Foreign bondholders jump ship

By Graeme Hunt and Nicholas Bryant

Friday 15th September 2000

Foreign investors have marked their lack of confidence in the economy by quitting government stock in record volumes since March.

The bondholders' capital flight - the worst for years - is the latest pointer that international financial markets have all but given up on New Zealand's economic prospects.

Five years ago New Zealand's "economic miracle" was the toast of New York and London but the derailment of the economic-reform process, political instability under MMP and a galloping balance of payments deficit have taken their toll.

In December, nearly 47% of total government stock was held by non-residents, increasing to more than 48% for the March quarter after New Zealand's victory in the America's Cup.

But by the end of the June quarter, shortly after Labour delivered its first Budget, non-residents' share of government stock had fallen to 44.3%. In July, for which the most recent figures are available, it slumped to 37.1%.

New research from Deutsche Bank shows foreign institutional ownership of local equity markets has slumped from 36% to 31% in the last two years, "as the post-restructuring gloss faded."

ABN-Amro's New Zealand chief economist, Rodney Dickens, conceded New Zealand was no longer seen by overseas investors as an exciting market.

In the early-to-mid-1990s New Zealand was viewed internationally as the economic laboratory of free-market and public-sector reform - resulting in strong migrant and capital inflows.

For the March 1996 quarter non-residents' share of government stock was more than 45%, rising to nearly 70% in the September 1997 quarter. It has steadily fallen ever since but the latest drop is the largest since the New Zealand economy started to weaken four-and-a-half years ago.

The weak kiwi dollar, which bought about 27USc more in late 1996 than it does now, is only one sign of New Zealand's economic slide.

The balance of payments deficit, which reached nearly $8.2 billion, or 8% of GDP in December, is the strongest indicator of the country's indifferent economic performance.

Labour inherited this problem when it won office last year but a range of dogmatic policies, including lifting tax on higher incomes, scrapping the Employment Contracts Act, renationalising accident compensation, delaying tariff reform and limiting parallel importing, have soured its relations with business.

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