Download New Zealand`s Balance of Payments

Parliamentary Library Background Paper No. 19
NEW ZEALAND’S BALANCE OF PAYMENTS:
past, present and future
(an update of the June 1996 paper)
Andrew Morrison
Economist, Parliamentary Library
June 1998
NEW ZEALAND PARLIAMENTARY LIBRARY
Members wishing an oral briefing or further
information on this subject should contact
Andrew Morrison on extension 9202.
Parliamentary Library
Wellington, New Zealand
June 1998
The author would like to thank David Irwin (from the New Zealand Institute of
Economic Research) for his comments during the preparation of the original
1996 paper.
2
Table of Contents
Executive Summary
1.
2.
3.
4.
5.
6.
7.
8.
9.
4
Introduction ...................................................................................................... 5
Balance of Payments: the different elements ................................................... 5
Why is the Balance of Payments important?.................................................... 6
What level of Balance of Payments is ideal? ................................................... 6
Current Account trends .................................................................................... 8
Factors determining the trends ......................................................................... 9
a. Saving...................................................................................................... 10
b. Investment ............................................................................................... 12
c. Terms of Trade ........................................................................................ 12
d. Other Factors ........................................................................................... 13
Prospects......................................................................................................... 14
a. Cyclic Factors.......................................................................................... 14
b. Other Short- and Medium-term Factors .................................................. 14
c. Long-term Factors ................................................................................... 15
Conclusion...................................................................................................... 16
References ...................................................................................................... 17
3
Executive Summary
• The balance of payments accounts summarise economic transactions between New
Zealanders and the rest of the world.
• There are two main sets of accounts - the current account and the capital account.
This paper focuses on the current account.
• Current account deficits add to our level of foreign liabilities. Large deficits
increase our vulnerability to various economic shocks.
• A major factor determining the appropriate level of deficit is whether it is driven
by productive investment.
• Three main periods can be discerned for the current account deficit since 1951:
1951-1974, 1975-1985 and 1986-1998. Deficits in the most recent period are up
on the preceding period (as a percentage of GDP), but still down on the first
period.
• The current account is made up of merchandise trade and of other payments (called
invisibles). Invisibles consist of services, income from foreign investment, and
transfers. Fluctuations of the current account balance have largely been driven by
changes to the balance of merchandise trade, although a deteriorating invisibles
balance has added to the deficit over the last few decades and has been responsible
for its dramatic rise over the last two years.
• The current account balance is equal to the difference between New Zealand’s
savings and its investment expenditure. Household savings have been steadily
declining since 1980, however improvements to the fiscal balance have lifted total
savings levels since 1992.
• The terms of trade have had a significant effect on the deficit, especially since
1970.
• The Asian crisis is an important factor dominating the current account in the shortto medium-term. However, our more competitive exchange rate should soon lead
to an improving current account balance, albeit slowly.
• Savings and income trends will influence the deficit thereafter. Demographic
factors will increase New Zealand’s savings rate over the next couple of decades
(as more people enter their high-savings middle-age years) which will have a
beneficial effect on the current account deficit over this period.
4
1.
Introduction
New Zealand’s current account deficit has increased considerably over the last year or
so and is likely to remain high for a while. A consideration of the balance of
payments is therefore timely.
This paper gives a brief account of what the balance of payments is, why it is
important and what is an appropriate level for a current account deficit. It also
describes trends since 1951 and assesses our prospects over the next few years.
2.
Balance of Payments: the different elements
The balance of payments accounts record the economic transactions of New Zealand
residents with the rest of the world. They are divided into two major parts: the
current account and the capital account. The current account records transactions
involving goods, services and investment income, and also includes transfers such as
pensions and gifts. The capital account records changes to New Zealand’s total
foreign financial assets and liabilities.
In theory, the sum of the current account and capital account balances is equal to zero.
If New Zealand imports more than it earns by exporting, it must pay for these imports
by either borrowing or by selling assets.
This paper will focus on the current account side of the balance.
The main current account categories are listed in the following table, along with the
most recent values for each category (for year ending 31 March 1998; $million)1:
Merchandise Trade
Invisibles
services
international investment income
transfers
total invisibles
Total Current Account
Credits
21,490
Debits
20,463
Balance
1,027
6,537
185
2,170
7,677
7,921
1,396
-1,141
-7,735
775
8,892
30,382
16,994
37,457
-8,101
-7,073
(note, credits result in payments to New Zealanders (e.g. exports) and debits payments to foreigners (e.g. imports))
This $7,073 million current account deficit is equal to 7.2% of gross domestic product
(GDP) and 25% of New Zealand’s exports of goods and services.
