KEY POINTS:
Current account or balance of payments statistics, which were released on Thursday, are arguably the country's most important economic indicator. This is because we are a small island nation and the Statistics New Zealand figures give a comprehensive outline of the country's total overseas receipts and expenditure and
its international assets and liabilities.
The current account is more important than the Government Budget and any proposed tax cuts, yet this last issue gets more attention from politicians and the media.
The latest current account figures showed that the deficit for the December 2007 year was $13.8 billion compared with $14 billion for the previous calendar year. The latest figures were a pleasant break because the deficit had risen steadily from $3.4 billion in 2001 to $14 billion in 2006.
As a percentage of GDP, which is the main way of comparing the current accounts of different countries, the deficit has risen from 2.8 per cent of GDP in 2001 to a high of 9.3 per cent in the March 2006 year but eased back to 7.9 per cent in 2007.
Although our current account deficit has fallen it is still the fifth largest among the 30 OECD countries. In terms of size the deficit ranks behind Iceland (13.9 per cent of GDP), Greece (13.9 per cent), Spain (9.8 per cent) and Portugal (8.1 per cent).
Switzerland and Norway have the two largest current account surpluses, both in excess of 15 per cent of GDP.
Our basic problems are that we have very little savings, we consistently spend far more than we earn offshore and we borrow from global markets to fund this deficit.
The bottom line on the accompanying table shows that we spent $1.21 overseas for every $1 of revenue we earned in 2002. This increased to $1.30 per $1 in 2005 but fell to $1.27 per $1 and then to $1.25 per $1 in the past two years.
It is obvious that no individual, business, government or country can consistently spend more than $1.20 for every $1 received without eventually having to face the consequences.
The $13.8 billion deficit in 2007 consisted of the following components:
* A deficit on goods, made up of exports and imports, of $2.3 billion compared with $3 billion in 2006.
* A surplus on services, comprising services provided and received, of $0.4 billion, the same as the previous year.
* A deficit on the balance on investment income, mainly comprising dividend and interest flows, of $12.5 billion compared with $12.1 billion in 2006.
* A current transfers surplus, mainly migrant receipts and payments, of $600 million. This was slightly lower than the $700 million surplus in 2006.
The biggest problem is the huge investment deficit, which is growing steadily year by year. This is because we have had to sell assets or borrow overseas to fund the huge current account deficit.
The country's assets and liabilities, which are listed in the accompanying table, clearly show how the country's international balance sheet has deteriorated since the end of 2002.
Our total international assets have grown by $44.2 billion, from $82.8 billion to $127 billion, over the past five years, whereas the country's international liabilities have escalated by $96.5 billion, from $182.9 billion to $279.4 billion.
As a result New Zealand now has net international liabilities of $152.4 billion compared with $100.1 billion five years ago.
There are several points worth noting about the international assets and liabilities data. These include:
* Overseas borrowings have surged from $131.8 billion to $209.5 billion since 2002. Government overseas debt has fallen from $18.5 billion to $17.1 billion but bank overseas borrowings have risen dramatically from $72.7 billion to $128.5 billion. A high percentage of this borrowing has been invested in residential property where no overseas income is generated to offset the foreign interest payments.
* We have sold a large number of our more successful and profitable companies to offshore interests and this is reflected in the return that foreign investors receive on the equity investments in this country. In 2007 overseas investors achieved a return of $8.2 billion or 12 per cent on their year opening equity investments of $68.6 billion. By comparison New Zealand investors offshore achieved an estimated return of only $1.6 billion or 3.3 per cent on year opening international equity assets of $48.4 billion.
* According to incomplete Statistics New Zealand data approximately $102 billion of overseas liabilities and $55 billion of assets are denominated in foreign currencies. Thus any decline in the value of the Kiwi would result in an increase in the country's net liabilities and current account deficit.
The importance of the current account is that it captures the full economic story rather than just part of it. For example, the country's export revenue has benefited greatly from the Tui oil field. However, only 12.5 per cent of the project is domestically owned - by New Zealand Oil & Gas - and, as a result, a substantial amount of dividends from this project will flow overseas and have a negative impact on the investment section of the current account.
This example clearly demonstrates why our abysmal savings record, particularly in financial assets, has a negative impact on the country's current account and international balance sheet.
Regardless of the outcome of the international liquidity crisis, New Zealand cannot continue to borrow overseas and invest these proceeds in overcapitalised holiday homes in Omaha, Waihi and Queenstown. This will leave a legacy of overseas debt and dependency for future generations.
There is nothing wrong with holiday homes but, because of our low savings rate, there aren't sufficient domestic bank deposits to finance these purchases and we have to borrow overseas to fund them.
In other words, far too much overseas borrowing is invested in residential housing and far too little in companies that generate foreign exchange.
The international liquidity crisis will bring its own challenges in the months ahead. Trading banks are reporting that New Zealand remains an attractive place for foreign investors but they are now requiring higher interests rates and are less prepared to lend long-term.
The cost of overseas borrowing has risen by approximately 1 per cent in recent months and further increases are expected if the credit crisis continues.
The banks have yet to pass on the full extent of this increase to borrowers.
A country is at the mercy of international financiers when it is almost totally dependent on overseas borrowing to fund its large current account deficit. These lenders don't grant any favours when credit conditions tighten.
The deterioration in New Zealand's current account and international assets/liabilities situation is basically a savings problem yet several studies concluded that the country did not have a problem in this area.
The updated 1997 Retirement Income Report, chaired by Jeff Todd, reiterated that the country was best served by the Government's New Zealand Superannuation scheme and voluntary private savings with no tax incentives. A referendum later that year on a Compulsory Retirement Savings Scheme, which was sponsored by Winston Peters, was soundly rejected by the electorate.
The KiwiSaver scheme, which was introduced last year, will finally address the country's saving problem but it won't have a material impact for at least a decade. By then we may have sold most of our important assets to overseas interests and be up to our necks in foreign debt.
Disclosure of interest: Brian Gaynor is an Executive Director of Milford Asset Management.
