5  Foreign debt, national assets and national wealth

To this point, we have examined the contribution of foreign capital to the New Zealand economy strictly in flow terms. While inflows of foreign saving obviously add to external indebtness, the additional domestic investment that foreign saving funds also contribute to growth of the economy’s capital stock, with implications for national wealth. Hence, we now shift our attention from assessing the impact of foreign capital inflows on national income, to examining the significance of the stock of foreign debt. We do this by constructing a stylised national balance sheet that includes aggregate measures of national assets, external liabilities and national net worth (or national wealth).

National assets are comprised of the capital stocks of the private and public sectors (including dwellings and consumer durables) as well as New Zealand investment abroad. On the other hand, national liabilities include total foreign investment in New Zealand in the form of equity and debt holdings of foreigners.

Estimates of national assets are constructed by following Makin (1993). The series included are: residential buildings, non residential buildings, other constructions, transport equipment, plant machinery and equipment, consumer durables and New Zealand investment abroad.

Statistics New Zealand provides data in real terms (in 1995-96 constant prices) except for investment abroad data. This series is deflated by private consumption deflator as conceptually wealth embodies present and future consumption possibilities available to domestic residents.[11]

Table 4 shows the composition of national assets. Overall, these increased by 46 percent over the past 10 years.

Note: Total national assets are calculated as the sum of Residential Building, non residential building, other construction, transport equipment plant machinery and equipment, consumer durable and NZ investment abroad. All figures in this table are in real terms at 1995-96 prices. More specifically:

1. Residential Building is from nktd series, nat.bak bank
2. Non residential building is from nktnr series, nat.bak bank
3. Other construction is from nktoc series, nat.bak bank
4. Transport equipment is from nktte series, nat.bak bank
5. Plant machinery and equipment is from nktp series, nat.bak bank
6. Consumer durable is from ncpd_z series, nat.bak bank
7. New Zealand investment abroad is from TIIAF series, tra.bak bank

Note: Total external liabilities are computed by summing foreign direct investment, foreign portfolio investment and other foreign investment which is mainly made up of bank deposit and loans. All figures in this table are in real terms at 1995-96 prices. More specifically:

1. Foreign direct investment is from TIILFD series, tra.bak in Aremos
2. Foreign portfolio investment is from TIILFP series, tra.bak in Aremos
3. Other foreign investment is from TIILFO series, tra.bak in Aremos
4. Total external liabilities can be obtained by either from TIILF series in Aremos or summing (1) to (3).

The total external liabilities include total foreign investment in New Zealand in form of equity and debt holdings of foreigners. Table 5 shows each component of external liability. Foreign portfolio investment in New Zealand is the fastest growing component among others. It has increased 146 percent from $28 billion in 1996 to $69 billion in 2006. Other foreign investment, mainly made up of bank deposits and loans, has been the second fastest growing component. It increased significantly from 1999 to 2000, and grew rapidly from 2004 onward. Compared with those two, foreign direct investment has had a modest growth rate. It has increased 34% from $48 billion in 1996 to $65 billion in 2006. The three components together resulted in an increase of 87 percent in total external liabilities, from $104 billion to $195 billion.

Note: For (1) and (2), see Table 5 and 6.

Table 6 summarizes the total national assets, total external liabilities and national wealth from 1996 to 2006. The national wealth has been accumulating gradually from 1996 to 2006 at an average annual rate of 2.7 per cent or a total of 30 per cent during the past 10 years. On the other hand, total liabilities grew from $104 billion to $195 billion or an annual growth rate of 6.7 per cent. However, the accumulation in national assets exceeded that of external liabilities in absolute terms, such that there was a significant increase in national wealth from 1996 to 2006 (Figure 6). The vertical distance between the total national assets and national wealth denotes for external liabilities (the dotted area). Below, the vertical line area shows the gain in national wealth. There was a significant increase in national wealth during the period despite the increase in external liabilities.

Figure 6 - Total assets and net wealth: $NZ billion in 1995-96 constant prices

Source: Statistics New Zealand

Figure 7 plots the national wealth per worker from 1996 to 2006. A sharp increase in the national wealth per worker occurred in the first half of the period – 1996 to 2001, followed by fluctuations from 2002 to 2006. By 2006 national wealth per worker was again at the 2001 level. The fluctuations from 2002 to 2006 reflect increases in the labour force participation rate. On the other hand, the national wealth per head has increased gradually from 1996 to 2006. The national wealth per worker and per head has increased from $168,000 and $70,000 to $180,000 and $81,000 respectively. This implies that every New Zealander was $11,000 “wealthier” in 2006 than in 1996 (or $14,000 in 2007 prices).

Figure 7 - National wealth per worker: $NZ billion in 1995-96 constant prices

Source: Statistics New Zealand

Figure 8 - National wealth per head: $NZ billion in 1995-96 constant prices

Source: Statistics New Zealand

In summary, despite the increase in external liabilities that has followed from New Zealand’s use of foreign capital, net wealth has risen over the last decade both in aggregate and per capita.

Notes

• [11]See Makin (1993).