Low domestic savings/reliance on foreign savings

Some measures show New Zealand has a consistently lower rate of household saving compared to other OECD countries

The level of saving influences the development of the financial system. According to Statistics New Zealand’s (SNZ) Household Income and Outlay Account New Zealand’s household saving rate is negative and historically has been low relative to a number of other comparator countries (Hodgetts et al, 2006). However, SNZ classifies the data as “experimental” rather than official and there are questions about its accuracy[13]. Alternative flow measures of household saving are either less negative or, in one case at least[14], still positive. Nevertheless, the overall picture is one of a consistently lower rate of household saving compared to other OECD countries.

The national saving rate is positive but low compared to most other OECD countries

National saving is the sum of household, business and government saving. New Zealand’s national saving rate is positive but low compared to most other OECD countries and has been declining in the last few years. In 2005 national saving was 4% of national disposable income, while in 2006 it was 1.6%. New Zealand’s persistent trend of current account deficits and high level of net external indebtedness also point to a relatively poor national saving record. The deficits have been funded by capital inflows from abroad.

New Zealand’s reliance on foreign savings has increased to the point where we have one of the highest current account deficits and net external liability positions in the OECD

At a rate around 10% of GDP in recent years, net national investment has been significantly greater than national saving. New Zealand’s reliance on foreign savings has increased to the point that New Zealand has one of the highest current account deficits and net external liability positions in the OECD. While the present very high current account deficit reflects a number of unusual cyclical influences, the underlying trend remains high relative to other countries. A key question is whether New Zealand’s high reliance on foreign savings has implications for financial system development and investment. This is discussed in the next section.

Figure 6 – Net national saving rates: selected countries

Source: OECD Factbook 2007

Figure 7 – Sectoral composition of savings

Source: Statistics New Zealand’s National Accounts, RBNZ calculations

Substitutability of foreign and domestic savings

The source of saving can also influence the development of the financial system. Standard neo-classical theory predicts that New Zealand’s heavy reliance on foreign savings should not matter for growth since foreign savings are perfectly substitutable for domestic savings. However, this theory relies on strong assumptions (e.g. perfect intermediation, complete/frictionless markets and rational behaviour) that are unlikely to hold, even with highly integrated financial systems.

There is considerable evidence suggesting that foreign and domestic saving are not perfect substitutes

There is now considerable evidence[15] suggesting that foreign and domestic saving are not perfect substitutes and that geography (particularly distance) and the size of the economy are important determinants of international financial flows. Information asymmetry (between investors and savers) is important and the extent to which it matters is a function of the physical distance between them, the size of the financial system and the efficiency of financial intermediation. Barriers relating to cross-border investment can include language, institutional and regulatory differences, high costs of acquiring information about small markets and behavioural considerations such as home bias[16].

Foreign investors prefer debt and direct investment

There appears to be a ranking of different forms of international capital flows with debt being less susceptible to information asymmetry, followed by direct equity investment then portfolio equity investment (Razin et al 1996). Consequently, New Zealand is more likely to attract foreign capital in the form of debt and direct equity rather than portfolio equity. Recent (net) financial account flows for New Zealand are in line with this claim. While falling short of proof, the data are thus consistent with the notion that differences in the availability of information influence international investment patterns[17]. Since 2000, the bulk of net inflows have been dominated by debt. While New Zealand does not appear unusual in terms of the debt/equity structure of external liabilities, the share of direct equity investment to total foreign equity investment is high (i.e. portfolio equity investment is low).

Although New Zealand has an open financial system, its small size and large distance from major international markets, could make it particularly susceptible to differences in the availability of information across borders. The higher levels of direct equity investment mean that fewer companies are likely to be listed on the NZX and the development of the stock exchange is therefore less than it would be otherwise. This may have an adverse effect on firms starting up that rely on a well developed local financial system. These problems are more likely to be evident for equity than debt, with young and small firms seeking equity finance most likely to be adversely affected.

Notes

• [13]SNZ, Treasury and the RBNZ are working to develop higher quality official measures.
• [14]Van Zijl de Jong, M. and G. Scobie (2006) ‘Housing: An analysis of ownership and investment based on the household savings survey’.
• [15]For example Tesar & Warner (1995) and Portes & Rey (1999).
• [16]Investors are more likely to invest in areas close to where they are located in order to increase the information available and consequently lower the risk.
• [17]Cross country studies typically exclude New Zealand but do include Australia.