Global sharemarket drop knocks New Zealand's international net worth

New Zealand's seasonally adjusted current account deficit narrowed $372 million to $1.6 billion in the March 2020 quarter, Stats NZ said today.

The smaller deficit was driven by our trade in goods with the goods deficit narrowing $613 million to $213 million.

New Zealand's services surplus narrowed by $83 million to $983 million during the quarter.

"Travel restrictions began in early February to combat the spread of COVID-19, followed by a shutdown of New Zealand's borders to all non-residents from 19 March," international statistics senior manager Peter Dolan said.

A $342 million fall in spending by international students and visitors was the main driver for the overall fall in services exports (down $460 million), followed by a fall in transportation services exports, down $83 million.

Services imports were also down $376 million during the quarter with travel services imports down $165 million and transportation services imports down $63 million .

Goods exportsGoods importsServices exportsServices imports
Jun-006907000000684100000027460000002382000000
Sep-007548000000719300000027840000002518000000
Dec-008367000000761800000031250000002697000000
Mar-018126000000734500000031690000002662000000
Jun-018349000000734500000031290000002622000000
Sep-018370000000747200000031330000002533000000
Dec-018014000000748600000030700000002572000000
Mar-028010000000837800000034520000002634000000
Jun-027970000000732500000033990000002609000000
Sep-027762000000767300000035020000002585000000
Dec-027422000000766600000036200000002585000000
Mar-037368000000739800000033880000002443000000
Jun-037150000000741800000034230000002426000000
Sep-037208000000741800000035660000002562000000
Dec-037164000000760500000035730000002539000000
Mar-047551000000806500000035270000002603000000
Jun-048142000000847600000038340000002732000000
Sep-047475000000827800000036200000002813000000
Dec-047776000000859000000034980000002857000000
Mar-057789000000854900000035520000002947000000
Jun-057804000000880100000035000000002994000000
Sep-057721000000920800000038310000002995000000
Dec-057950000000902000000035660000002993000000
Mar-068024000000935900000036930000003079000000
Jun-068850000000974200000038170000003144000000
Sep-069295000000989800000037280000003155000000
Dec-068574000000952600000038920000003085000000
Mar-078820000000987100000039220000003144000000
Jun-078677000000972200000039030000003200000000
Sep-079024000000979500000040350000003299000000
Dec-07104620000001056100000039880000003387000000
Mar-08104710000001102400000040650000003433000000
Jun-08105180000001191500000042510000003748000000
Sep-08112450000001217700000040370000003724000000
Dec-08115360000001165500000041040000003852000000
Mar-09108280000001030600000042250000003688000000
Jun-0910153000000961500000039280000003420000000
Sep-099767000000917100000041070000003336000000
Dec-099385000000926100000039810000003318000000
Mar-1010568000000979300000039010000003432000000
Jun-10112000000001009500000040560000003483000000
Sep-10109810000001022800000040510000003574000000
Dec-10112360000001093700000040550000003689000000
Mar-11118220000001108800000040960000003787000000
Jun-11124600000001147700000040420000003866000000
Sep-11117170000001127000000042480000003863000000
Dec-11121980000001149600000044410000003811000000
Mar-12115930000001186100000040080000003825000000
Jun-12117700000001164200000041120000003815000000
Sep-12117550000001155700000041050000003836000000
Dec-12113640000001133500000040010000003834000000
Mar-13116400000001150200000040390000003750000000
Jun-13113220000001152000000041540000003840000000
Sep-13121230000001230400000042330000003933000000
Dec-13133420000001176900000040580000003899000000
Mar-14136490000001215000000042180000003925000000
Jun-14124240000001221800000042210000003933000000
Sep-14120740000001230700000043130000003939000000
Dec-14123020000001270000000049110000004098000000
Mar-15123380000001245000000050540000004150000000
Jun-15119400000001263700000053060000004168000000
Sep-15127690000001328800000056220000004273000000
Dec-15121260000001291100000055350000004283000000
Mar-16120730000001250000000057010000004316000000
Jun-16122900000001283300000056170000004361000000
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Sep-17133420000001349700000061050000004625000000
Dec-17143850000001491000000061980000004695000000
Mar-18136100000001530100000063050000004822000000
Jun-18142180000001558200000064460000005028000000
Sep-18150230000001595700000062070000005159000000
Dec-18146860000001582100000063610000005277000000
Mar-19148220000001583800000063960000005352000000
Jun-19150610000001586400000064760000005395000000
Sep-19147390000001601100000065380000005520000000
Dec-19153240000001615000000066710000005605000000
Mar-20155850000001579800000062110000005229000000

International investment position affected by drop in sharemarkets

Volatility in world financial markets, sparked by the COVID-19 pandemic, caused large valuation changes in our international assets and liabilities. This drove a net rise of $10.1 billion in our net international liability position at 31 March 2020 compared to 31 December 2019.

At 31 March 2020, New Zealand's net international liability position reached $182.0 billion (58.0 percent of GDP), the highest percentage of GDP since the December 2016 quarter. This compares with 55.2 percent of GDP at 31 December 2019 and a peak of 84.2 percent (March 2009 quarter) during the global financial crisis (GFC).

The widening of the net international liability position was mainly due to net falls in market prices ($7.3 billion) and the value of financial derivatives ($6.9 billion). This was partly offset by a net financial account outflow of $7.7 billion.

"The fall in market prices reduced the value of New Zealand's assets abroad by $15.2 billion. This equates to 5 percent of all of New Zealand's internationally held assets at the start of the quarter," Mr Dolan said.

"By comparison, during the GFC, the greatest fall due to market price changes for one quarter equated to 4 percent of total offshore assets."

