Friday’s macroeconomics class was all about Trade and Capital Flows. After discussing international trade and Ricardo’s comparative advantage, we looked at a country’s balance of payments and its current & financial accounts. To finish off we analysed New Zealand’s BoP. As the data was a bit dated I decided to reproduce the analysis based on Statistics New Zealand’s most recent statistics. We also have a class test coming up, so it’s a good exercise, I guess!
Let’s take a closer look at New Zealand’s overall balance of payments as percentage of nominal GDP. (I decided to use nominal instead of real as I don’t think the BoP statistics are in real terms.) New Zealand’s current account balance has been consistently negative over the period from 2000 to 2015. The capital account balance is negligible except from 2011. This spike was triggered by the Canterbury earthquakes in September 2010 and February 2011. So these capital transfers are “reinsurance claims on non-residents associated with the exceptional Canterbury earthquake events” (Statistics NZ, 2011, p.4). Financial accounts have been positive over the last 15 years with the exceptions being 2011 and 2014.
The second diagram is a close-up of the current account balance. It reveals where the current account deficit comes from. While New Zealand has been running a steady services surplus and also a merchandise trade surplus in some years, this is largely offset by high outflows of primary income. So the key to the country’s large current account deficit is its net international investment position.
Primary income is defined as:
- Earnings from providing capital (company profits, dividends from shares, interest from lending money)
- Wages/ salaries from providing labour (Statistics NZ, p.7, 2015)
The driver is the former though. There are many foreign-owned firms in New Zealand and hence there has been an excessive amount of primary income earned from foreign investments in New Zealand compared to New Zealand’s primary income from abroad over the last couple of years.
The financial account is the counterpart. New Zealand has been running a financial account surplus in most years. This is intuitive as the BoP should ultimately balance. (Not to mention the considerable net errors and omissions here.) To finance the country’s current account deficit New Zealand borrows from overseas more than it lends (McDermott and Sethi, 2015). In particular, the main drivers are portfolio investment liabilities and direct investment liabilities for 2015. In comparison, New Zealanders are investing abroad, most importantly in portfolio investment assets, but there is still a net inflow of investment into the country.
So what can be done about New Zealand’s BoP? Well, my prof said go to your online banking account and buy a share in the foreign-owned banks (for sure a great not so serious advice). But that’s me for the day! The data for my analysis was taken from Statistics New Zealand and my spreadsheet can be found here: New Zealand Balance of Payments. This was a personal exercise and I do not recommend anyone reproducing my results without checking the analysis.
Thanks for reading!
C. John McDermott and Rishab Sethi. ‘Balance of payments – What is the balance of payments?’, Te Ara – the Encyclopedia of New Zealand, updated 28-Oct-15
Statistics NZ (2011). Impacts of the Canterbury earthquakes on New Zealand’s international accounts. Wellington: New Zealand Government.
Statistics NZ (2015). Balance of Payments and International Investment Position: December 2014 quarter. Wellington: New Zealand Government.