[Super_BQ]

I came across this article which I found quite interesting about NZ's current fiscal policy.

http://www.stuff.co.nz/4010053a13.html

For the 2007 year, a deficit of $14.45b kinda scares me. That's over $3,600 of debt each NZ person gained. I suppose the idea of a "Balanced Budget" (where revenues = expenditures) doesn't exist in NZ.

Some articles online claim NZ has the worse debt to GDP ratio among the developed nations in the world. Certainly monetary policy is not proving to be effective in NZ. As interest rates continue to rise, so does housing prices.

From the horse's mouth, NZ's debt analysis.

http://www.rbnz.govt.nz/statistics/extfin/e3/data.html

$186B / 4 million peeps = $46,500 :eek: each soul living in NZ owes in overseas debt. Those willing to prove other developed nations having a better record, please post a reply.

http://www.interest.co.nz/bennett-17Oct2006.asp

This article seems to be a real eye opener. One must ask is, "How long can NZ economy last before stagflation steps in?"

BQ

[stu70]

I guess if they do enter stagflation, the government will probably encourage growth through spending on capital projects or cut the taxes while the central bank will try to curb inflation through higher interest rates. But it is very tricky thing to implement such a complex plan. In America they are starting to see the meltdown in the housing sector. Remember the world always follows what happens in the USA. I would be very careful investing in NZ especially if that entails heavy borrowing (e.g. real estate).

[veronica]

someone show me the stats that prove the world always follows what happens in the USA please.

Its not something I have seen stated before., but then I don't read American newspapers.

[stu70]

someone show me the stats that prove the world always follows what happens in the USA please.

Its not something I have seen stated before., but then I don't read American newspapers.

You just have to read any financial news not necessarily American. Like it or not, the world markets follow Wall St. And I didn't cook it up. Regards

[veronica]

sorry thought you were talking house prices specifically rather than general financial things

[Super_BQ]

Stu's correct in a sense.

Though real estate may not go hand in hand with the financial stock market, it does however have an indirect effect - the economy takes a hit. A lot of emphasis has been aimed at those who took "sub-prime" mortgages in the US (over the past 3 - 5 years) and when the interest rate went up, it squeezed them out of the market. The reason why sub-prime loans has caused so much concern is because these are groups of people that are in no condition of having a mortgage - as by conventional mortgage tests show that they should not of been eligible to buy a house.

Of course in the land of the free, you're gonna see some new banks that open up to cator to these high-risk borrowers. Right now we're seeing record high foreclosures at both ends (the rich and poor) and also many of these so called sub-prime lenders have gone bankrupt.

Can we assume that NZ will follow along the same footsteps as the US? Only time will tell (but historically, it's been proven YES). I can assure you that the very cause of this "sub-prime" lending practice has been going on in NZ for the past couple of years or so. We could be 1 year or 5 years later before NZ will see the same (or worse) effect that the US is seeing now.

Just look at almost any bank in NZ offering sub-prime mortgages. For those not familiar with "prime rate" it is generally the reserve bank rate + 2%. Visit to any bank and one can see that a loan can be had for under 9%p.a. (less than prime).

From word of mouth and those into the real estate game here, many 1st time home families are stuck trying to mortgage 100% of the value. Some already owe 80% on their 1st home and are looking out to mortgage 100% on their 2nd home as an investment.

Is this practice healthy? Easy to say no and easy to put the blame on the people running to the banks for their next home. I have to say a lot of the responsibility belongs to the banks that issue these loans when in fact, they shouldn't be doing it. There's a reason why the reserve bank raises interest rates and that's to tighten the money supply in the economy. However the banks tend to play a blind eye and like any business, they run to make a profit - even knowingly there's a high chances of a low income family losing their home after 2 or 3 years into the mortgage. Perhaps "moral suasion" doesn't work and the NZ reserve bank needs to play a more active role in controlling the $ supply. Ok i'm getting off topic here..

WINZ is not a saint in this business. They're a gov't organisation that also provides sub-prime lending to low income families. When the families can no longer make the mortgage payment on their state home, who ends up paying (or has already paid) the rest of the mortgage?

[MarkS]

BQ, I think you're confusing a few things here.

First of all, yes, a current account deficit of that size is very concerning for this country. But I think you've misunderstood what causes it.


I suppose the idea of a "Balanced Budget" (where revenues = expenditures) doesn't exist in NZ.


