Surging dairy exports over the last three months of 2013 narrowed the gap between what the country earns and what it spends in its dealings with the rest of the world, and shrank the current account deficit for the full year to $7.5 billion.
It is the smallest annual deficit in dollar terms since June 2012, and when measured against the size of the economy at 3.4 per cent of gross domestic product it is the smallest since September 2002. It peaked at $14.6 billion or an internationally conspicuous 7.9 per cent of GDP in December 2008.
After decades of deficits New Zealand's net international liabilities are $147.6 billion, of which $101 billion is net bank debt, equivalent to two-thirds of GDP. It peaked at $159 billion or 86 per cent of GDP five years ago.
But the figure is flattered by $5.9 billion of reinsurance claims relating to the Canterbury earthquakes which have yet to be settled and which in the meantime count as foreign assets.
Excluding them, net international liabilities are $153.5 billion or 69.3 per cent of GDP.
In the December quarter, the current account deficit was $1.4 billion or $800 million when seasonally adjusted.
The balance on goods was a surplus of $1.7 billion, seasonally adjusted, boosted by a $1.4 billion rise in exports, driven by higher dairy volumes, and a $600 million fall in imports.
That was partially offset by an increase of a third of a billion dollars to $2.6 billion in the investment income deficit, largely reflecting higher profits earned by foreign-owned companies in New Zealand.
The $2.3 billion in profits earned on foreign direct investment in New Zealand in the December quarter was the highest for four years. Most of it, $1.3 billion, was reinvested rather than paid overseas as dividends, the highest proportion since Statistics New Zealand began recording reinvestment in 2000.
But with debt making up more than three-quarters of New Zealand's external liabilities, a rising interest rate environment will widen the investment income deficit, ANZ chief economist Cameron Bagrie said.
"Consumption spending must remain the sacrificial pawn to ensure our overseas debt and deficit metrics remain off the radar of overseas creditors," he said.
Economists expect the annual deficit to shrink over the next two quarters.
"Later in the year we see a wider deficit as a forecast strong investment upswing is not matched by domestic saving and the commodity price cycle is expected to swing downward," said Bank of New Zealand's economist Doug Steel.
"The latter may have already started for dairy products with the 5.2 per cent drop in prices at Fonterra's Global Dairy Trade auction overnight."
It was the third consecutive decline. BNZ expects dairy prices to fall over the coming 12 to 24 months as world supply rises.
Economists' consensus forecasts have the annual current account deficit widening to $10.6 billion by March next year and $12.5 billion in the two following years.
• $7.5b — current account deficit, versus $14.6b in December 2008
• 3.4% — of gross domestic product, versus 7.9% in December 2008