What is up with the balance of payments?

Ok, so this may seem arbitrary – but I think it gives a good indication of how dodgy statistics can be 😉

So on Thursday the Balance of Payments was released.  The BOP must equal zero – that is an identity it has to hold.  When people talk about the BOP deficit they are being weird, they often mean a “current account deficit”.

Now we did have a current account deficit over the December quarter, of $4bn.  So the outflow of goods, services, and interest payments exceeded the inflow by $4bn – quite a bit for a little country like NZ.

To pay for this we need to fund the “deficit”.  So we need to run a capital/financial account surplus.  In essense, we need to borrow money, or sell assets, to pay for the current account shortfall.  However, according to the statistics we also ran a capital/financial acccount deficit of over $2.6bn.

As the BOP=Current Account + Capital/Financial account, we did have a BOP deficit 😛  However, this then get adjusted for “errors and omissions”.  In this case, a $6.7bn (thanks to rounding) error/omission.  Well – that makes it pretty difficult to tell what the stats even mean 😀

Now, this is probably mostly on the financing side.

However, there is a second issue.  NZ is constantly running with positive errors in the BOP – which implies that we are either underestimating our capital account surplus or overestimating our current account deficit (or both, or not one but even moreso the other 😛 ).

This implies that this extremely important data point – which tells us how our debt with the rest of the world is changing, and our asset position – is systematically biased, and riddled with errors.

Now I am sure that Stats does the best job possible – this is just one of those unfortunate things that happens with incomplete data sets.  There is some stuff they just can’t get hold of – and as a result there are areas where we are all completely in the dark …

  • This may not be a problem. After all we have no idea as to what the BOP between the North and South Islands is and yet we still seem to get along just fine. Is not knowing the BOP between NZ and the rest of the world any different? It could be a problem if the government was to make policy based on incorrect data. But that is a general problem, not just one for the BOP stats.

  • Miguel Sanchez

    But it could be a very big problem if rating agencies use incorrect data to decide NZ’s sovereign credit rating, which in turn overseas investors use to decide whether to lend to us and at what price. Having read through S&P’s statements from recent years, I think it’s fair to say that the only reason that Australia is rated AAA and we aren’t is that their current account deficit has generally been a couple of % of GDP smaller than ours. (Never mind that all of the difference is made up of banks’ profits accruing to the Australian parents, which doesn’t have to be ‘funded’ as such.)

  • @Miguel Sanchez

    I take your point, but that isn’t a problem with the BOP, as such. That is a another problem that arises because of the inability of StatNZ to be able to measure what they say they can measure. It isn’t a issue due to the BOP stats being wrong.

  • Stephen Whittington

    I’m not sure if it is correct to say that we must finance a current account deficit.

    Let us say we sell $1 billion worth of goods and services, but buy $2 billion. We have a current account deficit of $1 billion. But let’s say that those who have received our dollars merely keep them under their mattress. We have a deficit, but we do not need to finance it by borrowing from them.

    They have a claim on our goods and services in terms of the use of money, but the fact that they’re willing to hold our dollar probably suggests that we aren’t doing too badly.

    Or am I completely wrong on this point?

  • @Stephen Whittington

    Just by national accounts logic the BOP has to be zero, a deficit on the current account has to be covered by a surplus on the capital account, or the other way round. If we have a current account deficit of $1 billion then we have to find $1 billion to pay for those goods. The way we pay for them is via either borrow money from overseas, or sell assets. This will gives us a capital account surplus.

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  • Andrew Coleman

    The current account position is is probably irrelevent, and in any case it is not well measured. One problem is that the data is not properly adjusted for the effects of inflation. In particular, SNZ records the net nominal interest payments flow, rather than the net real interest payment flow. Since (i) New Zealand has net debt of approximately 100 percent of GDP, (ii) most of the net debt position is in New Zealand dollars and (iii) under Dr Bollard’s leadership of the Reserve Bank, we have become a moderate inflation country (approximately 3% average over the last five years), the current account deficit is overstated by 2- 3% of GDP. This is non trivial. This adjustment is reasonably well recognized in most circles (but not the media) which is possibly why there is less concern about the size of the current deficit than there would otherwise be.

    There is at least one other well known measurement problem: SNZ does not measure foreign assets privately held by NZ residents, unless they are held through a financial institution (such as a pension fund or bank). Thus pension fund assets owned by NZ in a foreign pension fund (say a UK fund owned by someone who worked in London for a while), foreign shares (including non-dual-listed australian shares) purchased by NZers, and foreign assets owned by people migrating to NZ are not measured. As a consequence, the earnings on these assets are not measured either.

    Perhaps a good game would be to guess the size of these assets (my guess: half as much as last year)

  • Stephen Whittington

    I agree with you Paul, I guess I’m just saying that the current account deficit can actually suggest something positive. If others choose to hold NZ Dollars and inest them here, we will have a deficit. But that may in fact be a good thing for the country.

  • Miguel Sanchez

    Not really – it probably tells us more about the fact that we were willing to continue spending beyond our means. I don’t think we’ve seriously tested the limits of the international market’s willingness to lend to us just yet.

  • @Paul Walker

    I agree that it isn’t necessarily a problem – however, it is a statistic that investors use as a signal so it does have a real impact. When we have enormous errors like this I start to get concerned about the quality of the signal – and no doubt so do investors. This creates uncertainty – which is not nice stuff.

    I note Miguel felt a similar way – but I think that the uncertainty issue associated with it is the prime one.

  • @Stephen Whittington

    Stephen – indeed there is nothing wrong with a current account deficit – even one that is 9% of GDP. As long as household have well based expectations about future income streams then there is nothing to be concerned about.

    Remember also, that if we buy things from overseas and they just hold a “claim” on resources that will come into the capital account.

  • @Andrew Coleman

    Interesting comment. However, again I would state that my concern isn’t regarding the size of the deficit – it is the uncertainty provided by such an large error term.

  • @Miguel Sanchez

    I don’t know – we did do a lot of investment over the last five years. We borrowed money to get plant and machinery and build factories.

    Even if we did borrow to spend to some degree this would only be an issue if households misinterpreted the housing bubble as real wealth – and even though this is an issue there is nothing we could of done about it to start with.