National debt ‘danger signs’

Press, 28 August 1979, Page 6

National debt ‘danger signs’

PA Wellington New Zealand’s outstanding official overseas debt had grown five-fold in the last six years to about $3OOO million, while the percentage of export earnings devoted to servicing the debt had only doubled, said the New Zea-' land economist of the Bank of New South Wales (Mr C. S. Dawe) last even-

Speaking to the Turangi Chamber of Commerce Mr Dawe said that the outstanding debt itself had been increasingly denominated in hard currencies, the Swiss franc and the deutschmark representing 60 per cent of the total. “Consequently, the present and future burden of servicing and repayment is likely to increase sharply if the value of the New Zealand dollar drifts down against these currencies,’’ Mr Dawe said.

The absolute size of private overseas debt was unknown as it comprised not only the recorded debt of New Zealand companies but the capital and reserves of overseas-owned companies in New Zealand. The cost of servicing this debt was about $2OO million a year. After reviewing New' Zealand’s farming and manufacturing industries, Mr Dawe concluded that at present New Zealand’s overseas debt was not a burden.

He said that debtservicing costs were only a small proportion of export earnings, while overseas capital represented a small and declining share of total capital formation.

Taking advantage of the high degree of international liquidity and falling interest rates in recent years, the Government and private industry had been able to roll over loans as they matured, often at more favourable interest rates than originally. “However, there are already very obvious danger signs,” said Mr Dawe. “International inflation and lending rates are “The currencies of the major loans — deutschmarks and Swiss francs — are those that have appreciated fastest against the New Zealand dollar, boosting both servicing and repayment costs significantly in recent years. “The future managed

downward float of the New Zealand dollar will only add to this burden,” said Mr Daw'e.

In the present climate of international recession in which New Zealand would be called on to finance another sharp increase in the cost of imported oil in 1979-80, further borrowing was inevitable, he said. The alternative of deflating the economy until the balance of payments moved into surplus would not only accelerate the decline of manufacturing industry and turn the present emigration drain into a flood, it w’ould cripple the farming industry which was dependent on domestically produced goods and services and, to an increasing extent, the local market as an outlet for production.

However, once again there was a need to use borrowing wisely, recognising that, as the debt-export earnings ratio rose, then lenders, recognising the greater risk must raise their lending rates accordingly. “Though the fact is seldom publicly recognised, lenders have almost as much interest in the success of a business —be it individual, corporate, or country —as the owners. “Within the limitations of the law and commercial practice the lender will be doing his best to ensure the success of the enter-’ prise—it is up to the borrower to do that little bit more,” said Mr Dawe. One thing going for New Zealand as the world economic recession deepened was the mounting international bankers’ schizophrenia in what might be called the "international borrowers’ reverse beauty contest” In a reverse beauty contest the prudent judge did not look for beauty, the contestants were all ugly and the prize went to the least unattractive. When New Zealand lined up with all the other borrowers on the world stage, there were some ugly customers indeed, said Mr Dawe.

Some had up to 80 per cent of export earnings committed to debt servicing. New Zealand had not yet been ranked but its actions would decide its future. .