Gareth Morgan: Debt adds extra pressure to sell assets

The demand for New Zealand land from foreigners can be seen as the flipside of our penchant to spend more on imports than we earn from exports. Photo / Christine Cornege

Opinion

If foreigners can't use New Zealand dollars to buy New Zealand assets why would they be willing to hold New Zealand dollars?

Last week's column on foreign ownership of land seemed to raise a few hackles. Let's test the veracity of the protectionist view.

Foreigners who sell us the imports we covet don't really want to be paid in our quaint currency. So a pass-the- parcel process occurs until some foreigner is found who will either extend us credit (by holding our Reserve Bank's IOUs) or buys one of our assets, thus giving us the foreign currency to buy those imports we crave.

As a country that spends more than we earn, we run the risk of running out of people to borrow from, so we end up in a barter economy - we can only get foreign goods in exchange for our assets - companies, land, whatever. Pretty simple, really - spend more than your income then you need either to sell some of your assets or borrow more, to fund that excess.

Over the decades we've perfected the skill of raising debt - indeed, our external debt is up at record levels compared to our income (GDP).

Things have got a bit trickier for lending and borrowing of late, so to maintain our spending habits there's greater pressure to sell assets rather than swap foreigners holding our quaint notes with loans to profligate Kiwis.

The only way this reality might come to an end is for the NZ dollar to fall so far that the price of imports we hanker for becomes sufficiently expensive that we pull our heads in and live within our (income) means.

That prospect is so surreal it's not worth wasting time contemplating it.

You may have noticed the NZ dollar is actually rising rather than falling, suggesting that the effects noted above are nowhere near the point of bringing the boom down on our overspending habit. Our overseas creditors are quite happy to keep lending to us at the interest rates we're happy to offer so long as we (a) keep paying the interest and (b) enable free conversion of those debts to other assets we own that they can buy.

Ban foreigners from buying our assets, though, and there certainly will be a sharp shock to the system.

If foreigners can't use New Zealand dollars to buy New Zealand assets why would they be willing to hold New Zealand dollars?

Those dollars would become like debentures in just another New Zealand finance company, in quick time worth much less than their face value - in effect the kiwi would cease to have any asset backing. It would fall and that would deter further lending from overseas.

In other words, the demand for New Zealand land from foreigners can be seen as the flipside of our penchant to spend more on imports than we earn from selling our stuff to foreigners.

The foreigner who sells to us must be able to convert what we pay them into real assets. If a creditor is happy with your debt it's only because they know ultimately it's convertible to the assets you offered up as collateral. And in the case of a country, that is the integrity of the local currency (in which the debt is expressed), or its convertibility to real assets like land.

So let's return to the subject of last week's column - the sale of land to foreigners and the redneck response that it seems to galvanise in the national psyche. If you are going to spend more than you earn, you have to either borrow more or sell some assets and raise the dosh that way.

If your creditors run out of patience with your indebtedness or doubt your ability to keep servicing it, they will insist on you selling some assets - they just won't hold your IOUs ad infinitum with no prospect of them being convertible to real assets.

And as your indebtedness climbs, creditors' preference will shift to funding your next splurge via buying some assets rather than yet another loan.

Our land is an entree to the income from our most valuable activity - farming. So in its own right it has appeal to investors, certainly against the backdrop of the global commodity price upswing.

If a foreign investor thinks the price of the asset reflects an attractive entry to the prospective profits that could flow, they will want to buy it - just like anyone else. The land's not going anywhere, of course, it remains located right where it's always been and over time its ownership will change - sometimes foreign, sometimes not. No big deal.

The real worry is that Kiwis will be muscled out of the market for their own land by foreigners. This scenario, which some seem to think is nigh, is when the locals have got themselves into such a wealth hole they can no longer afford to pay the world price for assets.

That would only come about because our reckless spending habits have driven our indebtedness to levels that force us to sell assets.

Apparently many New Zealanders have so little confidence in their fellow citizens' financial nous that they are dead scared there will be a mass sale of our land assets to foreigners. Why else would they be so staunchly against foreign ownership?

You might argue that they are against it because they are simply unsalvageable xenophobes and racists. I would doubt that. We are after all talking about New Zealanders here.

If then we accept there is some credence to the argument that Kiwis will keep borrowing as a nation until we are paupers in our own land, then sure, bring down some legislation to save us from ourselves.

A prohibition of land and business sales to foreigners would be one solution - it would drive down the currency and scare off foreign lenders and investors. Argentina is currently banning greater exports of its beef despite huge international prices, simply because they want to eat it themselves and at cheap prices.

I can't imagine how that might do anything but damage the supply of Argentine beef but it shows these sorts of whacky interventions are not unheard of. Ban land sales to foreigners but expect lower incomes as a result.

I have a financial interest in a dairy farm and processing factory in Brazil. For that economy such foreign investment brings growth and jobs - and milk it would otherwise have to import.

It sees also a technology transfer from New Zealand to another country - the real worth after all in our dairy industry lies in the decades of intellectual capital, productivity and technology that we have been silly enough to roll up into our per hectare land price. The benefit to New Zealand from that activity is significant as well - an inflow of profits we wouldn't otherwise have.

If instead I'd invested in dairying in New Zealand I would simply have pushed land prices up and, I'm reasonably sure, have made less money. So it's being argued by the xenophobes that a win-win for New Zealand and Brazil is worse than if I'd spent my money developing a farm up the slopes of the Southern Alps.

Get real. Foreign investment is how countries develop.

The only fear you need have is the fear of being incapable of living within your means - hardly the fault of the foreigner.

Gareth Morgan is director of Gareth Morgan Investments