3.
Why is the Balance of Payments important?
1
Where “merchandise trade” is the term for the import and export of goods; the main “services”
categories are transportation, tourism and insurance; “international investment income” consists of
earnings accruing to New Zealand investors on their investments overseas (in the case of credits) and
to foreign investors on their investments in New Zealand (in the case of debits); and “transfers” is the
term for funds given or received where no offsetting payment is required; for example, foreign aid,
gifts and migrants funds.
5
Because the current account and capital account sum to zero, the current account
balance is the mirror image of the capital account balance. Thus, a current account
deficit signifies a fall in New Zealanders’ net foreign assets (or an increase in their net
foreign liabilities).
What makes the level of the current account deficit especially important for New
Zealand is our high level of foreign debt. New Zealand’s total net overseas debt is the
highest in the OECD (as a percentage of GDP and of exports) and higher than many
third world “problem” countries. It is also well above the levels permissible by the
standard rules of thumb used by analysts. High debt levels are expensive because
they have to be serviced, often at less-than-preferable terms. They also increase our
vulnerability to interest rate and foreign exchange changes and to any fall in
confidence in the New Zealand economy.
In addition, large current account deficits increase the risk of economic instability.
They must be funded by continuous inflows of foreign capital. If foreign investors
lose confidence in the New Zealand economy - for example, they may regard the
current account imbalance as symptomatic of deeper problems such as
“inappropriate” policy or low rates of savings - then they will reduce their investment
in New Zealand. The result would be higher interest rates, a depreciating exchange
rate, inflation and recession, especially if the adjustment is sudden.
4.
What level of Current Account Balance is ideal?
For the foreseeable future, a current account deficit is inevitable in New Zealand.
This is because our savings are insufficient to fund the levels of investment we make
in replacing and adding to our capital stock (e.g., buildings, equipment, etc.).
What is an appropriate level of current account deficit depends on several factors:
• The current level of overseas debt.
Adding to already high levels of debt further increases our exposure to interest rate
and foreign exchange risk and to the costs of servicing the debt.
• The extent to which the increase of net foreign liabilities is used for productive
investment.
Debt and other liabilities have to be serviced. High current account deficits will
not be sustainable if the debt is principally used for consumption and non
productive purposes.
6
• The type of debt (or other liability) used to finance the current account deficit
(especially its term).
For example, the use of short-term debt increases our exposure to interest rate
fluctuations and capital flight.
The first of these factors is an especially limiting one for New Zealand, as was
explained in the previous page. The second factor has also been a cause for concern
over recent years, with much of the rising debt being driven by household borrowing
to purchase housing. Housing is hardly an investment likely to increase the
productive capability of the country. The third factor is not as great a problem as it
once was.2
As the above indicates, the level of current account deficit which is sustainable
depends on a complex array of factors. There is no simple, hard and fast rule that can
be applied. An article by the Reserve Bank discusses the different factors in more
detail.3 It concludes that, as regards current account sustainability, New Zealand’s
strengths outweigh its weaknesses, and “any external correction is unlikely to be of
the extremely disruptive variety seen in Mexico in 1994, or the kind East Asian
countries are now working through”.
Most definitely, financial markets have marked down the value of the New Zealand
dollar over the last year. However, the adjustment has not been sudden, nor has it
been dramatically out-of-kilter with that of Australia and other countries closely tied
to the crisis Asian economies. The adjustment has also been from levels widely
regarded as over-valued, and has coincided with a monetary easing4 (and its
associated weakening currency) which is normal at this stage of an economic cycle.
However, this is not to say that there is room for complacency. Despite the economic
strengths mentioned in the Reserve Bank article, the current account deficit is well
above that level widely mentioned as the rule-of-thumb for dangerous territory
(namely, 5% of GDP). Our high level of debt makes us very vulnerable to any rapid
and major change of investor sentiment.
2
After increasing over most of the period from December 1992 (when the current series began) to
March 1997 (from 28% to 37% of total debt), debt with a maturity of less than 90 days now makes up
only 28% of total debt. Debt denominated in NZ dollars, which is not so vulnerable to currency
fluctuation, has risen from 31% to 54% over the same period.
