Cullen playing to overseas gallery in Budget speech

By BRIAN GAYNOR

Foreign investors and the international credit agencies were watching Michael Cullen as he delivered his first Budget. He was conscious of their interest and keen to please.

No longer does the Finance Minister play just to domestic audiences. The influence of overseas investors has steadily increased, even with a traditional Labour Government.

The days when the Government totally dominated the financial markets - as in the Muldoon era - have also passed. In the age of globalisation, financial markets shake a big stick at many Governments, New Zealand included.

Overseas investors and financial markets have a growing influence because of the country's large current account deficit and heavy reliance on overseas capital.

The big stick was clearly demonstrated on Thursday morning, when the New Zealand dollar dropped in response to the latest current account figures.

The overseas debt figures released yesterday also struck a negative note. They show reliance on borrowing continues to grow.

The current account deficit for the March year, which is the difference between what the country earned and what it spent, was $8.5 billion, or 8.2 per cent of gross domestic product - the highest annual deficit, in percentage terms, since the June 1986 year and above the danger level of 5 per cent of GDP.

The country has recorded a total deficit of more than $40 billion over the past 10 years. This has been mainly financed through selling assets or borrowing overseas.

The problem with asset sales and overseas borrowings is that they place further pressure on the current account deficit. The dividends paid to overseas shareholders affect the balance of payments as does interest paid on foreign-sourced debt.

The latest figures illustrated the depth of this problem. In the year ended in March, overseas investors earned $8 billion from the money they invested or lent to New Zealand. By contrast we earned just $0.2 billion on money sent offshore.

Foreign portfolio investors in New Zealand earn a relatively high return because of our high interest rates and dividend yields.

The situation in Australia is also negative but not as serious. In the year ended March, overseas investors in Australia earned $A29.6 billion whereas Australian investors realised $A10.4 billion from their overseas investments.

Statistics New Zealand says the huge investment income deficit is due to several factors, including:

The sharp increase in earnings of overseas-owned companies, particularly the Australian-owned banks.

A rise in overseas debt and international interest rates.

The damaging effect of the fall in the New Zealand dollar on these interest payments.

The figures for the March 2000 year show that overseas-owned companies remitted 87 per cent of their earnings to foreign owners and reinvested only 13 per cent back in the business.

The statistics also reveal that overseas portfolio investment in New Zealand declined by $1.5 billion during the March quarter. This accounted for the relatively poor performance of the sharemarket.

In the 12 months ended March 31, total overseas debt rose from $102.4 billion to $109.1 billion.

Total foreign debt represents 105 per cent of GDP compared with 62 per cent in Australia.

The registered banks are the biggest overseas borrowers. Overseas debt trends over the past 12 months have been as follows:

Government overseas debt has fallen from $17.4 billion to $16.4 billion.

Registered banks have increased their borrowings from $39.5 billion to $51 billion and now represent 47 per cent of total overseas debt.

Overseas borrowings by the corporate sector fell from $45.5 billion to $41.7 billion.

The major financial institutions have borrowed United States dollars, Japanese yen and Australian dollars and a high proportion of the money has been lent to the domestic property sector.

This is bad for the current account deficit because the property sector does not earn foreign exchange to pay interest on the foreign loans or to repay them.

The overseas-owned banks are generating huge profits from these activities and are remitting large dividends back to parent companies.

One of the most poignant figures is the increase in private-sector debt from $33 billion to $92.7 billion in the past decade. Over the same 10 years annual exports rose by only $9.9 billion. This raises the question: how much of these overseas loans has been invested in the export sector?

The answer is very little, if any reliance can be placed on the Organisation for Economic Co-ordination and Development (OECD). The Paris-based organisation's statistics show that New Zealand had the worst export volume growth of any OECD country in the second half of 1990s.

Our export volume grew by only 16.6 per cent over these five years compared with an average of 40.7 per cent for all 29 OECD countries and 61.3 per cent for small countries. Even Portugal and Iceland, which also have large current account deficits, achieved much higher export growth than New Zealand.

Total commodity exports including agriculture, horticulture, fish, mineral and forestry products still account for more than 60 per cent of the country's exports.

New Zealand can ill-afford to be at the bottom of the export growth league because the economic reforms have decimated the import substitution sector. The country needs to generate significant export growth to compensate for the sharp increase in imports.

Dr Cullen presented his first Budget against a backdrop of the latest current account and overseas debt statistics.

He had to satisfy a wide range of interest groups, including traditional Labour Party supporters, his Coalition partners, employee organisations, business and the financial markets.

The financial markets want him to be fiscally prudent. In other words, overseas investors, who dominate the share and foreign exchange markets, demand that the New Zealand Government continues to run Budget surpluses.

In this environment it is not surprising that Dr Cullen's first Budget fell flat. He created none of the anticipation and excitement of the first budgets of Roger Douglas and Ruth Richardson.

It is hard to criticise any particular part of the Budget, but the individual parts do not add up to much. The small allocations to the different sectors will be accepted gratefully but the new Finance Minister is far too cautious.

New Zealand's long-term prosperity depends on export growth. This will require a tax regime that encourages investment in the export sector, a superannuation scheme that promotes savings and a foreign investment policy that entices overseas companies to establish export-oriented operations in New Zealand.

Unfortunately, Dr Cullen's Budget speech had little to say on these topics.

Unless Dr Cullen and his fellow cabinet members pay more attention to the export sector, future finance ministers may not be able to move without first consulting our foreign lenders and the international credit agencies.

Budget 2000 feature

Minister's budget statement

Budget speech