Actually, NZ consistently runs a budget surplus, i.e. revenues are more than expenditures (see e.g. http://www.stuff.co.nz/stuff/0,2106,3897482a13,00.html)

Most of government spending doesn't affect the current account deficit (or surplus, should we be so lucky!) at all. That's because it's taking money from people inside the country, and spending it on (e.g.) wages for people in the country, benefits for people in the country, etc. It's analogous to moving money from one pocket in your trousers to the other - it doesn't make you any better or worse off. The current account deficit exists because more money leaves the country than comes into it (New Zealand "spends more than it earns", as imports are greater than exports). Each one of us contributes to the deficit every time we buy something in a shop that was made in China, but then each of us (as migrants) offsets that deficit when we move into the country bringing savings with us. Interesting, poor nations tend to have big current account surpluses (e.g. Latin American countries exporting vast amounts of coffee beans), whereas rich countries tend to have deficits (only the relatively well off can buy TVs and computers made in the Far East). Much more (including an interesting map) at Wikipedia (http://en.wikipedia.org/wiki/Current_account)

Some articles online claim NZ has the worse debt to GDP ratio among the developed nations in the world.

...

$186B / 4 million peeps = $46,500 each soul living in NZ owes in overseas debt. Those willing to prove other developed nations having a better record, please post a reply.

Wikipedia (http://en.wikipedia.org/wiki/List_of_countries_by_public_debt) has a list of nations of the world, ordered by the percentage of their national debt compared to GDP. Lebanon is number one on the list, with debt equating to a shocking 209% of GDP. A few other countries:

2 Japan 175.5%
26 Germany 66.8%
29 Canada 65.4%
30 France 64.7%
32 United States 64.7%
61 United Kingdom 42.2%
100 New Zealand 19.9%
120 Hong Kong 1%!

So that little list includes the world's five biggest economies, and NZ is doing an awful lot better than each of them. Not too bad. Of course, those figures are total debt, rather than overseas debt, but they should show the point.

Certainly monetary policy is not proving to be effective in NZ. As interest rates continue to rise, so does housing prices.

Rising interest rates should have a positive affect on the current account, as they cause money to flow into the country. That's only temporary of course, until rates move down and the money flows out, so that's not too much to get excited about.

Rising house prices are of course a feature around the world at the moment, especially in the UK. There's plenty of structural problems there that will take a long time to work though. However, I don't think "rising house prices" automatically means "monetary policy is not proving effective" - monetary policy generally primarily targets inflation. (Of course, inflation is high at the moment, so it might be indeed be correct to say monetary policy is failing!)

As for the sub-prime market, my understanding is that some of the lending that has been going on in the States has been mindblowingly irresponsible. We're not just talking about 100% mortgages, or even 100% self-certified mortgages (where the borrower doesn't even have to prove their income). Much of the current worry in the States is from 100% mortages where the payments are set below that needed to pay the interest, with the intention that in a few years the price of your house has risen and you can re-document the loan. Does that sort of product exist in NZ? I'd be very surprised if it does in any kind of significant numbers. That doesn't mean that NZ won't suffer if the US economy tanks, but it does mean that things won't necessarily be as bad as some might fear.

[Super_BQ]

Mark,

Actually, NZ consistently runs a budget surplus, i.e. revenues are more than expenditures (see e.g. http://www.stuff.co.nz/stuff/0,2106,3897482a13,00.html)

Can you explain the $15.3B deficit shown there? By my interpretation I can't see any surplus shown under Official Government sector.

http://www.rbnz.govt.nz/statistics/extfin/e3/data.html

Furthermore, the % of GDP shown of around 115% doesn't look good - I must be missing something here.

It's analogous to moving money from one pocket in your trousers to the other - it doesn't make you any better or worse off.

It's inflationary and goes against the reserve bank each time they raise interest rates. I've often said that fiscal policy (the gov'ts budget) vs. monetary policy (the central banks economy) do not go hand in hand.

The current account deficit exists because more money leaves the country than comes into it (New Zealand "spends more than it earns", as imports are greater than exports). Each one of us contributes to the deficit every time we buy something in a shop that was made in China, but then each of us (as migrants) offsets that deficit when we move into the country bringing savings with us.

Perhaps an explanation why the NZ currency has been trading over 70 cents ($1US->NZ)? Each time the reserve bank raises the rates, more $ floods into NZ to lock in on the interest. If more cheap imports from China were the case, then why hasn't the NZ currency dropped to reflect this curent account defecit?

From your wikipedia post of current account (http://en.wikipedia.org/wiki/Current_account)

Action to reduce a substantial current account deficit usually involves increasing exports or decreasing imports. This may be accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports. Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly affect the balance of payments. This can be accomplished by increasing domestic inflation (e.g. by cutting interest rates), loosening monetary policy (making more money available), or adjusting government spending to favor domestic suppliers.

But doesn't this contradict your statement?

Rising interest rates should have a positive affect on the current account, as they cause money to flow into the country.

[gpbenton]

Mark,



Can you explain the $15.3B deficit shown there? By my interpretation I can't see any surplus shown under Official Government sector.

http://www.rbnz.govt.nz/statistics/extfin/e3/data.html


You appear to be talking at cross purposes. Mark's comment was regarding a budget deficit (or surplus), which is the difference the government takes in taxes from what it spends.

The figures in this link are from overseas debt, which is something different.

[gpbenton]

The best figures I've found are here
http://www.nzdmo.govt.nz/nzefo/2006/selected.asp

This shows a current account deficit of -7.4% of GDP, but a budget surplus of +3.5%.

