Reduction in NZ's vulnerability due to Regulations

CTU media release
23 June 2010

Reduction in New Zealand’s vulnerability due to Reserve Bank regulations

The International Investment Position shows a welcome improvement in New Zealand’s vulnerability to sudden changes in international money markets. This is largely due to actions taken by the Reserve Bank to require banks to reduce their dependence on short term overseas funding, says the CTU. There is a reduction in international liabilities due in a year or less to 40.4 percent in March 2010, down from 55.3 percent two years ago, in March 2008.

However banks remain the biggest single contributor to New Zealand’s international liabilities. The debt they owe overseas, which has mainly been used to fund mortgages and helped inflate the house price bubble that peaked in 2007, is still almost three quarters of New Zealand’s net international liabilities. At 74.2 percent of those liabilities in March 2010, it is a higher proportion than it was two years ago, in March 2008 when it was 73.1 percent. In gross terms, banks owed $150 billion at March 2010 compared to $138 billion two years ago.

“It appears that the Reserve Bank has been successful in beginning to wean the Big Four Australian owned banks off their short term borrowing habits, but not so successful in reducing their dependence on overseas funding,” said CTU Economist and Policy Director Bill Rosenberg. “That makes it more difficult for the Reserve Bank to control monetary conditions. The Reserve Bank should be considering more direct actions to control the banks’ overseas borrowing.”

“South Korea for example has recently increased restrictions on the use of foreign currency bank loans to make sure that they are mainly for overseas use. It has also tightened regulations on short term borrowing by banks.”

Otherwise, the Balance of Payments shows welcome improvements, with reductions in the current account deficit due to relatively low imports and high dairy prices, and profits from overseas investment in New Zealand being less of a drag on the economy. “We have yet to see, however, how much this is a trend and how much this is due to the lingering recession which has affected company profits and reduced consumer and company demand for imports. We are seeing the benefits of higher prices for relatively unprocessed commodities like milk powder and logs. That will not last, and doesn’t encourage high value added exports which creates higher paying jobs. Much of the improvement in net international liabilities during the year has been due to changes in asset valuations and the exchange rate rather than substantive changes.”

New Zealand's net international liabilities stood at $166.7 billion or 88.9 percent of GDP in March, a reduction from the $168.3 billion or 90.6 percent of GDP in December 2009. In March, the government’s net international position was positive – it held $6.4 billion more in overseas assets than it owed overseas.

ENDS

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