Global sharemarket drop knocks New Zealand’s international net worth

New Zealand’s seasonally adjusted current account deficit narrowed $372 million to $1.6 billion in the March 2020 quarter, Stats NZ said today.

The smaller deficit was driven by our trade in goods with the goods deficit narrowing $613 million to $213 million.

New Zealand’s services surplus narrowed by $83 million to $983 million during the quarter.

“Travel restrictions began in early February to combat the spread of COVID-19, followed by a shutdown of New Zealand’s borders to all non-residents from 19 March,” international statistics senior manager Peter Dolan said.

A $342 million fall in spending by international students and visitors was the main driver for the overall fall in services exports (down $460 million), followed by a fall in transportation services exports, down $83 million.

Services imports were also down $376 million during the quarter with travel services imports down $165 million and transportation services imports down $63 million .

International investment position affected by drop in sharemarkets

Volatility in world financial markets, sparked by the COVID-19 pandemic, caused large valuation changes in our international assets and liabilities. This drove a net rise of $10.1 billion in our net international liability position at 31 March 2020 compared to 31 December 2019.

At 31 March 2020, New Zealand’s net international liability position reached $182.0 billion (58.0 percent of GDP), the highest percentage of GDP since the December 2016 quarter. This compares with 55.2 percent of GDP at 31 December 2019 and a peak of 84.2 percent (March 2009 quarter) during the global financial crisis (GFC).

The widening of the net international liability position was mainly due to net falls in market prices ($7.3 billion) and the value of financial derivatives ($6.9 billion). This was partly offset by a net financial account outflow of $7.7 billion.

“The fall in market prices reduced the value of New Zealand’s assets abroad by $15.2 billion. This equates to 5 percent of all of New Zealand’s internationally held assets at the start of the quarter,” Mr Dolan said.

“By comparison, during the GFC, the greatest fall due to market price changes for one quarter equated to 4 percent of total offshore assets.”

The flow-on effects of COVID-19 on market price changes also saw the value of New Zealand’s liabilities to offshore fall nearly $8 billion.

Valuation changes in financial derivatives also had a large impact on the wider net liability position. This quarter saw record high increases to the value of both our overseas derivative assets ($12.1 billion) and our derivative liabilities ($19.0 billion).

“Financial derivatives are a type of financial instrument, such as futures contracts that can be used to manage various types of risk or speculate on price movements of underlying assets,” Mr Dolan said.

Financial account reflects need for liquidity

The threat of a global pandemic also triggered a flurry of activity in the financial account in the March 2020 quarter.

New Zealand’s portfolio assets abroad had an inflow of $11.8 billion while other investment assets had an outflow of $12.6 billion. This reflected investment fund managers, including the New Zealand Super Fund (NZSF), adjusting their portfolios in response to financial market volatility.

“We saw New Zealand investors move out of equity assets, such as overseas shares, with the proceeds shifted into more liquid assets, such as cash and deposits,” Mr Dolan said.

“In uncertain times, there is a preference for ready cash or liquid assets as they can be accessed quickly.”

In part, these transactions also reflected a need for cash on hand to meet obligations arising from a high degree of volatility in derivative contract values.

The main impact of this is reflected in the record $4.7 billion financial derivative liability transactions to meet contract liabilities in the quarter.

Reserve Bank increases offshore assets

Another driver for the outflow of New Zealand money going abroad was the RBNZ’s investment in reserve assets, holding more assets in foreign currencies.

“The large $10.5 billion investment in reserves again has its origins in a need for liquidity, this time from the RBNZ’s operations to inject cash into the New Zealand financial system,” Mr Dolan said.

One outcome of this cash injection was a large rise in the settlement account balances the local banks have with the RBNZ. The RBNZ used some of the rise in these balances to invest in USD deposits, increasing New Zealand’s reserve assets offshore.

Government’s external lending increases

New Zealand’s net external debt narrowed $10.6 billion to $141.7 billion at 31 March 2020.

New Zealand’s net external debt, borrowed from foreign lenders, is different from its net international liability position as it records liabilities in the form of debt instruments and excludes equity (shares) and financial derivatives.

The RBNZ and NZSF were the main drivers for increases in external lending for the central bank (up $14.1 billion) and the general government (up $6.0 billion) respectively. External debt (borrowing from offshore) of the government sectors remained relatively unchanged.

“While the New Zealand government has borrowed significant sums in response to the impacts of COVID-19, this has not, so far, come from offshore borrowing,” Mr Dolan said.

Net errors and omissions

The balance of payments recorded net errors and omissions (NEO) of $6.2 billion in the March 2020 quarter. This indicates an underestimate of liability transactions or an overestimate of asset transactions.

NEO is mostly caused by under-coverage, under-reporting and gaps in our measures. There is ongoing work looking into ways to improve our NEO by way of coverage, measurement and timing.

The following are the likely causes for the large recorded NEO during this period:

• The difficulty in accurately separating or isolating the impact of valuation effects from transactions. The effects of changes in asset prices and exchange rates get transmitted from one economy to another via price or other changes in the reconciliation statement.
• We do not currently measure offshore assets and liabilities held by New Zealand individuals on their own accord or held by trusts.