Ballooning deficit needs popping

The lift in exports in the December quarter was all in prices - volumes fell nearly 2 per cent. Photo / Kenny Rodger

New Zealand spent $16 billion more than it earned in its dealings with the rest of the world last year, driving up overseas debt and heightening the country's vulnerability amid a global credit crunch.

The current account deficit - the broadest measure of the gap between what New Zealand earns from the rest of the word through trade and investment and what the rest of the world earns from it - was $4 billion in the December quarter, or $3.8 billion when adjusted for seasonal effects, Statistics New Zealand said.

It pushed the annual deficit to $16 billion, equivalent to 8.9 per cent of gross domestic product, from $15.5 billion and 8.6 per cent in September. The ratio has not been so high since September 2006.

ANZ National Bank economist Philip Borkin said it was one of the largest deficits in the developed world and in the context of a global credit crunch left New Zealand in a vulnerable position.

It increased the country's net debtor position to $168 billion or 93 per cent of GDP, also a very high level by developed country standards.

"Based on underlying fundamentals we estimate the sustainable level is closer to 60 per cent," said Goldman Sachs JBWere economist Shamubeel Eaqub.

New Zealand's gross overseas debt is just under a quarter of a trillion dollars of which two-thirds is held by banks and 36 per cent matures within 90 days.

The state of the external accounts was cited, along with rapidly worsening Government accounts, by rating agency Standard and Poor's when it put New Zealand's credit rating on negative outlook in January.

The International Monetary Fund has also been concerned about the high level of external debt for some time, its head of mission for Australia and New Zealand, Ray Brooks, said on Monday.

"But the difference between New Zealand and other countries that stands it in good stead is that the banks are almost fully hedged for foreign exchange risk and corporates are largely hedged."

He contrasted that with the position of countries in eastern and central Europe which have funded their external deficits with foreign borrowing which is unhedged.

"When the exchange rate falls that creates a problem in eastern Europe.

"Here it helps, because you don't have to borrow as many US dollars to fund the same amount of New Zealand dollars. Plus, the [Government] wholesale funding guarantees here and in Australia give a cushion, and the banks are continuing to access foreign funding," Brooks said.

Eaqub said he did not foresee a near-term risk of capital flight.

"Instead any vulnerability is likely to relate to the need to raise increasingly larger amounts of capital to invest in an economy with low productivity gains. In a world hungry for capital, continuity of capital supply cannot be assured."

However, economists believe the annual deficit is now about as bad as it gets in this cycle.

Though it may remain around 9 per cent of GDP for the March quarter, the combination of lower interest rates (reducing the cost of servicing foreign debt) and weak demand (cutting imports and the profits of foreign-owned companies) will bring the deficit down from there, they predict.

The quarterly deficits, on a seasonally adjusted basis, peaked last June at $4.7 billion, falling to $4 billion in September and $3.8 billion in December.

The main driver of the latest quarterly improvement, was a narrowing in the goods balance as exports rose and imports fell.

But the improvement in exports was all in prices - export volumes fell nearly 2 per cent - and the current account numbers have yet to reflect the drop in commodity prices over recent months.

The services balance, by contrast, deteriorated.

One reason was a fall in the number of tourists and the average length of stay.

Another was a rise in sea freight charges (which count as imports of services) which has been evident for several quarters now, Statistics New Zealand said.

The investment income deficit was little changed at $3.2 billion. Foreign direct investment in New Zealand earned its owners $267 million less, but that was largely offset by a $176 million fall in the returns on New Zealanders' portfolio investments abroad.

RISING DEBT

Another year older and deeper in debt:
* The current account deficit topped $16 billion for the 2008 year.
* Net foreign liabilities are $168 billion or $39,000 per New Zealander.
* Servicing that debt cost $13.6 billion last year, equivalent to nearly a month's output of goods and services.
* More than a third of foreign borrowings are short-term, maturing in less than three months.