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Capital flight aborted but foreigners go short term

By Nick Stride

Friday 6th October 2000

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There is little evidence of capital flight by foreign investors but a stockpile of short-term cash is building up in banks as longer-term investments mature.

The latest data available from Statistics New Zealand shows in the March year overseas holdings of debt securities - government and private sector bonds, bills and notes - fell $6 billion to $27 billion, while bank deposits grew $12.5 billion to $30 billion.

Statistics New Zealand said the major impact on the growth in deposits was refinancing of bills and bonds that had matured or been sold.

The trend could indicate foreign investors with maturing fixed interest assets have been deterred from repatriating their money by the weak dollar.

Reserve Bank figures show foreign holdings of government bonds and Treasury stock fell $3 billion over the year to March.

The National Business Review revealed last week a further $5 billion of foreign-held bonds will mature over the next few months. The debt will need refinancing.

"Foreigners are selling government stock and banking the proceeds," Bancorp Holdings economist Stuart Marshall said.

"Deposits are more easily convertible, more liquid, and avoid the country-risk premium."

The most important category of portfolio investors was holders of eurokiwis - bonds issued in New Zealand dollars by overseas institutions.

"If they held, say, a three-year bond that's maturing and they see the currency coming down, they don't want to leave the New Zealand dollar so they stick the money on 90-day deposit," Mr Marshall said.

But he noted it was "pretty difficult to see a flood of people leaving New Zealand."

Contradicting the view that falls in the New Zealand dollar have been driven by a loss of confidence in the country's economic direction, overall foreign investment rose $8.2 billion, to $135.4 billion in the March year.

Most of that rise, however - about $6 billion, according to Statistics New Zealand - was accounted for by local banks borrowing overseas to finance New Zealanders' borrowing.

Mr Marshall said more worrying than movements in holdings of financial instruments would be sales by foreign investors of direct holdings - defined as a stake of more than 25% - of New Zealand companies.

For the March year direct investment in local companies was little changed at $63.7 billion but the growth rate has flattened over the past two years.

After four years' growth at an annual average rate of 15%, from $35.2 billion in 1994 to $62.9 billion in 1998, only $800 million has been added in the past two years.

Mr Marshall criticised the emphasis put on the current account deficit by Treasurer Michael Cullen in his recent two-week tour of Europe.

"The fuss over the current account deficit is pretty silly really. It occurs because so much of New Zealand is foreign-held," he said.

"Most of [the deficit] is in dividends and profits owing to them but it's only leaving New Zealand if it's not being reinvested. Most of it is - they're here for the long term."

Deutsche Securities equities strategist Stephen Toplis said there was no evidence of wholesale selling of "portfolio" (under 25%) shareholdings.

"Foreigners are the price-makers and if they were selling you'd expect to see the index crash," he said.

"It's actually outperformed most of the indices in the Asian region."

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