3
Collins, S., De Simone, F.N., and Hargreaves, D. “The current account balance: an analysis of the
issues”. Reserve Bank of New Zealand Bulletin, March quarter 1998. p.15-34.
4
See footnote 10 for a definition of “monetary easing” and its significance.
7
5.
Current Account trends
G ra p h 1
C U R R EN T AC C O U N T B ALAN C E
(M a rc h y e a r, a s % G D P )
8%
4%
0%
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
-4 %
-8 %
-1 2 %
-1 6 %
S o u r c e : S t a t is tic s N e w Z e a la n d
Graph 1 shows the current account balance as a percentage of gross domestic product
(GDP). Three main periods are discernible:
• 1951-1974, characterised by constant fluctuations around an average of -1.4% of
GDP
• 1975-1985, where the balance improved from a dramatic low point, only to fall
again at the end of the period; the balance was considerably worse over this time,
averaging -6.4% of GDP
• 1986-1998, which showed a similar pattern to the previous period; the balance has
so far averaged –3.8% of GDP.
Graph 2 shows that, until recently, the current account balance trend has largely been
shaped by the merchandise trade balance. Over the second part of this period, a lower
balance of invisibles has served to pull down the level of the current account balance,
most spectacularly so in the last two years.
G ra p h 2
B A L A N C E O F M E R C H A N D IS E T R A D E A N D IN V IS IB L E S
( M a rc h y e a r, a s % G D P )
10%
5%
0%
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
-5 %
-1 0 %
M e r c h a n d is e T r a d e
-1 5 %
I n v is ib le s
C u rre n t A c c o u n t
-2 0 %
S o u r c e : S t a t is t ic s N e w Z e a la n d
Graph 3 shows the balance of invisibles and its three components. It is changes to the
balance of international investment income which have primarily determined the
shape of the overall invisibles balance over much of the period. Its deterioration has
considerably counter-balanced the gradual improvement of the services balance.
8
Another highlight of the graph is the rise and fall of the balance of transfers in the
1990s. This was mainly caused by changes to the transfer of migrant funds into the
country, with these rising and falling in line with migration changes. A worsening of
all three components has contributed to the dramatic rise of the invisibles deficit over
the last few years.
G ra p h 3
B A L A N C E O F IN V IS IB L E S A N D C O M P O N E N T S
( M a rc h y e a r, a s % G D P )
4%
2%
0%
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
-2 %
-4 %
-6 %
-8 %
-1 0 %
T ra n s fe rs
In te rn a tio n a l In v e s tm e n t In c o m e
S e rv ic e s
T O T A L IN V IS IB L E S
S o u rc e : S ta tis tic s N e w Z e a la n d
6.
Factors determining the trends
Three key determinants examined in this section are national savings, national
investment and the terms of trade. Other factors are also briefly discussed at the end
of the section.
First, however, a consideration of savings and investment together.5 Savings and
investment are the major factors determining the trend of the current account balance.
The lower the amount that New Zealanders save compared to what we invest, the
greater our demand for foreign capital and for foreign goods and services. Indeed, the
current account deficit is actually equal to the gap between savings and investment,
both in theory and (bar some measurement differences) in practice.6 The closeness of
this relationship is shown by the bottom two lines of graph 4.
5
Where “savings” is defined as the amount left from disposable income after subtracting expenditure
on consumer products, and “investment” is defined as expenditure on items which generate a flow of
benefits over time (such as the plant and machinery in a factory).
6
This relationship can be derived from the economic equations showing the relationship between basic
National Accounts components such as GDP, investment and so on. Similar algebraic computation
also shows the current account balance to be equal to the gap between a nation’s earnings and its
spending – a concept easier to understand in terms of common sense, as most householders know that
if they spend more than they earn, they must borrow the difference or draw from their assets.
9
G ra p h 4
T H E S A V IN G S - IN V E S T M E N T G A P
(a s % G D P , M a rc h y e a r)
40%
30%
20%
10%
0%
71
72
73
74
75
76
77
-1 0 %
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
S a v in g s (1 )
I n v e s tm e n t (2 )
S a v in g s - I n v e s tm e n t
C u rre n t A c c o u n t B a la n c e
-2 0 %
N o te s :
(1 ) G ro s s N a tio n a l S a v in g s (i.e ., S a v in g s + C o n s u m p tio n o f F ix e d C a p ita l)
(2 ) in c lu d in g v a lu e o f p h y s ic a l in c re a s e o f s to c k s , a n d th e s ta tis tic a l d is c re p e n c y
S o u rc e : S ta tis tic s N e w Z e a la n d
Graph 4 also shows the trend of both savings and investment.7 These are now
discussed in turn.
