Current account turns to deficit

Photo / Kenny Rodger

The current account balance moved back into deficit in the December quarter, driven by an increase in income earned by foreign investors from investments in this country.

Figures published by Statistics New Zealand (SNZ) today show a seasonally adjusted current account deficit of $3.1 billion in the three months to December. That follows a $39 million surplus in the September quarter, the first surplus in 20 years.

For the year to December, the current account deficit was $5.5b or 2.9 per cent of GDP, down from $16b or 8.7 per cent of GDP a year earlier, and down from $5.9b or 3.2 per cent of GDP in the 12 months to September.

ASB Bank economist Jane Turner said rising debt servicing cost for the Government will also, in the medium term, contribute to a larger deficit.

"We expect the current account deficit to widen to around 5 per cent of GDP over 2011."

That would still put the deficit below the 10 years previous, she said.

UBS New Zealand senior economist Robin Clements said the lift in the income by foreign-owned banks was further exaggerated by New Zealand banks' tax settlements.

Tax transactions in the banking sector last year were worth $1.6 billion. Without this, the current account deficit would have been $7.1 billion in the December 2009 year.

During the year to December imports of goods fell $8.5b, while income from foreign investment in this country fell $6.3b.

In the December quarter the investment income deficit, which is not seasonally adjusted, rose by $2.7b, the largest rise on record and coming after five consecutive falls, SNZ said.

Unusually large company tax transactions in the June and September quarters reduced after tax profits of foreign-owned New Zealand banks.

Some of that tax was reversed in the December quarter, contributing to a rise in profits earned by foreign-owned banks.

The tax was related to structured finance deals in the banking sector.

In December, a tax settlement was announced between the Commissioner of Inland Revenue and the affected banks. As a result, an identified $379m of the tax charged in previous quarters was reversed.

The tax transactions in the banking sector in the June and September quarters reduced the current account deficit, SNZ said.

Along with the partial reversal of charges in December, the combined tax transactions were worth $1.6b. Without those effects, the current account deficit would have been $7.1b or 3.8 per cent of GDP in the December year and $7.9b or 4.3 per cent of GDP in the September year.

Goldman Sachs JBWere economist Philip Borkin said that the deficit was larger than expected thanks to a sharper recovery in the profitability of foreign firms in New Zealand.

This was arguably a good thing as it reinforced a domestic economic recovery, although expectations were that the current account deficit was expected to deteriorate again moving forward.

It was too early to say whether deficit had been corrected in a structural sense, given that servicing costs on net foreign liabilities would remain large.

A sustained improvement continued to rest on prolonged period of weakness in the New Zealand dollar, he said.

The $400m fall in the current account deficit from the September year to the December year was mainly due to a fall in the balance on services deficit. Imports of transportation services was the main driver, with lower spending on sea freight during the latest quarter.

For the December quarter, the seasonally adjusted balance on goods was a surplus of $237m, down $405m from the surplus in the previous quarter, SNZ said.

Exports of goods fell $255m, due to lower volumes of dairy products and crude oil. Imports of goods rose $150m in the quarter, despite price falls for all categories.

Net international liabilities were $167.5b or 90.3 per cent of GDP at December 31, down $5.3b from September 30.

The fall in the net international debtor position from September to December was the most significant fall since the series started in 2000. It was mainly driven by a $5.2b fall in net international debt.

Foreign-owned companies reinvested a record $1.5b of their profits back into this country during the December quarter.

That rise in reinvested earnings reflected the increase in profits during the quarter, following four quarters of declining profits, SNZ said.

NZPA / NZ HERALD