New Zealand May Hit a Crisis: An analysis of a small open economy


New Zealand’s position of net borrower represents a long-run problem with some ripple effects

  • A negative net international investment position: New Zealand over the years has built a trust from international investors possibly due to the transparency of its big institutions. From the first quarter of 2003 to the fourth quarter of 2014, the country presented a negative difference between its international assets and international liabilities. This position is making New Zealand one of the most indebted countries in the developed world with a net equalizing approximately 101% of GDP (calculated from the data set) in the second quarter of 2012. Such situation isn’t necessary ideal if we consider the deficit of the current account.
  • A deep and persistent current account deficit: New Zealand has a low rate of saving. Consequently, in face of a deep current account deficit and a rapid rise of investment, the country is using a high interest policy to generate more revenues. From 1990 to 2014, the net interest rate payment over GDP has increased in general and thus corroborates the argument of New Zealand dependence to external funds.
  • Rising private and government consumption: Private and public consumption is rising in New Zealand. Such level of consumption combined with the low level of savings put the country in an overwhelming path of rising debt.

A high vulnerable country consistently exposed to external shocks

New Zealand has a foreign currency debt outstanding approximately 60% of GDP. Furthermore, half of the international debt liabilities are denominated in foreign currency

  • A rise of international assets: Over the years, New Zealand as a small developed economy has tried to increase its international assets. Such position reinforces the country’s exposure toward international crisis. Most of the assets are located in countries like Australia and the United States.
  • A high volatility of real exchange rate: Exchange rate is not a direct policy variable in New Zealand. Since 1985, the exchange rate has floated through the change of the official cash rate, which is the main policy target controlled by the Reserve Bank. The volatility of exchange rate witnesses the exposure of New Zealand’s economy to external shocks. A high interest rate has often time caused an appreciation of the exchange rate.

New Zealand harsh domestic economic situation is an omen of a structural crisis

New Zealand is using an inflation target of 1-3%. So, over the last years inflation has been quite stable

  • Worsening fiscal balance: Since 2008, New Zealand has seen a rapid decline of its fiscal balance. During 2010, this balance was negative possibly due to the rapid increase of government spending. Although there is a forecast of an eventual improvement of such balance, it is likely to still remain in deficit.
  • Falling credit and rise of money supply: After rising since 2008 to face the crisis and particularly the recession, credit is now falling. In the other side, money supply is rising to possibly face the high demand of currency after the Reserve Bank cut the interest rates right after the 2008 financial crisis.

New Zealand persisting condition of net borrower combined with the current account deficit will harm its economy

We have analyzed New Zealand’s economy by reviewing its big indicators and what it means for their economy. The analysis shows a fact that New Zealand is a highly vulnerable country and reducing such vulnerability is inevitably a key to its economic success. However if nothing is done, although inflation is quite stable, the country could hit a crisis in the future.



References: recession/news-story/9038ab124f180ae8912a5a6bcf847e62



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