Reserve Bank says lower external debt is encouraging but some risks remain

Release date
17 July 2017

A large improvement in New Zealand’s net foreign liabilities as a share of GDP since 2009 makes the economy less vulnerable to shocks, Deputy Governor Geoff Bascand said in a speech today.

“New Zealand’s net foreign liabilities – what we owe to the rest of the world, broadly speaking – reached nearly 85 percent of GDP at the start of 2009 but now they are down to 58.5 percent of GDP, their lowest level since the late-1980s,” Mr Bascand said.

“New Zealand has become less reliant on offshore funding over the past decade, and the maturity of bank borrowing has lengthened, reducing the risks from a potential funding shock,” he said. The liquidity policy introduced by the Reserve Bank in 2010 has contributed to this improvement.

The decline in New Zealand’s net foreign liabilities (NFL) partly reflects low global interest rates that have reduced the interest payments on our overseas debt, and high equity prices that have boosted the value of our overseas assets. 

More significantly, a better balance between national saving and investment during the current economic expansion has helped contain the current account deficit and lowered the ratio of net foreign liabilities to GDP.

“Although some of the macroeconomic factors that have driven the improvement in our NFL position are potentially more transient or fortuitous than others, the higher domestic saving and financing of investment augurs well for the durability of the current growth phase.” 

However, Mr Bascand warned that New Zealand’s net foreign liabilities as a share of GDP is still relatively high internationally, especially given our exposure to commodity exports that can be subject to large price swings.

“Significant uncertainty remains regarding household behaviour and the contribution of the sector to New Zealand’s saving-investment gap, and the extent that banks as intermediaries might increase their reliance on offshore funding.

“Borrowing from the rest of the world isn’t automatically ‘bad’. It can be a good thing if it leads to productive investment that enhances our economic performance and leads to high per-capita incomes over time, but debt-fuelled consumption is less sustainable.

“Much of the investment undertaken by the household sector is in the form of new house builds and renovations to existing homes. If housing demands cannot be met by increased household sector or domestic saving more broadly, it will be reflected in a deterioration in our NFL position.”

Mr Bascand said that banks have recently begun to compete more aggressively for deposits and tighten lending standards, which should help alleviate offshore funding pressures and prevent a significant increase in NFL.

“Relying on non-residents to fund investment makes the financial system vulnerable to changes in the availability or cost of that funding.  That vulnerability may be exposed in times of acute financial stress, with financial institutions’ access to funding cut off or available only at much higher interest rates.

“As always, the Bank will be monitoring these developments closely. We welcome the improvement in New Zealand’s net foreign liabilities since the GFC, but do not see it is a reason to become complacent,” Mr Bascand said.

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