Does New Zealand Face the Fate of Iceland?

March 5th, 2009

Privately, with friends and family, I’ve been referring to New Zealand as Iceland 2. The financial situation here is not quite as absurd as Iceland’s, but the comparison is legitimate because of New Zealand’s extremely high debt load.

NEW ZEALAND FOREIGN DEBT SITUATION CRITICAL: “ADJUSTMENT” IMMINENT, WILL BE FORCED ON THE COUNTRY IF NECESSARY

I wouldn’t be surprised if this results in Australiazealand.

—Private email to a reader

Via: IHT:

The economy is in its worst recession on record, the current account deficit is ballooning, the government faces a sea of red ink and credit ratings firms have the country under the microscope – is New Zealand the sick man of the South Pacific?

Once a darling of foreign investors because of high interest rates, the country appears almost like Iceland, judging from the current account deficits it has accumulated over three decades.

After weathering the Asian economic crisis and drought in 1997 and 1998, the $95 billion New Zealand economy enjoyed its strongest growth since the 1970s, thanks partly to soaring commodity prices and debt-fueled consumer spending.

Now the economy is shrinking as the once-hot housing market has stalled, skyrocketing fuel and food prices have turned consumers cautious and the credit crunch has hit.

Unlike Iceland’s banks, which were brought down by aggressive and highly leveraged growth, or European banks rescued by their governments, New Zealand’s banking industry shows no signs of stress yet.

The big Australian banks – National Australia Bank, Westpac Banking, Australia and New Zealand Banking Group and Commonwealth Bank of Australia – dominate the market and have so far escaped the global meltdown.

Sue Trinh, a currency analyst at RBC Capital Markets in Sydney, said the likelihood of New Zealand’s becoming a customer of the International Monetary Fund was still low, given banks’ strong capital.

But she warned that the country showed many symptoms that usually lead developing countries to seek IMF help, and that will not ease investor perceptions of an imminent sovereign credit downgrade.

New Zealand “is one of the most heavily indebted developed economies, as measured by the net international investment position as a percentage of GDP,” Trinh said in a note to investors.

At the end of March last year, New Zealand’s national debt, as measured by a negative net international investment position, was 86 percent of GDP, second to Iceland in the group of countries in the Organization for Economic Co-operation and Development.

The country’s banks are rated AA by Standard & Poor’s and have funded a shortfall in savings with commercial paper issues, which have been renewed every few months. They minimized risk by hedging their foreign exchange exposure in the futures market.

Meanwhile, Britain, the United States, Germany, Greece, Austria, Belgium and Ireland bailed out banks with taxpayer cash.

Because of its perilously low household savings, New Zealand has long lived on foreign borrowings to fund spending.

Household borrowing stood at 174.5 billion New Zealand dollars, or $87 billion, at the end of December, which was financed largely by the “big four” Australian banks. About 40 percent of bank borrowing is due for renewal this year.

By the end of September, the annual current account deficit was 8.6 percent of gross domestic product, compared with the peak of 9.3 percent in the first quarter of 2006.

The saving grace had been the strong fiscal position of successive governments, with budget surpluses and falling debt.

That is changing. Market watchers expect large deficits as spending rises and tax revenues fall because of the deepening recession. At the same time, borrowing rises to cover the shortfall, which has brought warnings from rating agencies.

“We are worried that international investors may lose confidence in New Zealand’s ability to meet its obligation. That would present a risk at the sovereign level,” said Kyran Curry, an S&P credit analyst.

S&P has downgraded the outlook on New Zealand’s AA-plus foreign currency rating to negative from stable in January on concerns over its rising fiscal and external deficits.

But the economy’s former strength may be its future savior.

“Even though sizeable fiscal deficits are projected, New Zealand’s starting position is good, compared to other nations,” said Dean Spicer, ANZ’s head of debt capital markets, in a note.

Finance Minister Bill English told Reuters the economy and government finances have deteriorated since the Treasury’s forecasts in December.

He said the worst-case scenario of the deficit growing to 4.5 percent of GDP and government gross debt at 29 percent of GDP over the next three years had become more likely.

2 Responses to “Does New Zealand Face the Fate of Iceland?”

  1. tochigi Says:

    after a (very) quick skim through the RBNZ financial stability report (nov 08), i think the aussie-owned nz banks are reasonably fcuked. not totally fcuked, yet. they have fueled the housing and dairy bubbles 2002-2007. they will not pay the price because key&co will bail them out. don’t you just love modern financial capitalism? CRONY ‘R’ US.

    meanwhile, sometime in mid-2010: “who the fcuk stole our economy?” –nzherald

  2. tochigi Says:

    sorry, got the link mixed up…
    http://www.rbnz.govt.nz/finsta.....486853.pdf

Leave a Reply

You must be logged in to post a comment.