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Lack of NZ investment overseas contributing to external imbalances, Finance Minister English says; Wants more NZers to follow lead of Super, KiwiSaver funds into overseas assets

Lack of NZ investment overseas contributing to external imbalances, Finance Minister English says; Wants more NZers to follow lead of Super, KiwiSaver funds into overseas assets

By Alex Tarrant

New Zealand needs to turn around a lack of investment abroad to help correct the economy's external imbalances, Finance Minister Bill English says.

Speaking to a Victoria University-Peking University Conference on Contemporary China, English said that while New Zealand was a recipient of foreign investment in line with the OECD average, New Zealanders invested overseas at well below average rates.

English told media after his speech that the gap between New Zealand's outward and inward foreign investment was "one of the things that creates an imbalance between New Zealand and the rest of the world."

The government wanted more New Zealand businesses to follow the lead of the Super Fund and KiwiSaver funds which were investing in overseas equity markets, he said.

Current account deficit dominated by income deficit

New Zealand's current account deficit - the shortfall between its earnings from the rest of the world and what the rest of the world earns from New Zealand - has been dominated by an income deficit as foreign investment in New Zealand earns more than New Zealand investment abroad.

The latest figures from Statistics New Zealand for the year to March 2012 show the country's NZ$9.74 billion current account deficit over the year was dominated by a NZ$10.77 billion income deficit.

To show how much the income deficit dominates New Zealand's transfers with the rest of the world, in the year to March 2012 it combined with a NZ$2.74 billion goods surplus, a NZ$1.25 billion services deficit, and  a NZ$0.46 billion current transfers deficit to give that current account deficit.

Encouraging signs

Despite the low level of New Zealand investment abroad, there were some encouraging recent examples of New Zealand firms investing overseas, particularly in China, English said.

"Fonterra has significant plans to increase the number of farms in China, a roughly NZ$50 million investment per farm. High-tech firm Rakon opened a US$35 million factory in Chengdu last year," he said.

"Real estate firm Richina has substantial holdings in both the commercial and residential sectors in China, with operations in both New Zealand and China. It also has plans to distribute a wide range of branded consumer products from different Kiwi suppliers."

FDI good for NZ

Despite bemoaning the lack of New Zealand investment abroad, English used the majority of his speech reiterating the benefits of foreign direct investment into New Zealand.

He used examples like Australian investment supporting the emergence of New Zealand's wine industry since the 1980s, and Japanese investment in the 1990s which helped introduce more value-added production and efficiency to the forestry industry.

"As a small country, we naturally rely on FDI to help us achieve economies of scale, and for access to ideas and consumer markets. We do not have the large stock of capital which older and wealthier countries have," English said.

Foreign direct investment had benefits for New Zealand in three broad areas: First, as a source of capital to supplement New Zealand’s domestic savings; Second, as a driver of growth in wages, employment and output; And third, for the transmission of technology, skills and know-how to New Zealand and for improving connections to valuable international markets.

New Zealand simply did not save enough to cover its investment needs, hence the current account deficit.

"Foreign investment can bring benefits that foreign borrowing does not. These benefits can be of particular value to a small economy, and include: FDI provides a stronger buffer against economic shock because investment comes without the fixed interest payments of debt; FDI produces transfers of technology and know-how, and provides access to international markets," English said.

"In 2008, Treasury concluded that foreign capital flows into New Zealand lifted incomes by around NZ$3,800 per worker between 1996 and 2006 in today’s prices, and lifted wealth by NZ$16,000 per person," he said.

"Foreign investors in New Zealand do take out some profits, but between 2006 and 2011 they have also reinvested about 25 per cent of their returns on equity back into New Zealand.

"New Zealanders interact with foreign-owned businesses every day. Over half of the companies larger than NZ$100 million in New Zealand have majority foreign ownership. Many of these companies are a familiar part of our national landscape, and provide Kiwis with a huge range of products and services. They are also among our largest employers. A recent study showed about a quarter of Aucklanders work for foreign owned companies," English said.

