By Bernard Hickey
Let's take matters into our own hands
It's now clear our government and our banks are not doing anything substantial to reduce our vulnerability to another Lehman-style Global Financial Crisis or to improve our national savings rate.
We have short term net foreign debt of around 50% of GDP or around NZ$90 billion. Every 90 days much of that has to be refinanced by our banks in the 'hot' international money markets that froze during the Lehman crisis of late 2008.
Our Reserve Bank had to tide over these banks in late 2008 and would have to again if the markets froze because not enough has been done to reduce that exposure.
European authorities and the Greek parliament managed to avoid a default and another financial meltdown by the skin of their teeth last week, but there remains a significant risk of more turmoil in the weeks and months ahead. America faces default by August 2 unless its politicians can agree to lift its debt ceiling and China is struggling to slow down its over-heated economy.
Our Reserve Bank has introduced the Core Funding Ratio to try to reduce our banks' reliance on these short term money markets, but as the IMF pointed out in March the exposure is still too large.
Essentially our policymakers have decided to cross their fingers and hope nothing goes horribly wrong. They're also taking a punt that China will succeed in its Goldilocks plan of slowing down its economy so it's not too hot and not too cold. They are betting this will keep commodity prices high and rising, which will in turn drive a farming-led transformation of the economy from being all about borrowing and spending to being all about saving and producing.
But even their own forecasts show this punt and hope strategy won't work. Treasury is forecasting our net foreign liabilities will rise to 85.3% of GDP by 2015 from 78.6% now as we continue to rack up current account deficits of more than 5% of GDP. New Zealand is getting more indebted and selling more assets to continue spending more than it earns.
Last month's Macro Forum conference also made clear that New Zealand's low savings rate means we have to offer relatively high interest rates to keep servicing our growing foreign debt, which in turn keeps our exchange rate higher than it should be and stops us from diversifying out of low added-value commodity exports into higher value, higher wage manufacturing and services exports.
New Treasury Secretary Gabriel Makhlouf seemed relaxed about this outlook in his initial interviews this week and has already said we should continue to sell assets to foreigners. The Reserve Bank remains wedded to a free floating currency, no capital controls and its inflation targeting mandate. And John Key's government ran a deficit last year of 8.4% of GDP, most of which will be paid for by foreign borrowing.
So if our policy makers won't do anything, what can New Zealanders do individually to reduce our short term foreign debt and improve national savings.
Here's a few ideas:
- Stop spending on imported goods and services or switch to locally made items. That keeps the funds circulating within New Zealand and reduces the need to borrow to fund a current account deficit.
- Use those savings to repay bank debt if you have it. This will help reduce the banks' need to borrow offshore to fund that debt.
- Use locally owned businesses where you can because that reduces the profits exported to foreign owners, again reducing our current account deficit.
- If you have repaid debt then the easiest way to ensure it helps repay foreign debt is to save with a bank. That allows the bank to reduce foreign borrowing.
- If you have to borrow, use a bank that funds its lending with local term deposit funds. That excludes the big four Australian banks and Kiwibank, who are continuing to borrow in hot international money markets to fund lending here. The leaves the likes of TSB, SBS Bank, Heartland Building Society, PSIS and the credit unions.
- If you're investing in a business, choose one that either exports or competes with imports, and one that employs locals on high wages. This wil reduce our current account deficit and improve savings.
In essence, save like the wind New Zealand because unless we do it ourselves it will never happen.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.