The release of New Zealand’s latest international investment position has shone a spotlight on the country’s debt. The data was released this week in conjunction with the March quarter balance of payments statistics.

The latest external debt figures raise some questions: Does New Zealand have too much overseas debt? Who is responsible for these borrowings? Is the situation improving or deteriorating?

The accompanying table summarises the country’s external debt and external lending situation. There are two important figures:

• Gross external debt, which is the country’s total overseas debt.

• Net external debt, which is determined by subtracting New Zealand’s gross overseas lending from its gross external debt.

The first important figure, gross external debt, is divided into four components – government, banks, inter-company and other.

Overseas government debt fluctuated between $15 billion and $18 billion in the early 2000s but has increased steadily since then, mainly because of the global financial crisis and the Christchurch earthquakes.

According to the latest Statistics NZ figures, external NZ Government debt is now $54.7 billion while the Reserve Bank has external borrowings of .2 billion. Overseas borrowings represent nearly two-thirds of total gross Crown debt with the remainder sourced from domestic investors.

Total Government debt, both external and domestic, represents 38 per cent of GDP, low by international standards. Ten OECD countries have total government debt to GDP over 100 per cent, the top five being Japan with a 232 per cent government debt to GDP ratio, Greece 188 per cent, Italy 147 per cent, Portugal 142 per cent and Ireland 132 per cent.

Only Australia, Estonia and Luxembourg have a lower government debt/ GDP ratio than New Zealand while the combined OECD ratio is 111 per cent.

The biggest contributors to New Zealand’s gross external debt are the registered banks which now account for $117.9 billion, or 48 per cent, of the country’s gross overseas borrowings.

The banks steadily increased their overseas borrowings from $55.2 billion in 2001 to a high of $139.4 billion in 2008. A high percentage of this foreign-sourced debt was on-lent to house purchasers. The banks had to borrow overseas because there were insufficient domestic deposits to meet the borrowing demands of house buyers.

Bank-sourced external borrowing has been an important contributor to the buoyant housing market.

The following 2004 to 2008 bank figures illustrate this:

• Residential mortgage lending increased by $54.3 billion.

• Individual-sourced bank deposits rose by only $28.7 billion.

• Bank overseas borrowings surged by $56.4 billion.

Subsequently there has been a dramatic turnaround in bank funding. From 2008 to March 31, 2015 the banks have reduced their overseas borrowings by $21.9 billion, New Zealanders have an additional $51.9 billion of bank deposits while the banks have increased the size of their residential mortgage lending books by $47 billion.

NZ’s net external debt; Looking better in recent years

($ billion)







External debt



































Gross external debt







Gross external lending







Net external debt







As at March 31

The recent OECD report on New Zealand noted that the reduction in our banks’ reliance on overseas funding was a positive development. A reversal in this downward trend would be a negative development, particularly if it is used to fuel the already buoyant Auckland housing market.

The other two gross external debt sectors are inter-company and other. Inter-company comprises companies that receive debt funding from their overseas parent company; the other classification contains companies, organisations and individuals that borrow in their own name.

New Zealand’s gross external debt, which is a combination of government, bank, other and inter-company borrowing, has risen steadily from $125.2 billion in 2001 to $247.2 billion as at March 31.

While New Zealand’s Crown debt/GDP ratio of 38 per cent is low by international standards, our gross external debt/GDP ratio of 103 per cent is high. The reason for this is that we have relatively small capital markets and borrowers have to rely on overseas funding.

By contrast Japan, has a government debt/GDP ratio of 232 per cent and a gross external debt/GDP ratio of only 55 per cent. The latter figure is low because the Japanese Government is able to source a high proportion of its borrowing from domestic lenders through the country’s capital market.

These New Zealand and Japanese figures illustrate that we have to look at the size of a country’s capital markets, and the ability of borrowers to raise money onshore, when assessing overall debt situations.

Last, there is net external debt, the difference between a country’s gross overseas borrowings and lending.

New Zealand’s net external debt has expanded from $76.2 billion to $138.9 billion over the past 14 years with the net contributors to the latest $138.9 billion figure being government $11.2 billion, banks $97.2 billion, other $1.3 billion and inter-company $29.3 billion.

The Government’s net external deficit is much lower than its gross external debt because both the Crown and Reserve Bank have overseas deposits through a number of sources including the NZ Super Fund.

New Zealand has a net external debt/GDP ratio of 58 per cent, which is in the middle of the pack as far as developed countries are concerned. The good news is that the net external debt/GDP ratio has fallen from 81 per cent since 2010.

A recent study by the International Monetary Fund – When should public debt be reduced? – examines the issue of public or government debt. It concludes government debt should be reduced because of risk management and the problems faced by governments if they have too much debt when a crisis develops.

The study also believes that high government debt weighs on economic growth.

However, the IMF’s analysis of thirty OECD countries shows New Zealand has an extremely low level of government debt and is the third-ranked country, after only Norway and South Korea, in terms of its capacity to increase public debt.

Debt is a complex issue and it is difficult to say with certainty whether a country or its Government has too much or too little debt. However, there are two important points that should be taken into account when considering this issue:

• All sources of debt, including government and household, should be considered. For example Japan has a very high level of government debt and a low level of household borrowings whereas New Zealand is the other way around.

• The ability to fund debt onshore is important. The Japanese Government is able to raise a high proportion of its borrowings from domestic investors whereas the New Zealand Government sources the majority of its debt from overseas investors.

New Zealand’s net external debt position has improved in recent years because a number of investment funds, particularly the NZ Super Fund, have boosted the country’s gross external lending figures.

However, a big issue is the small size of New Zealand’s financial markets and the requirements of domestic borrowers to source a high percentage of their debt from overseas lenders.

The New Zealand economy would be in a much stronger position if domestic borrowers could source most of their borrowings from domestic lenders through the country’s financial markets.


Brian Gaynor

Portfolio Manager