(a)
National savings
A nation’s savings are what is left of its disposable income after its final consumption
expenditure is subtracted. Savings are thus affected by changes to income and to the
amount of this income spent on consumption (or not saved).
A major factor behind changes to a country’s savings rate is the trend of its economic
growth. Savings tend to be high during periods of high economic growth, and low
during low or negative growth periods. One reason for this is that most people (in
households, businesses and governments) are slow to change their spending habits in
response to changes of income. Thus strong economic growth during the early
seventies kept gross savings high at a rate averaging 26% of GDP from 1971 to 1977.
Savings fell considerably during the 1978 recession, plateauing around that level from
1978 to 1989 (with an average of 19%). It fell further during the 1991 and 1992
recession years, and has risen and fallen with the 1990’s economic cycle.8 This
relationship is shown in graph 5.
7
“Savings” is gross savings, i.e. it also includes consumption of fixed capital (depreciation), and
“Investment” not only includes gross fixed capital formation, but also the values of the physical
increase of stocks and a figure representing a statistical discrepancy between two ways of calculating
GDP. Consumption of fixed capital is fairly constant at around 7%-10%, whereas the value of the
physical increase of stocks and the statistical discrepancy are very small.
8
Note that data on savings have high margins of error. This is because savings tends to be calculated
as the difference between two far larger figures - income and consumption. Any statistical or other
discrepancy in these larger figures will therefore have a substantial impact on the residual, savings.
10
G ra p h 5
S A V IN G S a n d IN V E S T M E N T (a s % G D P )
a n d A N N U A L G D P G R O W T H ( M a rc h y e a r )
8
35%
6
30%
4
25%
20%
2
15%
0
10%
S a v in g s (1 )
I n v e s tm e n t (2 )
G D P G ro w th
5%
0%
-2
Annual Growth of GDP (%)
Savings and Investment (% GDP)
40%
-4
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
N o te s :
S o u rc e :
(1 ) G ro s s N a tio n a l S a v in g s (i.e ., S a v in g s + C o n s u m p tio n o f F ix e d C a p ita l)
(2 ) in c lu d in g v a lu e o f p h y s ic a l in c re a s e o f s to c k s , a n d th e s ta tis tic a l d is c re p e n c y
S ta tis tic s N e w Z e a la n d
However, economic growth is not the only factor determining rates of savings. A
breakdown of net savings into its sub-components - household, Crown, and other
savings9 - is given in graph 6. Two points are especially worth noting. First is the
exceptional improvement of the Crown’s savings in recent years and its substantial
impact on national savings. Second is the constant decline of household savings since
1980. This latter trend has not only been the result of poor economic growth, indeed
it has continued to decline despite strong economic growth over recent years. Other
factors include: financial deregulation, which has increased households’ access to
credit; increased numbers of beneficiaries, who tend to be low savers; consumers (and
businesses) catching up on buying things which they had put off during the low
growth years of the early 1990s; innovative lending packages; and an increased
orientation of banks towards household lending.
G ra p h 6
N A T IO N A L S A V IN G S A N D IT S C O M P O N E N T S
(a s % G D P , M a rc h y e a r)
2 5 %
T o ta l
H o u s e h o ld
C ro w n A c c o u n ts
O th e r
2 0 %
1 5 %
1 0 %
5 %
0 %
7 2
7 4
7 6
7 8
8 0
8 2
8 4
8 6
8 8
9 0
9 2
9 4
9 6
-5 %
S o u rc e :
S ta tis t ic s N e w Z e a la n d , T h e T r e a s u r y
9
The “Crown” is defined as the core central government sector. Savings data from the Crown current
account is available only from 1987; for years before that in the graph, this savings data is adjusted by
changes to the Table 2 adjusted financial (fiscal) balance. Note that “other” includes mainly business
retained earnings, local government savings, and a residual item.
11
(b)
Investment
Investment levels in New Zealand also show a strong relationship with the rate of
economic growth, as is shown clearly in graph 5.
