Net international liability position narrows as net external debt widens

New Zealand’s net international liability position was $177.9 billion (55.5 percent of GDP) at 30 September 2020, $2.4 billion narrower than at 30 June 2020, Stats NZ said today.

The net international investment position represents the difference between New Zealand’s assets and liabilities with the rest of the world. New Zealand has a net liability position as we have more liabilities with the rest of the world than we do assets.

“Overseas investors hold more assets in New Zealand than we hold overseas but the gap between our external assets and liabilities became smaller in the last three months,” international statistics senior manager Peter Dolan said.

The narrowing of the liability position was due to a combination of transactions and changes in the value of assets and liabilities arising from market prices and financial derivatives.

A narrower measure of a country’s external financial position is net external debt which comprises assets and liabilities in the form of debt securities, loans and trade finance and excludes equity (shares) and derivative instruments. At 30 September 2020 net external debt was $150.1 billion (46.8 percent of GDP), $4.6 billion wider than at 30 June 2020 (46.0 percent of GDP).

“In the September 2020 quarter, our net international liability position moved in the opposite direction to net external debt,” Mr Dolan said.

“This was due to an increase in our overseas equity assets which are not included in net external debt.”

Comparing debt levels with those during the global financial crisis (GFC)

New Zealand’s balance sheet with the rest of the world – the difference between what it owns and owes overseas – is stronger than it was at the time of the GFC more than a decade ago.

The GFC of 2007-2009 had a large impact on the New Zealand economy and our position as a debtor country, as did the Canterbury earthquakes of 2010 and 2011.

At 30 September 2008, during the GFC and before the impacts of the earthquakes, New Zealand’s net international liability position was 80.5 percent of GDP, compared with 55.5 percent of GDP at 30 September 2020. New Zealand’s net external debt was 83.7 percent of GDP, compared with 46.8 percent of GDP at 30 September 2020.

The ratios of New Zealand’s net external liabilities to GDP are significantly lower as at 30 September 2020 compared to 30 September 2008, despite the impact of COVID-19 on the global economy this year.

Following the GFC and Canterbury earthquakes, the government issued debt securities to finance deficits. These debt securities were sold into the open market, including to foreign investors. As a result, the New Zealand government’s overseas debt rose significantly from under $20 billion in 2008 to over $50 billion in 2013.

In 2020, the New Zealand government issued debt securities to finance deficits arising from spending in response to the COVID-19 pandemic. The Reserve Bank of New Zealand (RBNZ) used its large scale asset purchases (LSAP) programme to purchase a large quantity of these newly issued New Zealand government bonds on the secondary market. This injected liquidity into the New Zealand financial system and lowered interest rates.

“As a result of the RBNZ’s LSAP programme, the rising level of New Zealand government debt remains within New Zealand,” Mr Dolan said.

“We have not, so far, seen the increase in general government external debt that we saw following the GFC and Canterbury earthquakes.”

At 30 September 2020, New Zealand’s general government sector, including local government, had a combined gross external debt of $55.3 billion, similar to levels seen over the past five years.

As at 30 September 2020, banks made up 78 percent of New Zealand’s net external debt and general government contributed 12 percent. The central bank (RBNZ) holds reserve assets held in foreign currencies and is therefore a net lender reducing net external debt by 8 percent. All other sectors contributed 18 percent to net external debt at 30 September 2020.