The flow-on effects of COVID-19 on market price changes also saw the value of New Zealand's liabilities to offshore fall nearly $8 billion.

Valuation changes in financial derivatives also had a large impact on the wider net liability position. This quarter saw record high increases to the value of both our overseas derivative assets ($12.1 billion) and our derivative liabilities ($19.0 billion).

"Financial derivatives are a type of financial instrument, such as futures contracts that can be used to manage various types of risk or speculate on price movements of underlying assets," Mr Dolan said.

Financial account reflects need for liquidity

The threat of a global pandemic also triggered a flurry of activity in the financial account in the March 2020 quarter.

New Zealand's portfolio assets abroad had an inflow of $11.8 billion while other investment assets had an outflow of $12.6 billion. This reflected investment fund managers, including the New Zealand Super Fund (NZSF), adjusting their portfolios in response to financial market volatility.

"We saw New Zealand investors move out of equity assets, such as overseas shares, with the proceeds shifted into more liquid assets, such as cash and deposits," Mr Dolan said.

"In uncertain times, there is a preference for ready cash or liquid assets as they can be accessed quickly."

In part, these transactions also reflected a need for cash on hand to meet obligations arising from a high degree of volatility in derivative contract values.

The main impact of this is reflected in the record $4.7 billion financial derivative liability transactions to meet contract liabilities in the quarter.

Reserve Bank increases offshore assets

Another driver for the outflow of New Zealand money going abroad was the RBNZ's investment in reserve assets, holding more assets in foreign currencies.

"The large $10.5 billion investment in reserves again has its origins in a need for liquidity, this time from the RBNZ's operations to inject cash into the New Zealand financial system," Mr Dolan said.

One outcome of this cash injection was a large rise in the settlement account balances the local banks have with the RBNZ. The RBNZ used some of the rise in these balances to invest in USD deposits, increasing New Zealand's reserve assets offshore.

Government's external lending increases

New Zealand's net external debt narrowed $10.6 billion to $141.7 billion at 31 March 2020.

New Zealand's net external debt, borrowed from foreign lenders, is different from its net international liability position as it records liabilities in the form of debt instruments and excludes equity (shares) and financial derivatives.

The RBNZ and NZSF were the main drivers for increases in external lending for the central bank (up $14.1 billion) and the general government (up $6.0 billion) respectively. External debt (borrowing from offshore) of the government sectors remained relatively unchanged.

"While the New Zealand government has borrowed significant sums in response to the impacts of COVID-19, this has not, so far, come from offshore borrowing," Mr Dolan said.

Year ended in quarterNet international liability position (%)Net external debt (%)
Mar-0173.363.6
Jun-0174.662.7
Sep-0173.060.1
Dec-0162.859.4
Mar-0265.760.9
Jun-0265.559.2
Sep-0265.459.2
Dec-0266.157.3
Mar-0366.355.1
Jun-0367.654.7
Sep-0368.155.4
Dec-0367.960.2
Mar-0469.661.1
Jun-0467.560.9
Sep-0470.561.8
Dec-0472.965.4
Mar-0571.764.9
Jun-0571.164.9
Sep-0573.567.6
Dec-0575.170.9
Mar-0672.671.7
Jun-0672.371.5
Sep-0675.174.3
Dec-0677.374.6
Mar-0775.474.3
Jun-0776.074.9
Sep-0775.776.6
Dec-0774.274.9
Mar-0874.075.3
Jun-0875.479.2
Sep-0880.483.6
Dec-0882.084.0
Mar-0984.283.8
Jun-0982.682.1
Sep-0981.981.4
Dec-0980.180.8
Mar-1078.580.0
Jun-1078.580.5
Sep-1073.876.0
Dec-1071.275.1
Mar-1162.366.8
Jun-1163.765.5
Sep-1167.768.8
Dec-1168.068.1
Mar-1267.166.4
Jun-1267.766.9
Sep-1268.066.7
Dec-1269.567.9
Mar-1368.165.9
Jun-1368.265.4
Sep-1366.563.0
Dec-1363.861.4
Mar-1465.059.1
Jun-1463.959.1
Sep-1463.558.7
Dec-1464.558.7
Mar-1562.357.4
Jun-1559.556.6
Sep-1560.755.8
Dec-1559.754.7
Mar-1661.255.3
Jun-1662.054.8
Sep-1663.157.8
Dec-1658.154.5
Mar-1755.153.6
Jun-1754.953.1
Sep-1753.753.0
Dec-1752.752.1
Mar-1852.051.4
Jun-1852.851.7
Sep-1852.851.7
Dec-1856.751.7
Mar-1954.650.3
Jun-1955.049.9
Sep-1955.850.4
Dec-1955.248.9
Mar-2058.045.1

Net errors and omissions

The balance of payments recorded net errors and omissions (NEO) of $6.2 billion in the March 2020 quarter. This indicates an underestimate of liability transactions or an overestimate of asset transactions.

NEO is mostly caused by under-coverage, under-reporting and gaps in our measures. There is ongoing work looking into ways to improve our NEO by way of coverage, measurement and timing.

The following are the likely causes for the large recorded NEO during this period:

  • The difficulty in accurately separating or isolating the impact of valuation effects from transactions. The effects of changes in asset prices and exchange rates get transmitted from one economy to another via price or other changes in the reconciliation statement.
  • We do not currently measure offshore assets and liabilities held by New Zealand individuals on their own accord or held by trusts.
/Stats NZ Public Release. This material from the originating organization/author(s) might be of the point-in-time nature, and edited for clarity, style and length. Mirage.News does not take institutional positions or sides, and all views, positions, and conclusions expressed herein are solely those of the author(s).View in full here.