The anxieties over our overseas debt obligations have faded significantly over the past generation. David Chaston updates the data and explores why we are less worried now

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Our overseas debt has now reached $408.5 billion.

On a per capital basis, that is $83,900 for each person in New Zealand.

That debt is made up of both private sector debt, plus Government debt. In addition we have other international liabilities (like carbon credits) and they are included in this total as well.

But the real question is, is that debt growing? And how fast?

And as a proportion of our growing economy, is that getting larger? Are we more indebted on a real basis?

The answer to those questions are less alarming.

Firstly, the data for this is found in our National Accounts, as published by Statistics NZ quarterly. That release tends to be used to record economic growth, but it includes far more comprehensive data than that. It is a full national balance sheet setting out all our assets and liabilities. From the detail around liabilities, you can find the “international position” on liabilities, which is commonly referred to as ‘overseas debt’.

A first principle to recognise is that we have long gone past the period where we had to borrow-to-pay-the-groceries. Now debt is incurred almost solely to invest in assets. And every lender requires the borrower to have skin in the game, a level of equity to support the borrowing. So asset levels are a core benchmark. Borrowing by either Government or corporates (including banks) isn’t for straight consumption; no lender would agree to such an arrangement anymore. They want to know that the asset being funded has a future income stream that will comfortably allow for repayment.

So the GDP benchmark is the appropriate one when looking at this issue on a national basis.

Focusing solely on the international position, here is the track of borrowing we are on:

On a net basis – our Net International Investment Position, Net IIP – we have a liability now of $156.1 bln to the rest of the world. This net position has been pretty stable over the past 10 years. It grew from $92 bln to $155 bln in the nine year period to the end of 2008, and has staying at that absolute level since.

But over those two blocks of time, nominal GDP grew +65% and +51% respectively (the second block includes the GFC recession).

The lid on net debt is held on by strong growth in our overseas assets, almost all by the private sector.

Putting this in the perspective of the underlying economy, here is the same data:

In this perspective, overseas liabilities are now at 143% of GDP and that is its second lowest since the data in this form became available (from 2000). And that is a recovery from its worst level in March 2009 when it was 166%.

On a per capita basis, the recovery is not as strong. It reached its peak at $88,016 in September 2016 and has fallen since then to the current level of $83,862. At the same time, our international assets on a per capita basis were at their peak at December 2017 at $52,017.

Community anxiety about our overseas debt levels has faded over the generations. Prior to 1984 when New Zealand was a closed and centrally controlled economy, anxiety levels were generally high and everyone worried about our overseas debt. Governments set public policy to try and reduce the stress. But since the opening up of our economy, while the debt levels have risen in absolute terms, the shock-absorbing mechanisms of the exchange rate, and the market-driven signals about what debt is sustainable, have both worked to push the issue back down to its rightful place in our economic perspectives and conversations.

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