Inside Money: Govt debt: more or less the same
9:30 AM Tuesday Aug 7, 2012
Photo / Mark Mitchell
There's been little dithering, hand-wringing or pants-wetting of late about the state of New Zealand government debt so here's a quick round-up for those who want to get wound-up again.
Firstly, the country's net overseas debt position (government and corporate) improved slightly over the first quarter of this year, down to only 123.6 per cent of GDP, according to Reserve Bank figures. While that sounds like a lot of liability, and it probably is, the proportion of overseas debt to GDP has been trending down since hitting a high of 138.3 per cent in March 2009.
Of the total roughly $250 billion overseas debt, about $44 billion is attributed to the government, most of which is in the form of government bonds.
In fact, offshore investors currently own about $34 billion of NZ government bonds or about 62 per cent of the market, Reserve Bank figures show - a proportion that held more or less steady over the last couple of years and is down slightly on the 64.1 per cent recorded in 2010.
Looking at the situation in a slightly different way total government debt securities, including bonds and shorter-term Treasury bills, come to about $71 billion.
The Reserve Bank conveniently breaks this down by institutional ownership from which you can spot the buyers and sellers.
An obvious seller is the Earthquake Commission fund, which has offloaded over $2 billion of its NZ government bond portfolio since 2010 while still holding just over $1.7 billion of the stuff as at June 2012.
Notable buyers of NZ government securities since 2010 include non-resident institutions (doubling up to $28.4 billion over the period) and NZ registered banks, loading up from $12.5 billion in 2010 to almost $18 billion as at this June.
Another group of keen buyers of NZ government debt include "trustee and nominee companies", which have increased holdings from $7.8 billion in 2010 to current levels of $13.3 billion. This is probably the influence of KiwiSaver funds, and looking at the longer time series, the rise in holdings by this sector does appear to mirror the lifeline of the scheme.
At any rate the New Zealand Debt Management Office (NZDMO) hasn't had any trouble hocking off bonds and whatnot. The latest NZDMO data shows it has raised about $7 billion from investors so far this calendar year at much reduced interest rates compared to a few years ago.
For instance, at the latest bond auction we borrowed $100 million due in April 2015 at an effective interest rate of 2.67 per cent and $150 million (due in 2023) at 3.57 per cent. In August 2011 both the medium- and long-term NZ government bond rates were over 6 per cent.
A good time to borrow more, you might think, but instead the NZDMO told us in May it would wind down on the credit card.
Government borrowing, the NZDMO statement says, "... will be reduced by $3 billion over the forecast period ending June 2016, relative to plans outlined by the NZDMO at the Pre-election Economic and Fiscal Update (PREFU) in October 2011."
It's a sinking ship and all we do is squabble about the size of the next bribe and raft of entitlements at the next election. I don't know who is worse - rapacious tax and spend socialists - or asset-selling capitalists? Bring on the IMF!
So selling 49 per cent of state assets for the argument of reducing debt, while forgoing secure good dividend returns to the government, to put this into private hands for discretionary spending, and then investing in necessities like schools, hospitals and the likes, is stupid. It is particularly nonsensical and idiotic, as it involves very strategic assets.
It will not improve the government books much - if at all. It would be cheaper to take advantage of letting the government borrow a bit more overseas at record low borrowing rates instead.
What must change is the over dependnce on foreign banks, that hand out credit for NZers to keep financing mortgages on inflated home prices, to finance consumer products and cars on debt. Maybe boost Kiwibank and also favour other local banks to grow and handle credit.
NZers must protect own know-how, develope and grow own business instead of selling them to overseas, and also improve savings.
If my financial advisor was silly enought to propose this trade he would be sacked. Must be all those merchant bank fees and salary increases for senior power company management that is driving the sale process because it is not common sense.