve Bank will maintain its ‘active hold’ setting at next week’s monetary policy meeting. However, if today’s capex numbers come in "very, very bad,” there will be pause for thought. McCrann also has a big crack at wind farms in a separate piece.

And finally, The Australian’s Rowan Callick explains how managers and professionals are sometimes earning more than their American counterparts, which is no surprise. However, some of the lower-income earners are starting to secure incomes comparable to lower-income levels in the US. Now that is great for China and totally messed up for the US.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles