New Zealand’s debt

NZ debt %GDPBrian Gaynor in the NZ Herald wrote an article on New Zealand’s debt position. There are two important figures to note:

1. Gross external debt, which is the country’s total overseas debt.
2. Net external dent, which is determined by subtracting New Zealand’s gross overseas lending from its gross external debt.

New Zealand Government debt is currently $54.9 billion with total Government debt (external plus domestic) representing 38% of GDP. This is low by international standards. The biggest contributors to New Zealand’s external external debt are the registered banks which now account for $117.9 billion. The banks increased their overseas borrowings from $55.2 billion in 2001 to 139.5 billion in 2008. However since the GFC, banks have reduced their borrowing from overseas by $21.9 billion which is a positive development. However the big concern for New Zealand is that with a small financial market domestic borrowers source a lot of their debt from overseas lenders. New Zealand would be in a much stronger position if its financial markets could fund domestic borrowers.


OECD Deflation

In 2014, 9 of the 34 members of the OECD experienced deflation whilst 3 others had zero inflation. Over the whole area consumer prices rose by only 1.7% mainly due to the fall in oil prices.

However in the Euro area inflation was only 0.4% over the year which is worrying especially as the European Central Bank (ECB) targets an annual rate of 2%. With interest rates at the ECB at 0.05% there is little scope for any stimulatory activity to increase inflation. Furthermore they are also charging banks deposits on money in the bank through a negative rate of 0.2%. Although lower oil prices will benefits businesses and consumers alike it maybe paradoxical if people expect lower inflation as cheaper energy pushes the headline rate into negative territory. So, the ECB has taken a leaf out of the US Fed’s book and decided on a form of quantitative easing by purchasing covered bonds and asset-backed securities.

Mario Draghi, President of the ECB, has not ruled out using additional measures “should it become necessary to further address risks of too prolonged a period of low inflation”.

Although Japan has an annual rate of inflation of 2.9% this has been largely due to an increase in the retail sales tax – if you exclude it from the calculation the inflation rate would be 0.9%. The Japanese Central Bank has a target of 2% inflation. As with the ECB interest rates in Japan are very low – 0.1% – so this leaves no scope for any stimulatory cuts. They are hoping that a further stimulus package of ¥3.5 trillion (NZ$ 37.41billion) on 27th December will boost the economy.

In New Zealand the annual inflation rate in September was 1% – the Reserve Bank Act 1989 stipulates a band of 1-3% while targeting future inflation at 2%. Unlike their counterparts at the ECB and the Bank of Japan they do have scope for stimulatory cuts as the official cash rate is currently 3.5%.

Deflation OECD

What is the OECD?

In many economic commentaries that students read the letters OECD frequently come up. So what is the OECD? Grant Cleland and Emma Doherty produced a useful summary in the Parliamentary Economic Review.

The Organisation for Economic Co-operation and Development (OECD) was established in 1961, and has its headquarters in Paris, France. It has the mission of promoting “policies that will improve the economic and social wellbeing of people around the world”. The organisation provides a forum in which governments can share experiences and understanding in order to develop and promote policies designed to improve the quality of people’s lives.

There are currently 34 members of the OECD (shown below), with New Zealand being a member since 29 May 1973. The latest country to join the group was Estonia on 9 December 2010.


The OECD collects and makes available a broad range of social and economic indicators, which allow member countries to compare their figures with other countries. Examples of these include unemployment rates, employment outlooks, health statistics, GDP and GDP per capita (i.e. New Zealand’s GDP per capita of US$32,117 in 2012 was ranked 20th in the OECD).

The OECD publishes a wide range of economic surveys, working papers, and reports on various topics of interest to member countries. These allow for the comparison of policies and statistics between OECD member countries (and some non-OECD member countries). OECD publications include:
–  Consumption tax trends.
–  Taxing wages.
–  Government revenue statistics.
–  The Programme for International Student Assessment (PISA).
–  Pensions at a glance. 

The OECD’s 2014 budget is 357 million Euros (€357m), with funding coming from its member countries. Funding is split into two halves.

The first part (Part I programmes), which accounts for around 53 percent of the budget, is based on the size of the members economy. The United States contributes 21.2 percent of Part I funding, followed by Japan (12.86 percent). New Zealand’s contribution to Part I funding is 0.82 percent.

Part II programmes are those that are of interest to a limited number of OECD members or special sectors not covered by Part I. These Part II programmes are funded according to a scale of contributions or other agreements between participating countries.

OECD GDP per capita figures – 2012

Here are Gross domestic product per capita figures for the 34 member countries of the OECD (Organisation for Economic Co-Operation and Development) for the 2012 calendar year on a purchasing power parity (PPP) basis. Purchasing power parity (PPP) is when an amount of money in one country can be exchanged for a quantity of foreign currency, and the two amounts will buy identical baskets of products in both countries – see recent post on the Big Mac Index.

The OECD is a group of countries that share a commitment to democratic government and the market economy. New Zealand has been a member of the OECD since May 1973. Currently, there are 34 member countries, with four new members joining in 2010. These included Chile, Slovenia, Israel, and Estonia.

OECD - GDP per capita 2012

Why have New Zealand’s interest rates been higher than other OECD countries?

The April Economic Overview publication from Westpac Bank published a feature article focusing on why New Zealand has relatively high interest rates. A paper written by Treasury came up with two views:

1. The Risk Premium View
2. The Excess Demand View

The Risk Premium View

Interest rates in different countries can diverge with different perceptions of risk or inflation. Although New Zealand’s inflation or exchange rate are not volatile in relation to other countries, there is unusually high levels of nationla debt. While our government debt is relatively low in comparison to other countries it is our overall debt which is running at 80% of GDP which is causing concern. This would tend to push up interest rates higher than other countries with lower debt levels, while also pushing the exchange rate lower than it would otherwise be. The graph below plots the average inflation-adjusted interest rates against net foreign debt for a range of countries, suggests that this is broadly true.

The Excess Demand View.
The exchange rate can increase especially as investors look for higher yields as a country might have higher intesest rates – known as the ‘carry trade’. Investors will pile into higher-yielding currencies only up to the point where the exchange rate has become sufficiently ‘overvalued’ for its expected depreciation to offset the prospective interest rate gains. Elaborating on the carry trade idea the significant amount of aggregate demand in the NZ economy has kept the NZ$ high. This strong level of domestic demand has been to the detriment of savings and has also meant that the Reserve Bank has had to keep interest rates above those countries that have higher savings rates. Furthermore increases in domestic demand have meant:
– a higher trade deficit
– significant foreign debt
– an overvalued exchange rate

Is saving the answer?
Saving is not by itself the panacea however there is a high liklihood that there could be lower interest rates and a lower exchange rate. Higher savings would also be rewarded with lower borrowing costs but contrary to the first point, lower foreign debt servicing costs and a more positive report from the credit rating agencies the NZ$ would be inclined to appreciate.

$100 a barrel makes NZ a viable option

With oil prices closing in on $100/barrel there are suggestions that New Zealand could be the place that petroleum companies next explore. The reason for the increase in demand is the shift away from the developed countries in the west to the emerging markets in the east. This year demand has exceeded supply by 90,000 barrels a day on average since early April. In fact China has started to run out of diesel over the last couple of months – it has also been responsible for 40% of world growth in diesel over the last 2 years.

With demand continuing to grow forcing prices up OPEC may be forced to raise production or quotas. In 2008 prices of $137 a barrel were very damaging to the world economy and allowing these levels of prices will have a serious effect on a recovery.