FOREIGN INVESTMENT.

Auckland Star, Volume LVII, Issue 114, 15 May 1926, Page 11

FOREIGN INVESTMENT.

RULES TO FOLLOW. SOUND SECURITY MAIN ESSENTIAL. (By HARTLEY WITHERS.) What are the features which an Investor should look for in considering a subscription to a loan, or any other form of issue, that is offm-ed from a foreign country ': It goes without saying that he will want security for his interest and capital, if the issue be a debt of a (Jovernincnt or public body or company, and the prospect of a fair rate of profit it it be a question of proprietorship through a holding of common shares. This requirement we try to secure by various well-known methods. In the case of public debts we look into the record of the borrower with regard to its punctuality in the past in meeting its obligations, the wealth of the area from which it receives its revenue, its practice with regard to keeping expenditure within its income, and we prefer, unless the credit of the borrower is so high that such a stipulation is unnecessary, a special and first charge on some item in the borrower's revenue which can be relied on as constant, such as Customs duties or a tobacco monopoly. If the borrower be a company, we want to be sure that its nett revenue is large enough to provide full for the service of the debt and that the assets pledged under the mortgage are ample for the purpose of covering our claim in case of foreclosure. And in the matter of all debts, whether of public bodies or of companies, we want to be sure that full provision is made for a sinking fund for the redemption of a debt by its due date, or by periodical drawings if so arranged. The prevalei.t fashioa, by which many issues, especially those of high standing, give the borrower an option of redemption, if it suits him, at the end of fifteen or twenty years, will not appeal to a prudent investor, who will know that if it suits the borrower to repay it will only be because the circumstances of the money market are such that it will be difficult for the 1 .ider to reinvest to advantage. With common shares we acquire the responsibilities of proprietorship, taking the last of the profits after all other claims have been satisfied, and bearing the first brunt of adversity, if fortune frowns, and in subscribing for them we take a more definite speculative risk, having satisfied ourselves, by the information available, that the past record justifies us in so doing. All these things are obvious and , , as the men of law say, "common form." But when we are invited to invest abroad ;i different set of considerations comes into the calculation, because those who invest abroad have to try to make sure that their imprest or profits cannot only be earned but remitted. In order to do so we have to prefer iefiuea which may be expected directly or indirectly to increase the productive power of the borrowing country, and especially its power to produce goods for export. Because the interest or profit can only be paid to foreign creditors or proprietors by sales of goods abroad, which' will povide the debtor with the foreign currency required for these payments. If, therefore, ws lend to a foreign Government money to build itself a beautiful and spacious new capital, or to a foreign municipality money for pulling down a slum area and making a pleasant new suburb, or take shares in a company tht is going to add to the amenities of life in a far-off land by supplying - cheap picture palaces for the amusement of the inhabitants, we may be said to be increasing production, but it is not production of a kind that will help the debtor to meet his foreign obligations. Every time that he has to remit interest or dividends he will have to come into the market to buy foreign currency, and he will not, by his use of our money, have done anything to feed the market in exchange by the provision of goods for export. From these examples we are able to Bee what kind of investments are most conducive to the prosperity of the borrowing country. They will evidently be those which will enable it to produce goods for consumption, either to be exported, or to be consumed at home, thua enabling the borrowing nation to reduce imports. Because a country which has to remit to foreign creditors must do so either by increasing its exports or by reducing its imports. At the same time we have to remember that production may be immensely helped, indirectly, by improvement in transport facilities, such as railways, roads and harbours, and that money is well invested that is wisely used for these purposes. Again, an investor who is not conscientious about the use of his money may well feel that he js justified in subscribing to a loan that is going to be used for what are called reconstruction purposes— the stabilisation of the currency and the regulation of the finances, as long as due precautions are exercised to see that a new leaf is really going to be turned. All these things, by bringing confidence and stability, promote production and enable a country to face us foreign obligations.

But when all these exceptions are allowed on the score of indirect assistance to production, it still remains true that both for the borrower and the lender those investments are most satisfactory which directly stimulate exports whicli, by their sale abroad, provide foreign currency to meet the obligations incurred.