Balance of payments outlook brightens

By BRIAN FALLOW

The balance of payments is packing up for a move to a more respectable neighbourhood next year.

The current account deficit for the September quarter, at $2.1 billion, was $300 million better than the market had expected.

The deficit is a measure of how much New Zealand's earnings from the rest of the world fall short of what foreigners earn from us.

Combined with a $200 million revision to the June quarter figure, the September figure reduces the annual deficit to $6.9 billion - equivalent to an estimated 6.5 per cent of gross domestic product.

The market had been expecting an annual deficit of $7.4 billion, or 7 per cent of GDP.

The kiwi dollar rallied on the news and by late yesterday was testing 43USc, up more than half a cent on pre-announcement levels.

WestpacTrust economist Nick Tuffley said a reduction in the risk premium attached to the kiwi dollar because of the current account would be one factor driving it above 50USc by the end of next year.

National Bank chief economist Brendan O'Donovan said the current account could squeeze in below 5 per cent of GDP when the December figure was released in March.

That would be due to:

An improvement in the underlying trend.

The $630 million frigate Te Mana dropping out of the figures.

An upward revision of nominal GDP.

Other forecasters are also picking a continuing improvement in the deficit, driven by a strong improvement in net exports.

The latest result reflected a further improvement (to a $341 million surplus, seasonally adjusted) in the balance on goods, as export growth outstripped imports.

But the balance on services remained flat. Although inward visitor numbers have been rising, the weak dollar has not been deterring New Zealanders from travelling.

The investment income balance improved but remained deep in the red, at a deficit of $1.57 billion.

The profits of foreign-owned companies fell $119 million to $708 million in the latest quarter, but Statistics New Zealand said the fall was "mainly" the result of head offices moving overseas.

Because those companies were no longer resident in New Zealand, their profits were no longer part of New Zealand's direct investment income debits calculation, it said.

There was an offsetting effect from New Zealand-owned head offices moving overseas.

"Because these head offices are no longer resident in New Zealand, their overseas subsidiaries are no longer remitting profits and making interest payments to New Zealand," said Statistics New Zealand.

Mr O'Donovan said the fact that a loss of such activity in New Zealand could perversely have a positive effect on the current account figure showed how poor an indicator of economic health it was.

He said the conventional wisdom was to attribute, at least with hindsight, some of the weakness of the New Zealand and Australian dollars over the past couple of years to concern about the countries' current account deficits.

But the New Zealand dollar's strength in the mid-1990s coincided with a period of sustained deterioration in the current account.

And the United States' deficit, now approaching $US1 trillion or 4.3 per cent of GDP, was perceived as a "good" deficit, the flipside of strong capital inflows into the US.

The latest figures show a shift in the collective dividend policy of foreign-owned companies in New Zealand.

Of the $3.7 billion in profits they earned in the year to September, $2.6 billion or 70 per cent was distributed.

By contrast, over the previous three years 95 per cent of the cumulative $10.6 billion in earnings was paid out in dividends and only 5 per cent retained.