By Gareth Vaughan
New Zealand's record current account deficit is significant in both a NZ and global context, and there are interesting comparisons to draw between 2023 and 2011 when S&P Global Ratings last downgraded NZ's sovereign credit rating, S&P's Martin Foo says.
The current account deficit, reflecting we're spending more than we're earning overseas, swelled to its highest dollar value of $33.8 billion last year. As a percentage of Gross Domestic Product (GDP), showing its significance in the context of NZ's overall economy, it weighed in at 8.9%, the highest it has been since the 1970s.
Foo, director and analyst at credit ratings agency S&P Global Ratings, spoke to interest.co.nz in the latest episode of the Of Interest podcast about this and more.
Foo talks about why NZ's current account deficit is so big, why it could get worse before it gets better, what a country can do to try and reduce a current account deficit, explains S&P's existing NZ sovereign credit ratings, why NZ scores lowly in S&P's external assessment, NZ's international investment position, how S&P would signal a potential downgrade, whether an upgrade's possible, and S&P's assessment of last week's budget.
"We [S&P] are raising our collective eyebrows and raising some serious questions. The current account deficit is an indicator of underlying economic conditions, or underlying fiscal conditions, and we have to think about what's causing these record imports," Foo says.
"New Zealand's external metrics do look quite weak compared to other comparable countries right now. As a simple example, last month the International Monetary Fund released its world economic outlook and the current account deficit at 8.9% of GDP was actually the largest of any advanced economy with the possible exception of Greece. Perhaps what's more interesting is the IMF is projecting that the deficit will stay quite elevated at about 8.6% of GDP in 2023, which would make New Zealand the worst performer on this particular metric."
S&P upgraded NZ's sovereign credit ratings in February 2021. They're now an AA+ foreign currency rating and a AAA local currency rating, both with stable outlooks. They're the highest and second highest credit ratings S&P issues. (In the podcast Foo explains what foreign and local currency ratings are).
S&P last downgraded NZ in September 2011, lowering the foreign currency rating one notch to AA, and the local currency rating a notch to AA+. Foo says there are some interesting comparisons between then and now.
"New Zealand was facing a rising current account deficit and that was occurring in conjunction with earthquake related spending pressures, as well as fiscal stimulus to support growth. And if you look at today's situation, if you substitute the word 'earthquake' with the word 'cyclone,' then you have a situation that's airily familiar."
Nonetheless Foo says S&P still sees NZ as having "very, very strong credit metrics."
"We currently have New Zealand on a stable outlook. If we were to move we would typically signal that with a change of outlook, perhaps to negative. Right now we're still comfortable with the stable outlook," Foo says.
64 Comments
Gee, it's so heart warming to read that. It must be a particularly comfy cocoon you are cosseted in.
Exactly what do you suggest NZ does to replace the export earnings derived from primary production exports?
Stop the ag bashing and put forward solutions that will support the standard of living you/we enjoy and painlessly (as a national economy) replace that core export earning capability.
Encouraging investment in productive export businesses would be key (and discouraging investment in housing or balancing investment in property vs investment into business). Ditto banks lending.
National should further that by leaving the tax on investors in place and instead to focus on how to incentivise investment in other sectors - such as gaming software, maybe furthering investment in AgTech, climate change tech (ideally by not putting all our eggs in the one power generation solutions and subsidising the steel industry) but having multiple solutions including investment in home grown... and look at any sectors that have a local strategic foothold (eg. rocketlab and xero) and how to grow out from those.
Leaving as-is is a long term disaster....
ACT is actually the worst for it, I read through their budget and they are proposing to cut R&D tax credits, scrap Callaghan Innovation, remove all film subsidies, and sell the rest of the power company assets so we no longer have any control over them. It's ideology-driven, it doesn't matter if these expenditures bring in more revenue and economic activity than it costs if it goes against their dogma.
Why are our political parties so shit.
It’s always puzzled me that NZers insist on closing oil and gas production in NZ, but they’re happy to pay for oil and gas from the Middle East or Asia and create jobs + support offshore industries in those countries. Classic example of can’t have your cake and eat it too.
nod to our woke Greens -- better to have cheap overseas labour dig up dirty coal and ship it thousands of miles in deisal burning tankers -- than dig up our own much cleaner high grade coal -- creating jobs and wealth for all NZ's -- and then we can tell the world how green we are --
Easy to insist that mining companies as part of their liscence are required to improve and maintain effected roads -- and reinstate the land for a public use -- say cycle park, natural wetlands etc at teh end of the mining --
Sure that extracting our own clean coal has to be a greener option than importing 1 million tons of dirty coke from South America or Asia
Not using NZ's coal is more a commercial decision rather than a green one. Huntly's coal, for example, is high grade suitable for steel smelting, so it would be wasted in the power plant (and cost more than the imported Indonesian coal).
At least, according to my flatmate who worked at the mine during the shutdown. Though he did say we had fields of lignite more suitable for power generation in the SI blocked by greenies...