A further highlight of graph 5 is how low investment now is, as a percentage of GDP,
compared with what it was during the 1970s and most of the 1980s. This is despite
the strong investment growth that has occurred in recent years. Graph 7 shows that
this is due to a significant fall in government investment. Private sector investment is
in fact around the highs achieved in the 1970s and 1980s.
Graph 8 shows the type of investment that has occurred. It suggests that one reason
for the higher level of private sector investment recently is the growth of residential
investment. Investment in residential buildings is the only type of investment that has
grown from the mid 1980s. It grew from 4.5% of GDP during the high investment
year of 1986, to 5.6% in 1997. By way of comparison, investment in plant,
machinery and equipment fell from 14.0% to 10.0%.
G ra p h 7
G R O S S F IX E D C A P IT A L F O R M A T IO N *
(b y s e c to r; % G D P ; M a rc h y e a r)
3 0
P r iv a te
C e n tra l G o v t.
L o c a l G o v t.
T o ta l
2 5
(% GDP)
2 0
1 5
1 0
5
0
7 2
7 3
7 4
7 5
7 6
7 7
7 8
7 9
8 0
8 1
8 2
8 3
8 4
8 5
8 6
8 7
8 8
8 9
9 0
9 1
9 2
9 3
9 4
9 5
9 6
9 7
92
93
94
95
96
97
* T h a t is , in v e s t m e n t ( n o t in c lu d in g in c r e a s e o f s to c k s a n d s ta tis t ic a l d is c r e p e n c y ) .
S o u r c e : S t a t is t ic s N e w Z e a la n d .
G ra p h 8
G R O S S F IX E D C A P IT A L F O R M A T IO N *
( b y c a p it a l a s s e t ; % G D P ; M a r c h y e a r )
30
25
(% GDP)
20
15
10
5
0
72
73
74
75
76
77
78
79
80
81
82
* T h a t is , in v e s t m e n t ( n o t in c lu d in g in c r e a s e o f
s to c k s a n d s t a tis tic a l d is c r e p e n c y ) .
S o u r c e : S t a tis t ic s N e w Z e a la n d .
(c)
83
84
85
86
87
88
R e s id e n tia l
N o n - r e s id id
P la n t , M a c h
L a n d I m p ro
T o ta l
89
90
91
B u ild in g s
e n t ia l B u ild in g s & O t h e r C o n s t r u c tio n
in e r y & E q u ip m e n t
ve m e nt
Terms of trade
The savings-investment gap is one way of analysing the current account balance
trend. It is also worthwhile singling out other factors which impact on the balance.
One important factor is the terms of trade.
The terms of trade is an index measuring the volume of merchandise imports that can
be exchanged for a fixed volume of exports. It is purely a function of export and
12
import prices. These price changes have an immediate effect on the balance of
payments - a higher terms of trade means higher earnings for exports relative to what
we pay for imports, and hence a reduced current account deficit.
Graph 7 shows the close relationship between the terms of trade and the balance of
merchandise trade, especially during the 1970s and 1980s.
G ra p h 7
T E R M S O F T R A D E IN D E X a n d
B A L A N C E O F T R A D E (% G D P )
(M a rc h y e a r)
1 ,6 0 0
Terms of Trade Index
1 ,4 0 0
4%
1 ,3 0 0
0%
1 ,2 0 0
1 ,1 0 0
-4 %
1 ,0 0 0
-8 %
T e rm s o f T ra d e
T r a d e B a la n c e ( % G D P )
900
800
Balance of Trade (%GDP)
8%
1 ,5 0 0
-1 2 %
51
53
55
57
59
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
S o u r c e : S t a t is t ic s N e w Z e a la n d
(d)
Other factors
A significant determinant of import volume changes is our economic growth rate,
with high rates of growth resulting in more imports of raw materials and intermediate
products for processing in New Zealand. Export volume growth is largely dependent
upon the growth of our trading partners. Other factors matter too, for example:
exchange rate changes, livestock numbers, local weather patterns, market access, and
so on. More recently, factors affecting the invisibles account have had a large impact
on the balance of payments. Especially important has been the large increase of
foreign direct investment into New Zealand, its profitability, and the associated
widening of the imbalance of net international investment income.10 Migration flows
have also had a significant effect.
Additional considerations, especially in the long run, are the mix of goods and
services produced and exported by New Zealand and the extent that we develop the
appropriate skills and structures to support exports and import substitutes.
