Heavy debt leaves NZ vulnerable

By BRIAN FALLOW Economics Editor

New Zealand households' ravenous appetite for debt has left them, and the country, vulnerable, Reserve Bank Governor Don Brash said yesterday.

In the 1990s, households went on a borrowing spree, Dr Brash said in a speech to the Canterbury Employers' Chamber of Commerce.

"We estimate that household borrowing increased by $45 billion during the 1990s alone, from 57 per cent of disposable income in 1990 to 110 per cent in 2000."

That is not an abnormally high debt-to-income ratio by international standards.

"The difference between New Zealand and most other developed countries is that we do not have as many assets as householders in other developed countries.

"Basically we have borrowed to finance consumption or relatively unproductive investments."

Household savings rates are now negative - collectively we spend more than our disposable income - and the lowest in the OECD.

But unlike the US, where savings rates have also fallen, this does not reflect burgeoning wealth.

Real household wealth has been falling for several years and is the lowest of the developed countries.

Financial assets, for example, equate to only around 70 per cent of annual disposable income, compared with 270 per cent in the larger developed countries - even after the fall in global share prices last year.

And the level of home ownership was no longer particularly high by international standards, Dr Brash said.

The flipside of rising household debt has been an increase in banks' borrowing overseas, which now funds a third of all their lending.

All up, New Zealand uses some $170 billion of foreign capital, of which about $120 billion is debt. Even when offset by New Zealand investment overseas the net figure is $88 billion, or 80 per cent of gross domestic product - compared with 20 to 30 per cent in other developed countries.

A substantial adjustment of household balance sheets would be needed over time, Dr Brash said, and that would begin to reduce the level of external indebtedness.

But the process would not be painless.

"Think, for example, of a large number of baby-boomers realising that they really do not have enough income-generating assets to support a good lifestyle in retirement and forgoing the next move up to a bigger house. In aggregate the effects could be large," Dr Brash said.

Likewise if the savings rate were to move quickly back to 10 per cent of disposable income, that would have an impact on consumer spending.

But there were encouraging signs that such an adjustment would be gradual and not unduly disruptive, he said. Borrowing was growing more slowly than in the mid-1990s, though still faster than incomes.

On the international front heavy reliance on foreign capital is something New Zealand shares with many of the countries which have had exchange rate or banking crises, but Dr Brash said he was not predicting some sort of financial crisis for New Zealand.

Unusually for a heavily indebted country New Zealand was able to raise international loans in its own currency.

When banks borrow in foreign currencies they are able to hedge the debt back into New Zealand dollars.

But that depends on the willingness of other parties to take on the exchange rate risk by holding assets denominated in New Zealand dollars.

"Unfortunately," Dr Brash said, "we cannot be sure who these holders are, what drives them or what might make them reconsider their willingness to be exposed to a relatively small peripheral currency."