FDI, inward or outward, did not necessarily mean acquisition of full ownership by foreigners. In many cases it could take the form of a joint venture or partnership between New Zealand and foreign owners.

"And FDI is not a one shot deal. Businesses built up under foreign ownership can move or return to New Zealand ownership," English said, using the example of Shell petrol stations being bought by Z Energy (half owned by the Super Fund and Infratil.

If New Zealand could not access foreign investment the cost of capital would increase, constraining businesses’ ability to grow. That would reduce employment opportunities and household incomes, English said.

"Treasury has estimated that a permanent one percentage point change in interest rates (say, from 5 per cent to 6 per cent) would lower the level of GDP by about 2 per cent over a period of time. New Zealand’s standard of living would be lower without access to foreign investment," he said.

"FDI can have its costs. The quality of foreign investment matters, and New Zealanders care that investment goes to productive capital, and that it supports jobs and higher incomes. But fears of foreign ownership are frequently overstated. While it is true that the returns from foreign financing contribute to New Zealand’s current account deficit, it’s also important to consider the bigger picture," English said.

The outcome for the economy was positive overall when foreign capital raised worker productivity and national income increased by more than the return on the investment, he said.

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The only way forward is the hard way.  But it's got to be done.  Personal savings, which will turn into national savings, will turn into both local and overseas investments.

What does Bill expect ? We dont have compulsory superannuation contributions  like everyone else in the OECD. As an island we are quite inwardly focussed so foreign investment is not really on the radar for most people ,  and many  Kiwi's are poor savers anyway.

The government wanted more New Zealand businesses to follow the lead of the Super Fund and KiwiSaver funds which were investing in overseas equity markets, he said.
You just have to laugh or it would be a case of tears all round.
Didn't Mr Chaston highlight Pimco's less than charitable view of historic equity returns in today's Top 10: - ref #  9?
This long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return (known as the Siegel constant) since 1912 that Generations X and Y perhaps should study more closely. Had they been alive in 1912 and lived to the ripe old age of 100, they would have turned what on the graph appears to be a $1 investment into more than $500 (inflation adjusted) over the interim. No wonder today’s Boomers became Siegel disciples. Letting money do the hard work instead of working hard for the money was an historical inevitability it seemed.
Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?
Bill English, forever on the lookout  for something for nothing - he has been there before- right?

Are companies/trusts treated differently to individuals in relation to investments overseas.  If you have more than $50k invested offshore (excl Oz) don't you get hit with tax on 'unrealised capital gains'?  That's quite a disincentive from where I sit.

I believe so, well it certainly is the case for local and foreign issued bonds that are bought at a discount to par and or rise in price from the purchase reference point - capital gains taxes at the effective marginal income tax rate are alive and well for individuals. Unrealised foreign exchange gains have to be added to the penalty. Not much incentive really. I guess there are forces at work making those draughty boxes on the hillside attractive.

Well, d'ooh! Bill
NZ has a kindly taxation system that allows full tax deductibility on the costs of acquiring & developing property, but doesn't tax the resulting capital gains. 
And you wonder why Kiwis insist on continually pouring their money into rental properties, earning us zero external income, while financing it all from foreign borrowing?
The NZ system hardly encourages us to get into overseas investment.  In fact, you would be a screw loose if you didn't grab the landlord subsidy. 
You and John must be the only ones in the country to whom this is is a surprise

Our current account deficit is a huge problem with a projected $14,000,000,000 flowing to the foreign owners of our businesses and debt. So Foreign investment in NZ is a good thing? Apart from the two dubious examples quoted wouldn't we be better off owning our own big banks, insurance companies, forests, gold mines, oil industry, shopping malls, retailers, power companies, telecommunications outfits etc. Shouldn't our savings be going into Kiwi companies? According to Brownlee we're practically swimming in undiscovered oil and minerals but they're grovelling up to the likes of Petrobras and Sinopec to "invest" in stealing our assets. Makes no sense.
According to Bill we should be investing overseas instead, into equities of all things. Apart from the exposure to currency risks, why give my hard earned to the spivs on Wall Street or the City of London - a cross between a casino and straight out looting operation.

