A large improvement in New Zealand's net foreign liabilities as a share of gross domestic product makes the economy less vulnerable to shocks, but they are still relatively high internationally and the saving and investment behaviour of households remains the key risk, Reserve Bank deputy governor Geoff Bascand says.
"New Zealand's net foreign liabilities (NFL) - what we owe to the rest of the world, broadly speaking - reached nearly 85 per cent of GDP at the start of 2009. Eight years later, they sit at 58.5 per cent of GDP, their lowest level since the late 1980s," Bascand said in a speech published on the central bank's web site. In dollar terms, however, the value of the net foreign liabilities has not fallen substantially. It stood at $159 billion in March 2009 and $155b in March 2017.
The decline in New Zealand's net foreign liabilities partly reflects low global interest rates that have reduced the interest payments on the overseas debt, and high equity prices that have boosted the value of overseas assets, he said. However, a "better balance" between national saving and investment during the current economic expansion has helped contain the current account deficit and lowered the ratio of net foreign liabilities to GDP.
The central bank is projecting the NFL-GDP to remain at about its current level of just below 60 per cent between now and 2020. Bascand said that if the NFL position reflects an "enduring improvement" in New Zealand's savings-investment balance there are wider impacts. "If sustained, higher domestic savings relative to investment demands would help lower New Zealand's neutral real interest rate."
Bascand also said one "striking feature" of the improvement is that it has occurred despite the real exchange rate being high over much of the period. Typically a higher exchange rate would contribute to widening the current account deficit but "the improvement in the NFL-GDP suggests that the exchange rate might be more sustainable than previously assumed," he said.
He said one of the models the bank uses - the macro-balance model - assesses the degree to which the exchange rate is currently too high or low in order to stabilise NFL-GDP at its current level. The model indicates the current level of the real exchange rate is consistent with NFL remaining at about 60 per cent of GDP, he said. As a result, "a lower New Zealand dollar would be needed to lower NFL-GDP and our external vulnerabilities further."
He warned, however, that the net foreign liabilities as a share of GDP is still relatively high internationally, especially given the nation's exposure to commodity exports that can be subject to large price swings.
Also, "significant uncertainty remains regarding household behaviour and the contribution of the sector to New Zealand's saving-investment gap, and the extent that banks as intermediaries might increase their reliance on offshore funding," Bascand said.
He noted that borrowing from the rest of the world isn't automatically 'bad'. Rather, it can be a good thing if it leads to productive investment, but debt-fuelled consumption is less sustainable.
The key source of risk surrounding the outlook for New Zealand's NFL and the economy and financial system more widely is the saving and investment behaviour of households, he underscored.
"Much of the investment undertaken by the household sector is in the form of new house builds and renovations to existing homes. If housing demands cannot be met by increased household sector or domestic saving more broadly, it will be reflected in a deterioration in our NFL position," he said.