NZ annual deficit smallest since 1989

The current account deficit, a measure of how much more the country spends than it earns in its dealings with the rest of the world, shrank in the first three months of the year as export prices climbed and the profits of foreign-owned companies sagged.

The seasonally adjusted deficit of $1.3 billion for the quarter held the annual deficit to $4.5 billion. That is the lowest in dollar terms since June 2002.

Measured against the size of the economy, the annual deficit is 2.4 per cent, the smallest since September 1989 and down from 8.7 per cent as recently as December 2008.

Forecasters expect this to be about as good as it gets, however.

New Zealand has net liabilities to the rest of the world of $166.7 billion, 94 per cent of which is debt. As global interest rates rise, the cost of servicing that debt will too.

And one of the factors reducing the deficit over the past year, a decline in the profitability of foreign-owned companies in New Zealand, is expected to reverse as the economy picks up.

Strong export commodity prices have contributed to a $4.1 billion improvement in the goods balance over the past year.

The Reserve Bank expects the terms of trade (relative prices of the kind of things New Zealand exports compared with what it imports) to continue to improve for the rest of the year but then to fall away, though remaining at historically high levels.

ASB economist Jane Turner said the underlying trend in the trade balance remained strong. "Over the past year, the weakness in import demand had been a large driver of this strength. However, more recently the strength in export prices, particularly dairy prices which are up 32 per cent over the quarter, has helped maintain the trade balance in surplus," she said.

"Import demand has been relatively slow to recover. However, as the economic recovery gathers momentum and import volumes improve, the strength in the trade balance will be eroded."

Over the past year the current account numbers have been flattered by the Australian banks losing a tax argument with the Crown. This has reduced both the banks' profits and the country's investment income deficit.

Statistics New Zealand said that without that impact the annual current account deficit would have been $6.1 billion or 3.3 per cent of gross domestic product. That would still be an eight-year low.

The cumulative effect of 40 years of current account deficits is a net international investment position $167 billion in the red, equivalent to 89 per cent of GDP, very high by developed country standards. Of the $308 billion of gross international liabilities, nearly half ($150 billion) is overseas borrowing by banks.

The big Australian banks are among the most highly credit-rated in the world and for most of this debt the currency risk has been peeled off and hedged. But until recently more than half of the debt has been short-term, repayable in less than a year; the global financial crisis highlighted the risks in that.

The Reserve Bank's new prudential liquidity policy requires the banks to lengthen the maturity of their foreign funding. Statistics New Zealand reported yesterday that overseas debt repayable within less than a year is 40 per cent, down from 43 per cent a year ago and 55 per cent two years ago.

While forecasters expect the current account to deteriorate from here there is a wide variation of views about how fast.

The Treasury expects the deficit to have widened to 6.1 per cent of GDP in two years time, while the Reserve Bank is picking 5.3 per cent.

But Deutsche Bank chief economist Darren Gibbs is more optimistic: "In the near-term the annual current account deficit is likely to widen a little as last year's one-off bank tax receipts role out of the calculations. Beyond that we think that renewed improvement is possible in 2011, before a gradual deterioration emerges in 2012, taking the deficit back out towards 4 per cent of GDP."