KD - the current account deficit is NOT a huge problem, if one's regard for personal property rights is greater than one's regard for NZ's sovereignty - just keep selling chunks of NZ and she'll be right, maaate. 
I'm coming to the conclusion that the likes of Bill English and NACT are becoming a clear and present danger to NZ's sovereignty. I don't see firm and effective evidence to the contrary.
Cheers, Les.

Stand for parliament , Les , and see if you can effect any change .....
....... seriously , if you & Hugh , and baby-boomer-bully Hickey , and one or two others with more brains than a gnat can get in , we'll receive better governance .....
Gnats and Lay-Bore, oy vey ...... what a choice !

I presume the $14b profit  going offshore is the result of the company's making money on mainly exporting things.  I wonder what the sums would be if they were not here, lost jobs, lost exports, lost tax etc.

I have no idea why you would assume any such thing keriwin. Perhaps you would like to come back with some research. The current account deficit is largely comprised of interest payments and profits to foreign companies. The biggest chunk of the debt has been raised to fund housing, consumption and Government largess. The foreign owned companies are diverse but there are big chunks of investment in retail, shopping malls, banking, insurance and so on that are domestically focused.
Just to put this in context, we have a current account deficit forecast at around $14billion versus a trade surplus of one or two billion. If these guys are making heaps of money by exporting, the benefits are certainly not showing up on Kiwi balance sheets.

I am not assuming anything,  I just said it would be interesting to know what the affect would be if they were not here.

Your source for that figure of $14 billion, please?
Also - who is this "we"?  If you individually want to own shares in these various businesses you cite, you can.  How are you, or "we", made better off if I ,as a New Zealander, own shares in them (which for all you know, I do)?  
If you want to put your savings into a fund that invests in Kiwi companies, you have that option as well.
If by "we" you mean "the Government" - whether you and I are made better off as a result of Government owning these things depends on whether the Government manages them effectively so as to maximise their value, and spends the money that it earns from its ownership in ways that benefit us.  Looking at the record of Governments around the world and throughout history, I cannot imagine why you would assume that this or any other Government would do either.

Treasury forecast the current account deficit to rise to 6.8% of GDP next year. GDP is currently $202B, say $210 (in 2013) x 0.068 that's $14.28 billion. We have a trade surplus of one or two billion so the forecast net deficit on investment income must be at least $14 - more like $16 billion. That deficit is funded by borrowing - shows up on Government and/or private balance sheets - or selling more of our dwindling assets.
You'll have to ask Bill English who he is refering to when he says NZers should invest more overseas but I think he is talking about individuals and retirement funds etc., not central government. My investments are entirely with NZ infrastructure.
I was thinking the "we" was Kiwi individuals but I don't have a philsophical problem with Government investment in NZ. I would, for instance, by delighted if they partnered up with the likes of NZ Oil & Gas to help develop an oil field or two. Our SOE's are, by and large, succesful and well run companies that are returning a worthwhile return to us all. I don't share the view that Government ownership necassarily means some sort of Polish shipyard waste of space basket case. 

Fine, you've put all your investment into NZ infrastructure.  Let's assume you make good returns on that investment and so are individually better off than you would have been if you'd invested in a more internationally balanced way.
How does that make me - or "we" - better off than if the same investment had been made by a foreign firm?

I think you're both wrong. Our SOE's make a profit out of? Us. That's not a profit, it's a zero-sum game, regardless of whether the SOE does good stuff or not.
The expectation of returns, is the age old problem. It expects more and more bits of the planet to be available to be purchased. Expecting the remaining bits to get more expensive would negate the 'return' via iflation/bidding, no?
So you have the have a wee think about that glib 'better off'. Define please. Are you happy out-bidding others in a permanent-shortage situation? How long do you think they will let you do that? Could there not be a better approach?

