Borrow now at cheap rates to fund the future
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020 has been a very tough year. The impact of the
Covid-19 pandemic has exacted an incredible toll on society with over 2.1 million lives cut short by the virus.
The economic toll has been severe as well with financial pressure on workers, families and businesses.
Thanks to our geographic remoteness and the willingness of our Government to take tough measures, we have been fortunate in New Zealand to have experienced a much lighter impact than most of the global community.
As tough as it has been, there can be a silver lining to the pandemic. For bold decision makers, it offers a chance to reset and make bold plans to re-shape our society.
One side effect of the pandemic has been incredibly low interest rates. Governments can borrow money at unprecedentedly low rates. Recently, the NZ Government had the opportunity to borrow at negative interest rates.
Right now, our nation can borrow 10-year money at a little over one per cent. There is no shortage of cash available for borrowers at these remarkably low rates.
New Zealand has an infrastructure problem. Housing is the obvious one, it is estimated that we are currently short around 40,000 dwellings, current build rates cannot keep up with existing demand let alone make a dent in the existing shortage.
Driving on our roads is a frustration. Lack of capacity, lack of modern highways, lack of alternative routes or modes of transport is a common frustration.
Where is the sophisticated, widespread mass transit public transport in our largest cities? In Auckland, most housing growth is now in relatively distant satellite communities with poor transport links. The chance of new train lines to serve Auckland’s growing population in relatively distant commuter suburbs like Pokeno,
Warkworth, Kumeu is close to zero in the next 20 years.
Speak to any importer or exporter and you will hear frustration about delays moving goods through our ports and around the country.
Are our ports in the right places with the right transport connections?
It is time to be bold and spend some serious money to future proof New Zealand. We have a once in a lifetime opportunity to cheaply borrow money to invest.
Fiscally conservative governments over the last 20 years have our public debt in a very good place. Our worst debt to GDP ratio was in 1988 at 55 per cent when borrowing rates were nearly 9 per cent. Right now our debt to GDP ratio is around half of that but estimated to peak in 2023 at a similar level of around 50 per cent.
As well, a borrowing of around 1 per cent is likely to remain lower than the inflation rate over 10 years, thus putting the Government in the enviable position of borrowing money at a negative real rate.
The true value of the debt actually goes down over the life of the loan. As long as the loan is used to fund an asset with positive value, we are winning.
Complainers about the increasing debt level should be asked to reframe their complaint in terms of the real cost of servicing the increased debt.
It’s time for our Government to be bold and invest seriously in housing, infrastructure and education using this once in a lifetime opportunity to borrow money at a negative real interest rate.
As long as it’s invested in projects that have a positive social or financial impact, New Zealand will be winning.
Driving on our roads is a frustration. Lack of capacity, lack of modern highways, lack of alternative routes or modes of transport is a common frustration.
Paul Brownsey is Chief Investment Officer at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.