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The Treasury takes a refreshed look at the nature of our external debt and its components
Today's Monthly Economic Indicators published by The Treasury included a Special Topic: New Zealand’s external debt – an international comparison which is reprinted here.
By The Treasury*
A new breakdown of New Zealand’s external debt data, published by Statistics New Zealand as part of the September quarter Balance of Payments release, supplements the existing published data and allows us for the first time to directly compare our external debt position with international data compiled by the World Bank.
Taking stock of the new data
Chart 4 shows how the new external debt data fit in with the existing International Investment Position (IIP) statistics.
New Zealand’s total financial liabilities as reported by the existing IIP data at the end of the September 2012 quarter amounted to around 155% of GDP, with a fifth (33.5% of GDP) in the form of equity and the remainder comprising international borrowing.
To translate the international borrowing component into a measure consistent with the World Bank’s external debt tables requires subtracting the portion of the debt that relates to financial derivative contracts.
This returns a comparable external debt figure of 111% of GDP for New Zealand (the third column from the left in Chart 4), which is then broken down into the five categories as reported by the World Bank in the fourth column.
How does New Zealand compare?
Table 1 shows how the new, more granular data compare with a selection of OECD countries. New Zealand’s total level of external debt is slightly higher than the OECD average.
New Zealand’s public sector external debt, in the form of the ‘General Government’ and ‘Monetary Authorities’ categories, is lower than the OECD average. Similarly, at 10.5% of GDP, the external debt of the corporate sector (the ‘Other sectors’ category) is also comparatively low.
There are, however, two notable areas where New Zealand’s external debt position stands out – the first of which is in the banking sector. At just over 50% of GDP, and comprising almost half of New Zealand’s total external debt, debt in the banking sector is comparatively high relative to the rest of the OECD.
What sets the New Zealand banking sector further apart is the high proportion of the sector’s external debt that is owed to related parties ie, Australian parent banks. We were aware of this before the publication of the new breakdown. However, the new statistics put a precise number on the extent of related-party debt in the banking sector, which amounts to just under 60% of its gross external debt (around 30% of GDP).
The World Bank’s external debt compilation does not require countries to break down their external debt statistics in terms of what is owed to related parties, so it is difficult to assess how this compares to the situation in other countries.
However, given the high degree of foreign ownership of the New Zealand banking sector compared to other advanced economies, corresponding data from the Bank of International Settlements (BIS) suggest that New Zealand is a pronounced outlier in this respect.
The second area in which New Zealand’s external debt position stands out is the comparatively high share that is in the form of ‘direct intercompany investment’ (ie, external debt, mainly in the corporate sector, owed to overseas companies that have equity interests in New Zealand – column 6 of Table 1).
At 26% of GDP, such debt accounts for around a quarter of New Zealand’s total external debt compared to an average share of around 12% for the OECD as a whole.
What does this mean?
Overall, external debt owed to related parties by the banking sector, as well as direct intercompany external borrowing, is equivalent to just over half of New Zealand’s gross external debt – estimated to be by far the highest proportion in the OECD. To the extent that these two forms of international borrowing are more stable and less flighty sources of funds than completely unrelated forms of borrowing – a reasonable assumption given the deeper relationships and more-aligned interests between the counterparties – this implies that the composition of our gross external liability position poses less direct roll-over funding risk than in similarly indebted countries.
Given that the vast majority of our external liabilities are either denominated in New Zealand dollars or hedged, all else equal, this is also a factor that should lend support to our credit rating (although such hedging does expose New Zealand borrowers to counterparty credit risk).
Shifting the focus to the asset side
Nonetheless, while New Zealand compares quite well in terms of the magnitude and composition of our gross external debt, our position as a net international debtor instead highlights our weak international asset position.
This is illustrated by our comparatively high leverage ratio (ie, ratio of gross external liabilities to gross external assets) which, at close to two, is amongst the highest in the OECD.
Implications for policy
Altogether, the recent publication of the new external debt series by Statistics New Zealand affords us a fresh and more precise look at the composition and nature of a key portion of our international liabilities.
However, in terms of policy advice, the issues raised are similar in nature to existing work looking at ways to reduce the economy’s exposure to external vulnerabilities. Treasury has published a range of work over recent years on this subject including a 2011 Working Paper as well as the 2011 Briefing to the Incoming Minister.
Further research along the same lines remains a key priority.
This article was first published in January's Monthly Economic Indicators