Do you see it as a zero-sum game if two people voluntarily agree to a trade?  For example, if you, as a willing buyer, purchase something from me as a willing seller.  Or if you prefer, let's leave money out of it altogether - I offer to trade you a widget for two flanges, you agree, the trade takes place. 
The amount of widgets and flanges in the world is no greater than it was before the trade took place.  You and I are nevertheless both now better off than we were before.  We both now have something that we value more than we valued the thing which we exchanged for it - otherwise the trade would not have happened.
As for out-bidding others in a permanent-shortage situation - the very definition of a market.  Prices and markets exist precisely because there is permanent shortage.  There is not an unlimited supply of (insert practically anything) and therefore everybody cannot have as much (i.p.a.)  as they want.  The market mechanism, in which individuals decide for themselves how much they are willing to pay to acquire, and how much they are willing to accept to give up, (i.p.a.), is one way of determining who shall get how much (i.p.a.).
Certainly, other ways have been tried in which some central authority decides who shall get how much (i.p.a.).  They've not been very successful.

Mist - some things you get right, but you must have studied economics at some point - it's a bit of an intellectual boat-anchor, that one.
Makes folk trot out glib phrases like 'the economy', and 'better off'. Than what? Than who? Then you cloud it with 'investment'. Via debt? To date, almost all debt repayment has been a numerical/inflation exercise. Did you cost in the real extraction costs, and pollution costs, of your shoe-making machine? (I used to build tannery equipment, as it happens - gold contacts and rare earths.....)
Wealth is only the expectation that you can redeem it for something real. Don't make the mistake of assuming that because you can keep 'getting wealthy' in that manner, that the planet will do the physical underwrite. And the moment that it can't, you have bidding/inflation therefore not as much 'wealth' as you thought.
A process that has to accelerate.

"For me to give your model any merit PDK, "
Lets start from here,
I think maybe you are using the wrong word with "merit".  We have used a tremendious amount of fossil energy bending nature or the physical planet to our will...and continue to consume fossil energy to hold it there. Once that energy goes into decline and its about now, nature will go back to doing as it wishes....I see that as irrifutable, rather than merit it simply will be.
"You need to predict future events"
Given all the unknowns the not least of which is human behavior its not possible in any detail. But I think the trend is going to be pretty clear...
"give casual lead-ins and alternative turning points which stand up to observation. "
Im not sure what you mean by alternative....observation goes back to human behaviour, if pppl dont want to see, they wont see.
Just look at Romney and Ryan, two extremists who are at the head of one of the 2 major political parties in the US. Yet roughly 50% of the population will blindly and willingly vote for them.....I mean they make Rodney Hide look like a Commie....Some choice, if Obama wins this stupidity will carry a stagflation sort of way....If he loses the US will implode in civil war.....
"Not everyone can have a dam-able stream, a rich startup position, or the finance to buy a load of pv panels & the gear to go with them."
So those who see the change early will get the best seats.....
What is wealth?  someone with the foresight to move with confidence based on what the see in the future....
In terms of making shoes I fully expect that such local artisans will make a come back....clogs are quite simple.....I guess there might be some good examples of Holland in WW2....must research that....
Fossil energy has allowed great specialisation, but worse over-population...both have to be and will be corrected. So simpler, less ppl....NZ is one of the few places with the about right numbers IMHO. My worry is the super-rich will see us as the lifeboat and jump in en-mass and our stupid Govn will let them in.......The others will be the ultra poor with nothing to lose in taking to the high seas, and we will have nothing or the balls to stop them....neither set is any net use to us.