"we had fields of lignite more suitable for power generation in the SI blocked by greenies..."
Concerns were raised by "greenies", yes but the planned mining was abandoned by Solid Energy due to it's debts.
https://www.rnz.co.nz/news/national/128807/solid-energy-drops-lignite-p…
https://businessdesk.co.nz/article/solid-energys-lignite-plans-dead-all…
The lignite is low quality & never intended for power production, it was for diesel, fertiliser and briquettes for home heating use.
You may well discover that those Kiwi's most vocal on the topic will be the least impacted by their actions.
There is nothing wrong with a current account deficit per se, not for a high growth economy anyway with "relatively" strong public sector finances. My sense is that there is a currency crisis in our future though, maybe not for a few years but we are laying the foundations now. We are becoming highly exposed to importing coal and oil as well, a currency crisis and high reliance on imported oil will really see the standard of living fall.
It might be to do with us not having much of those resources underground to begin with?
Saudi Arabia is rich because countries can't choose how much oil is under them, and they got lucky.
https://www.worldometers.info/oil/new-zealand-oil/#:~:text=New%20Zealan….
The reserves you cite are what is remaining in the functioning fields. These are old fields that have been drilled for many years. There is much more oil and gas than this, but as there hasn’t been sufficient formal drilling or creation of new fields the ‘proven reserves’ are low.
https://www.mbie.govt.nz/assets/Data-Files/Energy/nz-energy-quarterly-a…
NZ should ramp up dairy and lamb production as much as possible - we are the most efficient country in the world in terms of carbon emissions from these products, so net benefit from an emissions perspective if we produce a greater share of the world's needs. Government should also invest in the value-added end of these industries through tax credits.
He and Orr are smashing records. i reckon a few to follow...
- biggest house price crash? (after having the least affordable housing and biggest bubble)
- highest raise in ocr (after their biggest drop in ocr during the pandemic)?
I think some other records might be claimable too - around child poverty ?
Way to go!
In all respects we are poor.
Damien Grant: We aren't in a cost of living crisis, we're just poor
Tacking the Audi and offshore holidays onto the mortgage, ultimately enabled by a ponzi scheme, has to stop.
It is worth looking at the NZ Treasury site to get a more complete understanding of our Current Account to understand the various strands of our income and spending internationally,....imports v exports, movement of funds from overseas investments v loss of money flowing out from foreign investment in NZ, etc..
The picture is pretty grim. Certainly there are some one off significant purchases such as defences equipment but little other indication that we are buying stuff such as hydro turbines which will give a productive return over the longer term.
When you match our disastrous terms of trade with our falling productivity, and falling education and public health standards, the picture is dire!
We get very little comment on this situation except from Michael Riddell's excellent column under the name "Croaking Cassandra".
It seems NZ is on a gentle, but inexorable path to becoming an impoverished Pacific Island(s). We should all be very concerned as there should be nothing inevitable about it....ie it could be corrected given the national will.
Not true Hipkins did, he got kiwis a good deal in Oz
I believe Australia got a good deal from us, not the other way around. This arrangement incentivises NZ'ers to move there, and those who are there to be able to permanently stay there. This in a time where they need good, and I emphasize good, labour just like we do now more than ever. We are just the most easily accessible workers who more often than not work hard and contribute.
"the picture is dire!'. Yes it is. And if anyone knows that, it's Adrian Orr.
"it could be corrected given the national will.", which can't happen given our reliance on speculative Debt to keep The System going. We've painted ourselves into an inescapable corner- as so many other counties have also done. So there won't be any willing going on, just praying.
I have recently left with my family. Looking back from the outside the situation seems even worse to me now. It will always be home, but my wife and I have had conversations about not going back unless there is serious improvement (which doesn’t look promising given the reflexive path the country is going down).
I enjoyed the interview. Can I gain some clarification over contributors to the surplus/deficit equation please.
Question.... are the profit declarations of foreign owned (or majority owned) companies counted as an outflow? I expect they are but not sure. I expect that, for example, with banking, Bluebird potatoe chips and Watties baked beans, NZ Inc is a net importer of theseproducts and services.
Are there steps at a national policy level that could reduce such net outflows?
If U look into GDP... and see that the Govts share of GDP has been increasing over the yrs, especially so, as each crisis seems to give them a mandate, .. then the current acct is far worse than it seems.
(Id guess, at some point, govt spending may get close to 50% of GDP....)
A trade surplus require "real" investment and productivity.
We could always
print money to pay off debt....but that would smash the value of our dollar.