[Rabbit]

I thought the outline of the three scenarios decribed in this article give a good indication of the current situation and what could happen in the future.

http://www.goodreturns.co.nz/article/976492101.html


"Here are three possible scenarios that could resolve our current account woes.

a slow but steady rise in our country risk premium which means a gradual increase in our interest rates and the Kiwi dollar probably being kept artificially high. This would be a slow and painful economic death! Domestic demand would eventually fall from slowing economic growth and rising unemployment. This would, in turn, decrease demand for goods and services and so a gradual improvement in our trade balance would result.

a dramatic fall in the Kiwi dollar as foreign investors leave their NZ dollar investments in droves. This is what happened in Iceland earlier this year and would result in a savage adjustment with the collapse in the Kiwi meaning a dramatic increase in interest rates as the Reserve Bank of New Zealand (RBNZ) fought to keep imported inflation under control. This would lead to a domestic recession with exporters doing very well and so a readjustment to our deficit would occur. This scenario probably needs a catalyst such as a country credit downgrade combined with consistent current account deficits of over 10%.

New Zealanders start to save more rather than spending up large as they are currently. Recent Government moves in the savings area are a policy response to this. If successfully implemented they are a long-term solution to improving our current account deficit while also starting to wean New Zealanders off their current residential housing investment dependency."

I suppose with Kiwisaver they are attempting to move towards the latter?

http://www.scoop.co.nz/stories/BU0703/S00512.htm

[Super_BQ]

You appear to be talking at cross purposes. Mark's comment was regarding a budget deficit (or surplus), which is the difference the government takes in taxes from what it spends.

The figures in this link are from overseas debt, which is something different.

Ok I get it. So the 3.5% surplus means the gov't collected more taxes than what it spent = a net income. But the $15,355 Billion (http://www.rbnz.govt.nz/statistics/extfin/e3/data.html)is the liability section (on the balance sheet) that the gov't still owes in debt overseas? So in normal accounting procedures, the net (surplus) income had reduce the debt figure of 9.6% (of GDP) from around 11% (of GDP) in the 2005 year.

I assume 'public debt' shown previously:

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Is a different can of beans than the "Corporate Sector & Official Government Sector" (http://www.rbnz.govt.nz/statistics/extfin/e3/data.html). ?

But according to this:

http://en.wikipedia.org/wiki/Public_debt

Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government, federal government, municipal government or local government

So could we say the 116.7% (of GDP) figure shown by the NZ Reserve Bank (Total Corporate & Official Government Sector) is simply, "Total NZ Public Debt" ?

If this was the case, then 116.7% would put NZ within the top 5 of here (http://en.wikipedia.org/wiki/List_of_countries_by_public_debt). ?

Sorry if I caused any confusion as we all know different english speaking countries have words for the same meaning. (ie. a boot of a car is the trunk and the hood is the bonnet). :D

[MarkS]

Looks like we're making some progress here! BQ, glad you're getting the distinction between government budget surplus/deficits and current account surplus/deficit.

Just a couple of things to correct in your post:

$15,355 Billion

That's $15,355 million thankfully - an overseas debt of $15 trillion would be very painful!

So could we say the 116.7% (of GDP) figure shown by the NZ Reserve Bank (Total Corporate & Official Government Sector) is simply, "Total NZ Public Debt" ?

NO! (again thankfully!). The figure of 116.7% includes all debt - the government contributes 9.6% of it, and the private sector (i.e. private businesses) contributes 107.1%.

So, New Zealand would only be in the top 5 of the list of countries by public debt if you include all of NZ's private debt, which obviously is not a sensible way of looking at things.

On another point (and I don't have any figures for this, but could probably find them), I believe that the NZ government is net in credit. The overseas debt of $15bn is counterbalanced by assets greater than that held inside NZ, e.g. in the superannuation, ACC, and EQC funds.

So, it would seem to me that the NZ government is in a fairly healthy state of financial affairs. Unfortunately, New Zealand as a whole has a worryingly large current account deficit (i.e. exports more than imports), and very high levels of overseas corporate debt.

[MarkS]

(and I don't have any figures for this, but could probably find them)

Ok, that was me not being clever. It's in the link posted earlier by gpbenton - Crown Net Worth is $55.555 billion.

[Paul]

Looks like we're making some progress here! BQ, glad you're getting the distinction between government budget surplus/deficits and current account surplus/deficit.

Just a couple of things to correct in your post:



That's $15,355 million thankfully - an overseas debt of $15 trillion would be very painful!



A billion in the US is a thousand million and in Europe it is a million million I believe just to add to the confusion of the above!!!

Some interesting points here about people interpretation of the financial statements of NZ - NZ current account receipts (net income from taxes etc) are certainly a lot healthier than ours in the UK!!

[Rabbit]

The dynamics of the NZ economy remain interesting.

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10434061