NATION OF DEBT
How Covid19 is changing the way we borrow
Kiwis owe more than ever but Covid19 has brought a new question: Is $120,000 a head too much debt to bear, or not enough to help the economy get back on its feet again? In part one of a series on the state of the nation’s debt, Liam Dann investigates.
‘‘THERE is room to accommodate more debt in the economy,’’
Reserve Bank of New Zealand manager of financial systems analysis Chris Bloor says.
That is a big shift in attitude from the central bank, which spent much of the past decade trying to slow the rate at which Kiwis were borrowing.
Latest figures show New Zealand’s total debt continues to rise, thanks to increased government borrowing and a housing market that has so far refused to be stalled by Covid19.
But unlike previous years, when the Reserve Bank had concerns about rapidly rising private debt, the bigger problem now may be New Zealanders not borrowing enough.
‘‘To a degree we’re trying to lean against the inherent cycles in lending,’’ Mr Bloor says.
‘‘So, taking on too much risk in the upswing and not enough in the downswing.
‘‘We have kind of switched mode a little bit in terms of what we are concerned about.’’
In simple terms, the Reserve Bank has to assess which is the lesser of two evils: debt levels so high that they make us vulnerable to financial crashes, or an economy which stalls because people are not prepared to borrow, spend and invest.
Reserve Bank credit data for the year to July shows business borrowing has been completely stopped in its tracks by the pandemic.
Consumer credit — the borrowing we do to go shopping — has also plunged.
Business lending as a share of GDP was already ‘‘flat as a pancake’’, economist Cameron Bagrie says. The annual rate of increase to the end of July was just 0.1%, but with a sharp dropoff in borrowing since April.
That reflects access to credit becoming more of an issue as banks get cautious, Mr Bagrie says.
But also the fact that firms’ desire to put cash to work has been diminished in a highly uncertain world.
That is a worry.
If business is afraid to borrow and invest, then it is not well placed to drive the economic growth and productivity improvement the Government is banking on to help us deal with rising Crown debt.
‘‘We do tend to see increased risktaking in boom times and decreased risktaking in a downturn,’’ Mr Bloor says.
The Reserve Bank wants to see both banks and business ‘‘taking a longterm view and looking out for opportunities’’.
As well as setting monetary policy to keep interest rates low, the Reserve Bank has made several moves to keep credit flowing, he says.
Loan to value ratio (LVR) restrictions have been removed for house buyers, the capital review for the banking sector has been deferred by at least 12 months and core funding ratios have been eased for the banks.
Mr Bloor also notes Reserve Bank support for the Government’s mortgage deferral scheme and business finance guarantee scheme.
‘‘So there’s a range of things we’ve done with that goal of trying to keep credit flowing to the economy and to try and prevent an excessive contraction in lending and credit to the economy.’’
For all that, Mr Bagrie believes the central bank faces an uphill battle in the face of a profound shift in public attitudes to their finances.
‘‘Uncertainty is the antithesis to investing,’’ he says.
‘‘We’re seeing that on the other side of bank balance sheets, when you’ve seen a
$29 billion surge in deposits since the start of the year.’’
Term deposit numbers have fallen and transactional and savings account balances are up sharply across households and the business sector.
‘‘Some of it is we’ve been in lockdown and we can’t spend that money, but there is a very strong hoarding of cash going on,’’ Mr Bagrie says.
Core Crown borrowing for the year to May 31, 2020 was
$121.73 billion — up 23% from $92.94 billion a year earlier.
It is worth noting that in nominal terms government debt has never stopped rising.
The debt reduction programme of the past several years is always framed as a reduction of net core Crown debt as a ratio of GDP.
But the figures to May 31 do capture some of the extra billions borrowed in the immediate wake of the Covid19 lockdown to cover the initial wage subsidy.
Clearly there is much more to come. The Debt Management Office — which issues government bonds — plans on borrowing $50 billion this fiscal year and $35 billion the year after.
The Reserve Bank now has a quantitative easing policy in place to buy up to $100 billion worth of Government bonds.
Few argue that this is not necessary right now.
And we are reminded regularly that, even after all this new borrowing, New Zealand’s Crown debt levels will be moderate compared with other countries.
But in a report last week, Westpac chief economist Dominick Stephens warned that it will still create issues.
‘‘The debt the Government has incurred in the course of its economic rescue may be perfectly manageable,’’ he wrote.
‘‘But New Zealand will still face the longterm fiscal challenges related to an ageing population, such as the cost of New Zealand Superannuation and the provision of health services.
‘‘With that in mind, future governments are going to have to make tough choices — either spend less or tax more.’’
Across the last three finance ministers, a counterpoint to taking on more government debt has been the need to offset this nation’s precariously high levels of mortgage debt.
Housing accounts for the single largest chunk of our private debt — and thus far Covid19 has not stopped that from growing.
At an annual rate of 6.4%, mortgage debt’s growth is down from rates of more than 9% we reached in the boom of 2016 and 2017, but still strong.
‘‘Overall the housing market story is different factors pushing and pulling,’’ Mr Bloor says.
‘‘There’s weakness in the labour market, with unemployment rising significantly, we’ve had a reduction in household incomes and we’ve seen a dramatic reduction in net immigration. These two factors usually result in significant slowing.
‘‘But at same time, interest rates have come down significantly.’’
Right now, low rates seem to be winning that tug of war.
ASB economists last week increased their forecasts for the property market.
They now see house prices falling by just 3% due to Covid19, as opposed to 6%.
‘‘We think term deposit rates could fall below 1 per cent with mortgage rates for some terms below 2 per cent,’’ ASB senior economist Mike Jones said.
The promise of extremely low interest rates for years to come will continue to boost asset prices.
‘‘It’s worth remembering that all of this is exactly what the Reserve Bank is trying to engineer as it tries to reflate the economy,’’ Mr Jones said.
‘‘Boosting asset prices, encouraging debt accumulation, and the associated increase in inequality are unfortunate sideeffects of the way easy monetary policy works.’’