Australia needs to establish a sovereign wealth fund to capitalise on the resources boom, but any funds should be saved in a foreign currency to protect against the negative effects of a sharp appreciation of the Australian dollar, according to Investec.
"Most sovereign wealth funds save in foreign currencies. Now that does a number of things, by far the most important is that you're taking some of the surpluses that are accumulating as a result of a resource bonanza and saving them for future generations," Investec Asset Management global strategist Michael Power told Investor Weekly.
"If you do save in foreign currency, by definition, foreign currency savings means that you're not allowing the exchange rate to pick up 100 per cent in the form of appreciation, that some of the windfall is saved by intervening in the exchange rate and keep the currency more competitive."
Power said the mining industry should support the establishment of a sovereign wealth fund that was constructed in a similar way to Norway's Petroleum Fund, the Abu Dhabi Investment Authority, or the Kuwait Investment Authority, which all saved their country's budget surpluses in foreign currencies, because it could function as an instrument for protecting their margins.
"Mining groups should be wholly in favour of a sovereign wealth fund if the money is saved in foreign currency, because a more competitive exchange rate protects their margins and is good for their business," he said.
"Our mining industry in South Africa has been crushed because of the currency appreciation.
"By keeping the Australian dollar more competitive and so helping prevent the hollowing out of Australian industries would also help Australia inoculate itself against the worst ravages of the Dutch disease."
The Dutch disease refers to a simultaneous increase in the exploitation of natural resources and a decline of the manufacturing sector in an economy.
The increased revenues from natural resources will make a nation's currency stronger compared to that of other nations, which erodes the competitiveness of export-dependent sectors.
The term was first used in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.
Power said the first indications of the phenomenon were already visible in the high prices for certain goods and services in Australia.
"Prices here are just so high it frightens me," he said.
"The idea to have a shirt washed at a decent hotel in town over the weekend costs $45 is just absurd. Two washes and you are buying a really fine new shirt.
"I've stayed at many very fine hotels across the world and it is nowhere near as much anywhere else in the world.
"The Dutch disease issue needs to be addressed head on by a central bank, but there is a level of denial."
