Foreigners have almost twice as much invested in New Zealand as New Zealanders have invested overseas, which means 6 to 7 percent of economic output goes on servicing debt and returning profits to offshore owners.
Reserve Bank Governor Alan Bollard gave these and other examples of the consequences of the country's external imbalances in a speech to the Wellington Chamber of Commerce today, which noted policy progress toward fixing the problem and work still to be done.
Years of running external deficit flows meant New Zealand was now significantly in debt to foreigners, he said.
The country was running a sizeable net investment deficit of around 90 percent of gross domestic product. Most of the debt was in the private sector and a significant proportion related to the banking system, which did most of the offshore borrowing, effectively on behalf of households and businesses.
Financial markets and credit rating agencies used a range of indicators to form their assessment of a country's viability or fragility.
External indebtedness played a role in the recent credit downgrade of Spain, Dr Bollard noted.
"New Zealand is one of the very few developed countries with net external liabilities so high," he said.
New Zealand's external deficit could not keep increasing without impunity, he said.
Ultimately, the markets would penalise the large external liabilities and deficit position by requiring a larger premium for its continued funding, he said.
A recent IMF reported noted that New Zealand's external position was unusual.
"We do not save much," he said.
Dr Bollard said New Zealand should take proactive steps to improve its external situation.
There were no magic bullets but a range of policy areas under way could make a positive difference.
These included moving New Zealand's tax system in favour of saving rather than consumption and ensuring fiscal policy remained focused on achieving a conservative path for public debt.
"But this challenge is not primarily up to the Government. It mainly requires the changes that we are seeing in household behaviours to continue," he said.
"Ultimately the onus was on household to continue the current trend of saving more and investing better," he said.