By Gareth Morgan
New Zealand has run current account deficits for as long as I can remember.
Those deficits get funded either by asset sales (private or government) or by increasing our debts. This is just simple maths.
At times we economists comfort ourselves with the truism that so long as the deficit as a share of GDP isn’t greater than the growth in GDP that year, then the increment to the debt at worst will keep the debt to GDP ratio constant. That too is simple maths.
Confused? Just believe me.
Anyway NZ is one of the most indebted countries in the world with a net external debt to GDP ratio of 90%. We are still behind Ireland (130%) if that’s comforting, and a smidgen short of Greece (91%), but Australia isn’t as bad (77%) while the US (19%), UK (14%) and Canada (20%), make us look delinquent.
This has come about – along with our interminable slide down the OECD standard of living scale – because we have an abominable record on economic returns from investment of our capital and labour.
We don’t have enough winners in terms of income generation, so the GDP we generate from applying capital and labour simply is insufficient to prevent our slide in relative living standards.
Notwithstanding that deficiency we continue to live it up like we are right up there with the world’s richest. And of course you can only drink champagne on a beer budget by selling your assets or raising more debt.
We do both.
So last week’s government celebration that the Chinese are keen to extend us more debt, buy more of our assets, is akin to the relief a chronic drunkard gets when the next drink is procured. But hey, we’re about to redefine our national targets to include happiness and other touchy-feely vibes from our clean, green and oh so pure environment, so determined are we to ensure the money side of the equation will matter even less.
Oh yeah? Money isn’t everything but having no money is. Ask anyone on poor street.
That reality is only slowly descending on us New Zealanders that remain here as the number of assets we own declines, and the share of our export income we have to devote to interest payments continues to rise. Our external liabilities are mainly private sector debt so the Business Roundtable would say “no ‘wuckin furries.”
Let’s switch for a minute from the sinking ship that Kiwis are aboard to the future for China, destined to become our largest creditor, and then the largest owner of our assets. Just what is their game?
On the surface it seems crazy that they would keep lending to indebted delinquents that use the money in large part to buy goods from China, so the Chinese export machine can keep humming. If the ability of the indebted to service their loans starts to falter doesn’t that mean that China will ultimately have to forgive debts - much like the US had to write off loans to Latin America in the early 1980’s?
That prognosis is correct but a lot of water has to flow under the bridge before debt forgiveness day. And meanwhile the Chinese can opt to buy assets with its export proceeds from the indebted rather than just allow the debts to pile up. In fact that’s a point we are reaching at present. China has a long term planning horizon, and unlike us is not obsessed with maximising what its households have to spend today. After all elections are not critical to the policy settings in the Middle Kingdom.
One thing we all know is China is natural resource hungry - it has a lot of resources within its borders but not nearly enough to satisfy the demands the world’s largest manufacturer needs. So getting access to resources abroad is a major objective. For example, remember all the fuss in 2009 when the Australians rejected China’s takeover offer for Rio Tinto and the revenge just a year later that saw that company’s executives sentenced to 14 years in Chinese jails? This stuff can get pretty heavy when push comes to shove.
Long before debt forgiveness becomes an issue, expect China to have accumulated a lot of assets in the countries that are happily running along on Chinese credit.
The equity for debt swaps will become ubiquitous as the debt dependency of some countries becomes a drag on their consumption-led growth formula.
New Zealand has to lift the income it earns from deploying its labour and capital, or alternatively just put up with a continued slide in income relative to other countries.
Choosing the latter underpins brain drain and we become little more than a retirement village for returning ex-pats, and a low income home for the rest.
Choosing the former requires a revolution in our tax, welfare and regulatory policies. We are a nation of incrementalists, so such a revolution is unlikely.
Gareth Morgan is a Director of Gareth Morgan Investments
This article was first published in the NZ Herald.