"You might owe half a million dollars, yet be able to employ a friend who needs a job; then you are wealthy".
No, you are in debt.
"you need to predict future events".
That's easy:  Is the current growth-requiring regime capable of being virtual?  If it was, there would be no need to attack the RMA, push Aquaculture, push mining, Antarctic fishing, more roading...... we counld do it cyber-ly.
We can't, it apparently has to be physical. While lesser intellects might be fooled by the "X years resource" claims, not understanding the difference between growth and 'at current rates', the reality is that all finite resources deplete very quickly in the face of exponential growth.
Beyond the peak of extraction of whatever the linch-pin resource is (and I argue it's fossil fuels) your growth has to rely on efficiencies, and triage of discretionary activities. Both are diminishing-return slash finite arenas.
Which leaves your debt to pay your mate, unrepayable. Same as the Transport Agency, and for the same reason.
Economics fails as a discipline, by failing to understand that the required physical activity requires energy, and that the laws of thermodynamics are immutable. Maybe it has some post-peak use, in tracking the down-side, but I doubt we'll get there. More likely, there will be serious wars over real resources, a reduction in population in the process, and a clean-slate start (winner will deny debt, loser will lose resources).

too many words.
I could pick you had debt, by your need to argue for a scenario where it can be repaid.
You might want to think on that.
The curently-held debt, including yours, is not redressable. Steve Keen is correct on that.  What happens to it is an interesting question - I suspect an up-the-chain hoovering, poor getting poorer, middle-class hollowed-out, banks last one standing.
Good luck.

Yes there will be attempts to 'service' the cumulative debt.
That will/has-already included the inevitable reduction of CB lending rates to effectively zero. Which won't be enough, and we are starting to see folk putting their 'wealth' into less-than-zero return form.
But a growth-requiring system can't carry on i negative territory. Your debt will be called in, part of that upward hoover, via those punters happy with a less-but-real return, than none.
Don't waste tme arguing here, back to your paddock. When the payment for your output drops below the cost of servicing your debt, you're gone.

Good luck with all that.
I'll stick to relating to the real planet, and how much is left of it. I wouldn't be in debt beyond peak energy - the goal-posts have to recede at increasing speed from there on.
or - all bets are off. That includes your 50%.

50% equity, well all I can say is I have 90% and Im worried its too much debt....
Consider what your business is worth ie net output if it has to go organic and some of your land is used to make your bio-deisel....d
Its worth way less I'd say.

MdM -
A physical barter I have less problem with, than a 'profit-take'.  The items existed (presumably) to be traded. They may not have been valued porperly though - indeed almost certainly weren't. To value physical items properly, the wider impacts of their extraction, processing, manufacture and pollution have to be FULLY mitigated in a physical sense. (We don't go near that - look at the climate-change denial, it's all about ducking the cost).
But when profit is talked of, we're in a different ball-game. That is an expectation that more can be 'bought', physically. It is an artificial expectation, the underwrite has real limitations.
It's Soddy, Positive Pigs and Negative Pigs, 1926.
But when it is an energy system, which supplies a nation with electricity, then it will do the physical supplying whether it's voluntarily-personed, whether privately owned, or Govt. If a 'profit' is made from the 'shareholders', to whom the 'profit' goes, then it's horseshit. A zero-sum game. Claiming that 'they are successful because they make a profit', is incorrect. Two entries cancelling each other out in the same ledger.

Unpin the ideology.
If you don't include the real cost (pollution mitigation and all) in the 'value', then you're in cloud cuckoo land. Playing a not-real game. Soddys negative pigs territory.
We do a lot of things which have a real negative cost - how long can that continue? And then ask "when?"

" It's almost if you're apply thermodynamic laws, then thinking everything should stop because the rules predict lossy transactions".
for 'should', read 'will'.
Good luck with your debt.         :)

I don't understand the distinction you are making between a "physical barter" and a "profit-take".  In both cases, both parties exchange something they have, for something else that they value more.  In both cases, both parties are better off than they were before as a result.
I don't have a problem with the external costs of extraction, processing, manufacture and pollution being internalised in the price of an item.  On the contrary, I am strongly in favour of it, as are most economists.   That is the purpose of market-based mechanisms such as the Emissions Trading Scheme.

