Comparing interest rates in N.Z. and overseas

Press, 3 February 1987, Page 16

Comparing interest rates in N.Z. and overseas

Interest rates on money bor - rowed overseas by the Government should be reflected in the interest rates within New Zealand, suggest B. L. Botherway in a letter to the Editor. Not necessarily, replies the Minister of Finance, Mr Douglas.

should be able to borrow for, say, 8 per cent to 10 per cent.” Mr Douglas replies that Mr Botherway had not appreciated that the interest rate was only one component in the costs associated with overseas borrowing. “Even relatively small movements in the exchange rate of either the borrowing or lending country can substantially alter the size of the loan repayments,” says Mr Douglas. “Thus, the effective rate of interest paid on such a loan by the borrowing country does not necessarily reflect the interest rate received by the lender in its own currency. This, incidentally, is one of the reasons why the low interest rate offered in the Maori Affairs Department loan negotiations was not as attractive as may have generally appeared.

Mr Botherway writes: “On January 17 ‘The Press’ reported that our Minister of Finance, Mr Douglas, had advised that the Government had borrowed $475 million to refinance Government debt. Interest rates for the 12year term and six-year term being 4% per cent and 4% per cent, respectively. I congratulate Mr Douglas on the fact that he has been able to borrow overseas funds at such low rates, particularly as New Zealand’s overseas credit rating has further deteriorated recently. Could Mr Douglas please tell me and your readers why interest rates are now climbing even further, with base rates having moved up by a tenth in recent weeks to rates varying from 19 per cent to 26 per cent plus. Surely if the Government can borrow at rates below 5 per cent the public

“The Government, naturally, borrows offshore at the best possible interest rates, and is continuing to negotiate very favourable terms. We have also been undertaking a major review of our overseas borrowings to ensure that exchange rate risks are minimised by spreading

loans over a number of different currencies.

“May I make the point also that the borrowing referred to in your letter is not going to refinance Government debt. It is being used to refinance debt incurred on the ‘Think Big’ projects by the partners in the projects, but which the previous Government had guaranteed against default. In other words, the poor financial position of the projects meant those guarantees were being called up, at huge annual cost to the Government.

“By taking these debts onto its own books the Government will achieve two important aims. First, it will eliminate the uncertainty associated with guarantees suddenly coming to light and placing added pressure on the Government’s fiscal position. The sudden appearance of hidden guarantees was the principal factor in the larger-than-forecast Budget deficit this year. “Second, it will allow the Government to manage the approximately $1 billion annual debtservicing costs associated with ‘Think Big’ more effectively and cheaply.”