10
Note that the flow of New Zealand investment overseas also increased substantially in the early
1990s but has been affected by poor returns over the last year or so, mainly due to falling prices for
forest products.
13
7.
Prospects
Any assessment of New Zealand’s future current account balance needs to
differentiate between cyclic, other short- and medium-term factors, and long-term
trends.
(a)
Cyclic factors:
Strong economic growth tends to cause a marked rise in the level of imports. This
results from firms investing more in plant and equipment, from producers requiring a
greater flow of intermediate goods for processing, and from consumers spending
more. With falling economic growth over the last few years, the growth of imports
has fallen and should continue to do so into next year.
The economic cycles of our trading partners are also a factor and impact on the
amount we export to them. The effect of the Asian crisis is that economic growth
amongst our trading partners will be more subdued both this year and possibly over
the next few years. This will also impact on international commodity prices, although
these effects should be balanced by a lower exchange rate for New Zealand.
A further cyclic factor is the easing of monetary conditions11 which usually occurs
around the bottom of the economic cycle, and the depreciation of the New Zealand
dollar associated with this. A lower dollar tends to encourage people to import less
and export more.
(b)
Other short- and medium-term factors:
Short- and medium-term factors considered here are: the Asian crisis; recent tax cuts
and Government spending increases; the mix of monetary conditions; the balance
between monetary and fiscal policy; trends in foreign direct investment; and levels of
household debt.
At the moment, the factor most dominating economic news is the Asian crisis. This is
having a significant impact on our economic growth, both directly and through the
effects of greater uncertainty on business and consumer confidence. The result is
likely to be lower import growth and possibly reduced export growth as the increased
competitiveness of the New Zealand dollar is balanced by lower demand for exports.
Tax cuts and increased government expenditure will also impact on the current
account balance. This is likely to be a negative factor, as it will lead to higher
expenditure by households than would otherwise have been the case.
11
The term “monetary conditions” refers to the mix of interest rates, exchange rates, and money and
credit growth, all of which are affected by a country’s central bank (for us, the Reserve Bank of New
Zealand). Easier or looser monetary conditions generally involve lower interest rates, a weaker dollar,
and higher growth of money and credit. Monetary policy is said to be easing, loosening or weakening
when it is having this effect. Easing monetary policy tends to lead to higher economic growth,
although with a lag. Tightening monetary policy has the opposite effect. However, these indicators of
monetary conditions can also move at different rates. When talking about the “mix of monetary
conditions”, the focus is whether the change of monetary conditions is achieved more by one indicator
(e.g. interest rates) or another (e.g. the exchange rate).
14
The mix of monetary conditions affects trading conditions in the short- to mediumterm. Monetary easing over the last few years has been achieved through
depreciation of the exchange rate, with short-term interest rates remaining high. The
result should be more conducive to improving the balance of merchandise trade, as
high interest rates subdue growth in the domestic economy (thereby reducing that
sector’s demand for imports) and the lower dollar encourages exports and discourages
imports.
Fiscal policy12 is also likely to impact on the current account balance. The more
expansionary fiscal policy is, the tighter monetary policy has to be to counteract
inflation. Tight monetary policy, with its associated strong dollar, is not as conducive
to export growth as tight fiscal policy.
Foreign direct investment into New Zealand has increased significantly over the last
few years and is likely to remain high. Related to this has been the “loss” of income
that foreigners have earned from these investments. This is likely to remain at high
levels. However, foreign investment’s net effect on the current account deficit is
difficult to assess in the medium- to long-run. If it raises general productivity and
income-earning ability within the New Zealand economy (for example, through
access to finance, technology, markets, etc.), then this may serve to counterbalance
the loss of profits. Furthermore, New Zealand investment by foreigners is partially
balanced by foreign investment by New Zealanders, although this has recently been
afflicted with poor returns.
The level of household debt has also increased substantially over the last few years,
and the resulting drop in household saving and rise in household investment (in
residential housing) has contributed to the worsening deficit. However, there is a
limit to how much this debt can increase. Households are likely to be a less important
source of the deficit pressures than they have been in the recent past.
These and the cyclic factors are likely to be fairly evenly balanced over the next year
or two, with the Asian crisis dominating events in the short run but the competitive
exchange rate and the end of the rapid rise in household borrowing working to
improve the deficit as the period progresses. Of course, the Asian situation still
involves considerable uncertainty.