Well you should. I trade an item in my hand for one in yours, no problem (the limits to growth of that activity will be when one essential resource is not available). If you add a profit charge, you expect to increase the amount in-hand next time, and it's represented by debt held by the other party. (if it was underwritten cash, go back to my first sentence). The debt is an expectation of a draw-down from the future. There is no guarantee - no linkage - that the physical world will be able to deliver. Unlike the in-hand proof that the present transaction can be delivered.
ETS?  a classic example of economics horseshit. The physical dilemma is that we need to reduce the real amount of CO2 in the atmosphere. That can be done two - and only two - ways. One is ceasing (not reducing, that's too slow) our emissions. Your economic system couldn't survive that. The other is sequestering - in a real, not virtual manner - the C02. That requires energy - the very thing creating the problem. So you have to triage what you are doing, to fix what you're doing, and you expect to grow meantime?
The physical problem gets worse - existing forests aren't sinks, they're zero-sum games. New forests are the only way to increase sequestration - but you have to keep their carbon sequestered - yeah right. Then the question is of acreage - and there isn't the acreage on the planet, to sequester what we put out.
Don't give me the 'at a certain price, a way will be found', crap. We're out of time for that, by the time we are 2deg hotter, your 'market' would be so stressed, that it won't signal anything. What we will get, from here on in, is an energy-constrained lack of, then negative supply of, growth. The continued bleating will be that we have to get wealthier, before we can address the issue. We won't get wealthier, so we won't address it.
Economics as it is currently set up - growth-requiring - can't survive permanent contraction.

Your idea of what economics is about is, if I might say so, an extremely narrow one, apparently deliberately designed so that you can disagree with it.  Please don't ascribe to me ownership of, and responsibility for, so circumscribed and distorted a view.

Economics is/was an artificial, man-made tracking system. It had to be growth-fitting, as that was what was happening at the beginning of the Gaussian..
It's relativity to, and ability to anticipate, real stuff in the real world beyond peak, is approximately nil.

"Economics is observation of value within a system.  It is not man-made/artifical in any way".
Ok, maybe I should say that the growth-based fiscal system cannot continue in a finite sphere of operations, and that economics, as taught, doesn't acknowledge this.  Show me the economist who understands that we are entering a permanent down-side! Herman Daly and? I rest my case.

"the Butterfly's Wing" which when they say that the top 1% has taken all the gains for the last 30 years neatly explains why the economy has sagged without more and more debt.

Ah, a discussion about who owns the deckchairs, but these ones are on the Carpathia.
Which sank on 17 July, 1918.
Seems to me you're better in physical proximity to your assets, more chance of retaining control. Who would be a shareholder in an NZ company which re-established on the Texas/Mexico border, for instance?

You don't have a chip on your shoulder by any chance do you???

I say , steady on , old bean .... Sore-loser doesn't have chip on his shoulder ..
....... he has two chips ! ...... our boy is very well balanced .......
And nice to see that the bold and the CAPS-LOCK are back !
..... shout the message till you're horse , me old chum ....... Tell the party pooper hike-it-HICKEY to go & throw himself to the wolves at the FBI ....

English has it right - of course the average NZer should be diversifying their savings outside of NZ. 
BUT if he's really serious about this, he needs to show it by removing the stupid Cullen tax regime that taxes foreign investments outside of Australasia differently. 

If you are referring to the FDR then I agree
A piece of legislation that is designed to discourage investors from investing in overseas shares.
The FDR makes it far too hard to invest in the next microsoft or next apple. 

Yes, that's what I'm referring to (and the rules around FIFs and CFCs). Both the system and the rates are a disincentive for the average NZer to invest/ diversify overseas. This particular piece of tax legislation is one of the key reasons why I have lived outside of NZ for the past 12 years (despite the tax break on offer for the first few years one gets on upon returning). 

They know this, I can't understand how they can have so little conscience when they speak.

Who will stop the megalomaniac’s in this country - driving the majority of the NZpopulation, tax- and ratepayers into bankruptcy ?