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Balancing the books

By Donal Curtin

Thursday 9th June 2005

Text too small?
At the risk of sounding like those inane journalists who ask the grieving mother, "How did you feel when the shark ate your child?", let me ask you this: how did you feel when you read that New Zealand had clocked up a $9.4 billion balance of payments deficit in 2004?

Were you dismayed that we don't seem to be paying our way in the world? Or worried that we're deeply in hock to foreigners? Or perhaps afraid that our recent good economic run was built on debt and illusion? It wouldn't be surprising if you were: that's how many in the media were suggesting you should react. But if you did, you were conned. And here's why.

Let's take a closer look at that $9.4 billion. You can split it up into three parts - a split, by the way, that isn't some strange divvy-up of my own, but the bog-standard way Statistics New Zealand itself cuts the figures.

One part we can ignore: net transfers is tiny and irrelevant and consists of odds and sods of grants and remittances (and where in any event we recorded a small surplus of $100 million, so it's clearly not contributing to any payments problem).

That leaves two large moving parts: the balance on goods and services (Statistics sometimes reports goods separately from services, but it makes no difference to combine them), and the balance on income.

The balance on goods and services tells us how our trading performance has been going. The doomsday myth is that we're sucking in huge quantities of imports that we aren't earning enough export income to pay for. The reality is that we're reasonably close to break-even on our international trade in goods and services (which includes things like our strong tourism sector): last year we ran a small deficit of just under $600 million. That's not in the least surprising, since last year we were growing faster than practically anyone else in the OECD, so it's to be expected that we bought a few more import goodies, and imported more capital equipment, than we might most years.

Nor is there the slightest sign that there's some awful trend happening to our trading performance: for much of the past decade we've run sizeable surpluses on our goods and services trade, and we have every prospect of doing so again in the future (especially as and when the Kiwi dollar comes down a bit).

So if there is some problem, it has to be in the remaining bit of our overall deficit, namely the balance on income. What this shows is that we earned $2.3 billion on the assets we own overseas, while foreigners earned $11.2 billion on the assets they own in New Zealand, hence a net deficit on income of $8.9 billion. Here you have it: the underlying source of our terrible payments 'problem'.

What the numbers are actually showing is that New Zealand is open to foreign investment, and that the foreigners who do invest here have a successful experience: their investments (whether by way of loan or equity) make money for them. Far from being a problem, this is great news: let's hope they tell all their mates, and that even more of them come down here and do the same. After all, that's exactly the policy that's worked wonders for the Irish and transformed them from being appreciably poorer than their larger island neighbour to being better off than the Brits (a trick we haven't yet been able to emulate with the Aussies).

Some people would argue that overseas investment into New Zealand hasn't been in the allegedly more desirable green fields development, but typically has been purchasing existing companies. So what? We're talking consenting adults here: a willing buyer meeting a willing seller, and both finding some value in the transaction. We get the lump sum (not counted in the balance of payments numbers in the alarmist newspaper headlines, by the way) and they get the dividend stream. We're both no worse off, and indeed given that the transaction took place at all, we're probably both better off.

We're big beneficiaries from this foreign funding. Our banking system, for example, is responsible for, and deeply reliant on, some $60 billion of net funding from overseas. So let's get down on our knees and thank the housewife in Penrith who puts money in her Australian bank account, which then gets lent out, via that same Australian bank, to a borrower in Penrose: without her, either local credit would be much more expensive, or local desirable spending plans would be put off, or both. In passing, it's also arguable that the $60 billion isn't even New Zealand debt, since the banking system is effectively Australian owned and the whole lot should show up somewhere as an 'Australian' problem, but that's another story again.

Here's a final analogy. Suppose a sharebroker analyst said this: "I've found a company that's paying what it owes to its bank, and it's paying dividends to its shareholders, and it's growing its profits each year." What would you think if the analyst then said, "This company is paying out vast amounts to its backers, and is therefore clearly a basket case"? You'd think he was deranged, and you'd be right. A better conclusion is that the company is a thriving going concern precisely because it's meeting all its costs. That's true of the company, and it's true of New Zealand.

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