(c)
Long-term factors:
What are the long-term factors driving exports and imports or, to look at it in a
different way, savings and investment?
Increasing diversity has been a striking feature of the export trend. At the beginning
of the 1980s, earnings from services (such as transportation, travel and insurance)
were equal to 21% of the value of merchandise exports, whereas they are now 31%
(down from a high of 35% in March 1996). The volume of non-food manufacture
exports grew 180% over the same period, well surpassing that of pastoral and dairy
12
Fiscal policy relates to government expenditure and taxes. It is said to be loosening or expanding if
government expenditure is rising or tax rates are falling.
15
exports (which grew 50%). There has also been a slight diversification away from the
main countries we export to: the percentage of exports going to Australia, Japan, the
United States and United Kingdom has fallen from 55% at the beginning of 1980 to
52% now, with growth of the Asian markets growing especially.
This increased diversity will lessen the risk of New Zealand’s dependence on only a
few commodities and countries. It is also likely to be self-sustaining, with the
development of new markets, networks and skills carrying considerable momentum.
One long-term trend affecting imports may be the level of New Zealand’s border
protection. However, the figures do not support this in any conclusive way. Imports
of goods and services increased as a percentage of GDP from 1989 to 1997 (from
23% to 28%). But this growth also coincided with New Zealand moving from the
bottom to the top of an economic growth cycle. Imports are still well down from their
high of 37% in 1985. Note, however, that even if there is increased import
penetration, this is not necessarily bad for the current account balance. The resulting
increased competition and better access to inputs may have positive effects on the
economy generally and on exports.
The long-term savings trend is favourable for the next couple of decades, which is
likely to have a beneficial impact on our current account balance (as was explained in
section 6). Demographic trends are one reason that savings should improve. The
1950s baby boomers are now middle-aged, which is the stage of their life-cycle where
people save the most. Another reason is increased uncertainty about state provision
and financing of health, education and old-age needs. The more the state pulls out of
these areas, the greater is the need for people to save.
The other main factor mentioned in section 6 was investment. While an increased
savings-investment gap is equivalent to a worsened current account deficit,
investment also provides the basis of future economic growth and increased savings.
8.
Conclusion
The current account deficit’s level is important for a high debt country like New
Zealand, as large deficits represent further increases to our international liabilities.
However, just as important is the make up of the deficit and the reason for the
increase. A deficit driven by productive investment is likely to be more sustainable
than one based upon surging consumption expenditure.
A country’s current account balance is equal to the gap between its savings and its
investment. New Zealand’s household savings rate has shown a disturbing downward
trend since 1980. However, since 1992 this has been more than compensated for by
increased government savings. The prognosis for savings (and the deficit) over the
next couple of decades is for an improvement, driven largely by demographic changes
and continuing high levels of savings by governments.
16
However, the current account deficit is likely to remain high over the next few years,
especially because of the Asian crisis, but a more competitive exchange rate should
soon begin reversing the recent trend.
The best policies for addressing persistent current account deficits are those which
raise national productivity and increase the level of domestic savings available for
productive investment.
9.
References
Birks, S. and Chatterjee, S. The New Zealand economy: issues and policies.
Wellington : The Dunmore Press, 1992. p226-244.
Collins, S., De Simone, F.N., and Hargreaves, D. “The current account balance: an
analysis of the issues”. Reserve Bank of New Zealand Bulletin, March quarter
1998. p.15-34.
Dadush, U. and Brahmbhatt, M. “Anticipating capital flow reversals”.
Finance and development, December 1995. p3-5.
Economic Monitoring Group. Foreign exchange constraints, export growth and
overseas debt. Wellington : New Zealand Planning Council, 1983.
Economist. “In defence of deficits”, 16 December 1995. p.66.
International Monetary Fund. Balance of payments manual (4th edition).
Washington, D.C. : International Monetary Fund, 1977.
Kriegsmann, K-P. Saving and superannuation: the reduction of government
involvement. Wellington: Ord Minnett Securities, 1991.
Statistics New Zealand. Overseas trade. Wellington : Statistics New Zealand, 1995.
Statistics New Zealand. Balance of payments: concepts, sources and methods 1991.
Wellington : Statistics New Zealand, 1992.
WestpacTrust. “How to be balanced about the Balance of Payments”. Financial
Markets Outlook, April 1997. 9.23.
17