New Zealand may find overseas investors more reluctant if the crisis in banking confidence worsens.
The collapse of Silicon Valley and Signature banks and the recent government-engineered takeover of the troubled Credit Swisse by its arch-rival have spooked financial markets, though US and European authorities have tried to shore up confidence in the banking sector.
But New Zealand is living well beyond its means and borrows large amounts to fund the gap between what it earns and what it spends, as shown in the latest country’s balance of payments data, which hit a 34-year high on the back of a large trade deficit and closed borders.
Westpac senior economist Michael Gordon said if confidence in the global banking system did not settle after the recent turmoil, a loss of confidence among global investors could make it harder and more expensive for New Zealand to fund itself.
He said experience from past crises showed the issue was not about the safety of New Zealand banks, which were well capitalised.
“Where the issues come up is a thing that New Zealand really can’t do much about, which is about the world’s willingness to fund what’s actually a fairly small, far-flung market that they don’t really need to be involved in, if they’re worried about their own positions.
“When people do really worry, they’ll go towards what they consider to be safe havens and often, that just means actually bringing money back home, or at least focusing on their home market and for the most part, home is not New Zealand for investors.”
New Zealand was reliant on funding from overseas to fund its spending, he said.
Gordon said if the country had less money coming in from overseas, it could lower the country’s balance of payments deficit.
“For now at least, we’re kind of spending beyond our current means, but if that became harder to fund, then in a way that takes care of itself, we would be forced to adjust.
“But it’s interesting to think about how that adjustment would happen and probably for the most part, we would have to cut our spending, including spending on imports, because we just wouldn’t get the funding for it.
“So that’s another way of saying we would be looking at a recession.”
He said the Reserve Bank has clearly signalled a recession in the economy later this year, but these factors could make the event more abrupt than many would want.
“If things got worse, you would see a few things happening in tandem, so there would be a wider crisis of confidence in global markets, then you could well be talking about recession in the likes of the US and Europe and other markets.
“That would make it much harder for our exporters too, and that would be another hit to our economy and on top of that there’s the financial channels which is a thing to watch for in a country like New Zealand, that it would get more expensive to borrow, over and above what the Reserve Bank is doing here with monetary policy.”
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