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New Zealand’s imbalances in a cross-country context

Daan Steenkamp

New Zealand’s current account deficit is the counterpart of a low rate of national saving relative to domestic investment. Persistent current account deficits have led to the build-up of a large net international investment position (NIIP) financed largely through foreign debt with short maturity. Dependence on foreign capital makes New Zealand vulnerable to changes in the availability and cost of external financing, although New Zealand has not added to this vulnerability by taking on currency risk. Debt maturity has lengthened over the recent past in response to market pressure and the Reserve Bank’s Prudential Liquidity Policy. Apart from New Zealand’s financial vulnerability, high debt levels threaten to weigh on economic growth by raising interest rates and crowding out private investment. A strong fiscal position in the run-up to the global crisis served to allay concerns over New Zealand’s credit worthiness, but the government’s finances have deteriorated in the wake of the crisis. It would therefore be prudent to improve the fiscal position sooner rather than later. Faster fiscal consolidation would also contribute to the required rebalancing of the economy towards higher saving and exports. This article considers New Zealand’s imbalances in a cross-country context in order to highlight sources of vulnerability.