As inflation got worse and interest rates rose, New Zealand’s interest payments to offshore investors also rose.
Meanwhile, restricted travel limited the amount that New Zealanders could earn from foreign tourists and students.
S&P last week said in a report that the large current account deficit remained New Zealand’s “key credit risk”.
However, the rating agency’s base case was for the deficit to narrow “steadily” to 4.2 per cent of GDP by the year to June 2026.
Indeed, tourists and students are returning to New Zealand, while the country exported large volumes of goods in the June quarter.
On the other side of the ledger, higher interest rates are squeezing budgets and slowing economic growth to the extent Kiwis’ demand for imported goods is falling.
Affirming New Zealand’s AA+ credit rating, S&P concluded: “New Zealand’s monetary policy flexibility, wealthy economy, and institutions that are conducive to swift and decisive policy action offset weaknesses associated with the country’s largest external balances.”
It said it could lower New Zealand’s credit rating if its current account was “persistently weak”.
The Treasury, in its Pre-Election Economic and Fiscal Update (Prefu), forecast the current account deficit narrowing to 4.6 per cent of GDP by the year to June 2026.
It saw this improvement happening at a slower pace than it expected in May.
“This will be due to lower export returns, higher demand for imports stemming from higher net migration, and higher interest rates pushing up the costs of servicing New Zealand’s international financial obligations,” the Treasury said in the Prefu.
It pointed to slowing growth in China, suppressing commodity prices to the detriment of New Zealand exporters.
“Between the beginning of May and mid-August, the benchmark US dollar dairy auction price declined 17 per cent to its lowest level since 2016,” the Treasury said.
“Ample milk supply and high inventories in China have also contributed to the lower price. Prices for New Zealand’s meat and forestry exports have also declined.”
ANZ economists were likewise wary of the risks posed by China.
“In big-picture terms, the current account deficit is still far too wide, making New Zealand vulnerable to a sovereign credit rating downgrade and suggesting there is a material risk that the transition away from this out-of-balance position involves higher-for-longer retail interest rates (as New Zealand picks up a wider risk premium) and a weaker New Zealand dollar,” they said in a report.
A weaker dollar would see New Zealand pay more for its imports, potentially exacerbating inflation and therefore putting upward pressure on interest rates.
Interest rates would also be elevated if the offshore investors that the Government, businesses and retail banks borrow from deem the country as being riskier.
The Reserve Bank wasn’t as gloomy as ANZ economists.
It said, in its August Monetary Policy Statement, that there was a low risk of the current account deficit causing the country’s economic or financial stability outlook to deteriorate.
“New Zealand’s external debt position is relatively sustainable, with a significantly lower ratio of net foreign liabilities to GDP than during the GFC [2009 Global Financial Crisis],” the Reserve Bank explained.
“The share of bank funding that is core - such as longer-term wholesale funding and deposits - is high, and much higher than it was before the GFC. This minimises the risk of a sudden funding withdrawal or that a large share of debt will roll over at a time when funding conditions are stressed.
“As was also the case before the GFC, the vast majority of New Zealand debt is either denominated in New Zealand dollars or is hedged.”
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