The currency that the government borrows is currency which has already been created and issued by the government through its spending. NZ Dollar Currency can only come from the government and it can't be created by bondholders. The government spends first and then it borrows back its currency. QE can be employed to buy back bonds but that just increases the currency reserves held by the banks in their exchange settlement accounts and that depresses interest rates and which is why bonds are issued in the first place,
Standard and Poor's, "Interest-Rate-Targeting Central Banks Supply Whatever Reserves Are Needed"
"modern central banks, in normal times (such as before the crisis and the forays into QE) target a short-term (usually overnight) interest rate in the interbank money market (the market in which banks lend and borrow central bank reserves). They do this by adjusting the amount of reserves on their balance sheet (in the banking system) to ensure that the interest rate is in line with their announced policy rate (the federal funds rate in the case of the Federal Reserve)".
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
The banks create credit or deposit money and they cannot create currency which can only come from the government. The government spends by issuing its currency to the commercial banks exchange settlement accounts which they hold at the central bank and any bond purchases must be made from these reserves. If banks require cash then they must also swap it for their reserves.
Levy Economics Institute, Publications
Working Paper No. 244 | July 1998, Can Taxes and Bonds Finance Government Spending?
This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy. https://www.levyinstitute.org/publications/can-taxes-and-bonds-finance-…
Tl...
I strongly disagree with your views.
Monetary base is only a proportion of money supply.
Govt borrows " money"... Mostly from the private sector which can only be bank created credit..... Ie inside money.
Like I said... What u assert as a"truth", is just an idea...
Just as monetarism was the be all and end all back in the late 70s'... and which over time has become useful...but not the "truth"., I'd say MMT will have a similar life span.
That's my view
The banks receive new currency reserves from the government and they themselves then create deposits into the accounts of the recipients, a double entry on the books of the banks, they receive an asset of reserves and they then create a liability on their books of a deposit. Taxation deletes both the bank deposit and the reserves again. How else do banks accumulate excess reserves with which to buy bonds with? Deficit spending will always lead to an accumulation of reserves by the banks and which will then drive down interest rates.
Budget deficits also increase household net savings as the government is spending more money into the economy than it is taxing back out again. If it was only spending money borrowed from the private sector then this would not occur. (Sectoral Balances). https://theconversation.com/how-government-deficits-fund-private-saving…
I was shouting this from the rooftops from about 2014 onwards on this forum, with NZ residential property, and just how much money was being sucked out the system for mortgage P & I and rents etc
While overseas money was using Auckland real estate to park their funds and protect them from their homeland's "financial regimes".....and pushing up prices !
I would always say we would be all so much better off with those funds, over all the years, going into businesses, capital investment, R & D, investment in new technology etc etc
But everyone just shut us down, as being "DGM's" and we where "financial idiots" for not joining in the PPP (property ponzi party)
Well, it went very well for a while, I will admit and some did do well out of it, however did anyone out there think of the long term ramifications of so much money going into a "NON PRODUCTIVE ASSET" and for all those PI's out there, rents DO NOT qualify.
Really I have never known a group of people to be so "swung" by the "property spruikers", media , banks , their "know all" uncle around the BBQ etc etc ......and the "greed" and penny pinching out there !
It only leads to a conclusion that these people weren't that "bright" financially ....or were so weak and indecisive and got caught up in the "hype" as couldn't make their own decisions, which brings us back to the issue of financial education and the almost non-existent lack thereof in this country, which the banks absolutely love btw :)
I have no sympathy for anyone who "overextended" themselves in any way - you can struggle and stress your way out of it on your own (and don't include the taxpayer !)
And next time you find your mouth talking "2 to the dozen" about property, at that family and friends BBQ - stop and think BEFORE opening your trap !
DYOR NFA
Said it before as well, long time dgm. I even sold our real estate 2014 or so, lost out big-time but still maintain I was seeing things correctly. If the general populace were to suddenly become"financially literate" at this point they'd scream and run a mile from our current system.
Yes, I can remember you on here .... just be patient redcows, what went up so stupidly, will come down ! You will not lose, those mortgagee sales will slowly but surely increase, as the banks just absolutely hate losing money !!
I never got into property investing in Auckland (or NZ) I could see it was just a ponzi scheme and would only really work if you already had at least 2 properties, in good areas - with alot of equity in them already ! ........and who wants to be a mortgage slave to some aussie bank !
The "sheeple" are now hanging on to all these immigrants coming in and by some "fairy dust" magic, the rental income will flow, with increasing $$$$$ to cover their increased costs ! while properties just get more and more people squeezed into them, while the chances of getting it "trashed" only increases, while costs just keep rising.
So we are back to square one - not enough reasonably priced accommodation (rented or owner occupied) for the number of people, while the standard of living drops ......we are slowly and surely heading down to 3rd world status, while some of the 3rd world is catching us up !
As regards "financially literacy" this is how out of touch even the real estate sector is .....text a RE agent asking what the rent was pw and they came back with $895 pw ....so I texted back and said "if I was to buy that property at it's "CV" with a 20% deposit and at todays rates for a P & I mortgage, I would need $2,500 rent pw ! ....and I'm still not covering any other expenses !!
2 words sum it up .......just ridiculous !!!
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