BNZ says NZ can service debt

New Zealand's balance sheet ratios are among the worst in the world, and with the global credit crisis does that mean the country is going to hell in a handcart?

The BNZ doesn't quite think so.

In its Economy Watch, released yesterday, BNZ head of research Stephen Toplis said international distress, underpinned by dysfunctional credit markets, left a country like New Zealand extremely vulnerable.

New Zealand's balance sheet saw net liabilities expand by $62 billion in the five years to September 2008 to $166 billion - equivalent to 92 per cent of GDP.

Gross foreign debt ballooned by 70 per cent to $235 billion (131 per cent of GDP), pretty much all of it in the private sector. That drove a substantial net outflow of interest and accrued profits - equivalent to around 7.5 per cent of GDP.

It would be challenging for New Zealand to roll over its existing liabilities, let alone raise the extra dollops of money implied by the ongoing high current account deficit.

Yet New Zealand's external financing predicament seemed a lot less frightening when looking at the detail, Toplis said.

The great majority of the increase in foreign debt over the past five years had essentially been into the local housing market, which, the bank believed, would simply drift down a bit further, not crumble the way it had in many other countries.

"In many respects, the servicing of New Zealand's foreign debt would seem to boil down to whether NZ households can keep paying their mortgages. By and large, we reckon they can."

New Zealand home prices fell between 5-10 per cent in 2008.

Price falls will be limited by the fall in home-building as well as the strong pick-up in immigration, foreseen for this year and next.

New Zealand's mortgage rates were now between 5 and 6 per cent, down from close to 9 per cent last year.

That was ultimately what was relevant to foreign debt servicing, not so much overseas rates and funding costs.

Of more legitimate concern is the relatively short-term duration of New Zealand's foreign debt.

As at September 2008, about 38 per cent of it was of 90-day duration or less.

"While this raises issues about being able to roll over the debt, this proportion is actually no different to where it's been for many years now."

And as much as New Zealand's size left it vulnerable, it also meant the capital required amounted to small potatoes for international players.

It was easier to ask for a few hundred million than tens of billions at a time, said Toplis.

"The more we've thought about the nation's balance sheet issues the more we reckon our current account deficit will come back from the brink."

- NZPA