Past $l5 billion in overseas debt

Press, 30 March 1983, Page 12

Past $l5 billion in overseas debt

The final of two articles by

JOHN GOULD,

Professor of

Economic History at Victoria University

The relative importance of official as compared with private sector debt in recent years has increased even more than is suggested by comparing their relative sizes, for servicing a million dollars of official debt has become more expensive while the cost of servicing a similar amount of private capital has declined. This is partly because Government borrowing abroad, as at home, has had to be undertaken at higher interest rates than in earlier years. In contrast, the profit rate in the private sector has declined. Further, the real, cost to the nation of overseas official borrowing has been further increased because many loans have been raised in relatively “hard” currencies. The cost of servicing and repaying these loans has risen with the appreciation of these currencies against the New Zealand dollar. The absolute figures of the overseas debt already quoted do not mean much in themselves; to reveal their significance they have to be set alongside some more familiar figure. The chart shows the changing value of official and private overseas debt as a percentage of Gross Domestic Product. The figures have been calculated for every fifth year from 1951 to 1971, and then annually until 1982. As a percentage of G.D.P., total net indebtedness increased fairly steadily to 1971, with a particularly rapid rise over the interval 1966 to 1971, this being in part due to the devaluation of the New Zealand dollar in 1967. In the early 19705, however, the rapid increase in G.D.P., together with upward revaluations of the New Zealand dollar which the Labour Government was able to implement in the first half of its term of office, resulted in a rapid decline in public and private sector debt as a percentage of G.D.P. At March 31, 1974 our total debt to G.D.P. ratio was little higher than 23 years earlier. The big increase in our debt ratio, has come in the last eight years. It reached a peak in March, 1978, and has since declined somewhat. It is noteworthy, however, that official indebtedness has increased during those eight years much more rapidly than private sector indebtedness. Indeed, the slight decline in the debt ratio since 1978 has been brought about entirely by the relative shrinkage in the private sector debt. Mr Muldoon can rightly claim that the biggest increases in our debt/G.D.P. ratio came in the years 1974-75 and 1975-76. These

increases were triggered by the first oil shock in late 1973 and early 1974, the dramatic decline of New Zealand’s terms of trade by 43 per cent in little more than a year which followed that shock, and the 1974 and 1975 Labour Budgets, which attempted to mitigate the effect of those external events on New Zealand’s real income and balance of payments by deficit financing and heavy overseas borrowing. In fairness to Labour it has to be added that our experience was shared by the large majority of higher-income countries. The current account surplus of O.P.E.C. countries increased from an average of SUS 3.4 billion in 1971 to 1973 to $U567.2 billion in 1974. This massive surplus had to be reflected in a correspondingly massive deficit and increasing indebtedness in the rest of the world. Note that our debt/G.D.P. ratio in March, 1982, was almost identical, according to my estimates, with that in March, 1976, the substantial increase in the official

debt to G.D.P. ratio being offset by a decline in the private sector ratio. As significant as the total of the external debt is the burden of servicing it in relation to our ability to repay. A guide to this is the ratio of net investment income to export earnings, as reported in the balance of payments annual estimates. From a level of about 3 per cent in the first half of the 19505, net investment income as a percentage of export earnings increased sharply to a plateau of 6 to 8 per cent throughout the 1960 s and early 19705. For this increase the relatively growing importance of private sector debt, with its then typically higher servicing cost, was partly responsible.With the large increase in total external debt in the crisis of the mid-19705, as well as the higher interest rates on fixed interest borrowing, the servicing ratio then increased markedly, and has averaged something like 12 per cent of export revenue in recent years. For most of the period since 1951 much the larger part of the outflow represented the cost of servicing private sector debt, rather than

official debt; for 1973-74, for example, interest on the official overseas debt amounted to less than 2 per cent of export earnings, as against a total servicing ratio of 7.3 per cent During recent years, however, this relationship has turned around. In the last few years more than half of the servicing ratio is accounted for by the cost of servicing the official debt. Thus in respect of the changing structure of the external debt and the cost of servicing it, Mr Muldoon’s administration has been marked by that willingness to expand the public sector at the expense of the private sector, which many regard as characteristic of him. What of the months since March, 1982? For a full statement, naturally, we have to await the end of the financial year and the appearance of the various official figures. In the meantime, we can note that the “National Business Review” recently (March 14) estimated the net increase in public debt from April 1, 1982, to early 1983 at about $1.34 billion. To this must be added the increase in the Reserve Bank’s net overseas liabilities, which the Reserve Bank “Bulletin” puts at

some $l3O million from April to December, 1982. Further, overseas exchange transactions figures suggest a substantial private capital inflow during the same period, though these figures are very approximate indicators since, unlike the balance of payments reports, they do not include the reinvestment of profits due to foreigners in New Zealand industry. Adding together these three items, and allowing for a further upward adjustment because of continued depreciation of New Zealand currency, it seems certain that by early 1983 at least $2 billion more had been added to our total overseas debts. Given the March, 1982, figure of $12.35 billion, this suggests that the recent estimate of a $l5 billion over-all debt is very close to the mark. This, too, relates to the weeks before the devaluation of the New Zealand dollar following Mr Hawke’s readjustment of the value of the Australian currency. The effect of this recent devaluation has most likely been to push our total overseas indebtedness above $l5 billion.