KEY POINTS:
The gap between what New Zealand spent abroad and what it earned narrowed over the last three months of last year, but banks are relying increasingly on short-term borrowing to fund the deficit.
Higher reliance on short-term funding is seen as risky in times such as these, when
the overseas wholesale markets that banks normally tap for much of their funding are nervous and in need of repeated liquidity-boosting interventions by the US Federal Reserve and other central banks.
The current account deficit, reflecting trade and investment flows with the rest of the world, was $3.4 billion in the December quarter which, adjusted for seasonal effects, was nearly $500 million smaller than in the September quarter.
The balance on goods was a surplus of $85 million, the first quarterly surplus for nearly five years, boosted by higher volumes and prices for dairy products and the first full quarter's production from the Tui oil field.
But it was swamped by the usual deficit in investment income - $3.3 billion in the latest quarter. That was up $87 million on September, in part because of higher interest costs.
The balance on services (including tourism), which has been declining, deteriorated markedly to record a deficit of $7 million compared with an average surplus of around $135 million over the previous four quarters.
For the whole of last year the current account deficit was $13.8 billion, equivalent to 7.9 per cent of gross domestic product.
While that is high by international and historic standards it is the lowest the deficit has been, measured against the size of economy, for two and a half years and compares with a peak of 9.3 per cent in March 2006.
"It still remains high by historical standards, during a time when financial markets remain turbulent, but at least it is heading in the right direction," Commonwealth Bank economist Chris Tennent-Brown said. "We expect the annual deficit to dip below 7 per cent of GDP by year end."
First NZ Capital economist Jason Wong also expects the deficit to improve over the next year or two, driven by the strong terms of trade and weaker domestic demand growth flowing through into weaker import growth.
The cumulative effect of decades of current account deficit is that the country's international liabilities, net of New Zealand investment abroad, is $152.4 billion. That is $1.7 billion more than at the end of September and nearly $10 billion up on a year earlier.
Most of it - 88 per cent or $134 billion - is debt rather than equity, and 78 per cent, or $104 billion, of the net debt is held by banks.
The December quarter's current account deficit was funded by a net capital inflow of $3.3 billion. The inward flow was dominated by $5.8 billion of short-term debt securities, primarily issued by banks, Statistics New Zealand said. That was partly offset by a fall in longer-term debt.
But altogether there was a rise over the quarter of $6.7 billion, or 6.2 per cent, in the level of New Zealand's overseas debt which has a maturity of less that a year.
Reserve Bank governor Alan Bollard in a speech three weeks ago noted that banks had accepted "a significant amount of short-term capital flows in order to minimise funding costs".
"We want to look at whether the vulnerabilities this can create have been adequately priced and managed," he said.
"Breakdown of short-term lending markets is one specific challenge we would expect to confront if the financial stability situation deteriorates markedly further in one or more of the major advanced economies."
Oil and dairy deliver first trade surplus in February in four years
Exports exceeded imports by $258 millon last month, the first February in four years to record a trade surplus.
Exports were up $864 million or 30 per cent on February last year, outstripping a $479 million or 16 per cent rise in imports. But the improvement in exports was heavily concentrated in dairy products and petroleum, boosted by production from the Tui oil field.
In the year ended February 2008, exports were $2.8 billion higher than in the year to February 2007.
Excluding dairy products and oil (up $1.8 billion and $1.3 billion respectively) exports fell, Bank of New Zealand economist Stephen Toplis said.
In the three months ended February, imports of plant and machinery were 11 per cent higher than in the same period a year ago. That is consistent with business surveys in which firms report having little spare capacity and a high exchange rate which makes imports cheaper.
But imports of consumer goods too were up 7 per cent. "It baffles us that there appears to be no let-up in consumer goods imports, despite clear indications that retail spending is softening up," Toplis said.
