KEY POINTS:
The current account deficit went from bad to worse in the September quarter, highlighting New Zealand's continuing reliance on imported credit at a time when credit markets are jittery.
For the year ended September the deficit was $14.2 billion, the third largest ever in dollar terms and equivalent
to 8.3 per cent of GDP.
For the year ended June it had been $13.7 billion or 8.1 per cent of GDP.
The deficit represents the difference between what New Zealand earns from the rest of the world through trade and investment and what the rest of the world earns from us.
As with an individual who spends more than he or she earns, the shortfall has to be financed either by borrowing or by selling assets.
In the main it is by borrowing. Over the past year New Zealand's foreign debt has increased by $25 billion. The increase in foreign-owned equity in New Zealand rose by $10 billion over the same period, including valuation gains.
The cost of servicing that debt and providing a return on that equity, net of the income from New Zealand investment offshore, was $3.2 billion in the September quarter and $12.4 billion in the September year.
Over the past year just over 60 per cent of the profits of foreign-owned companies in New Zealand were repatriated as dividends rather than left as retained earnings locally.
"In the current global environment, where risk is being repriced and credit is becoming more expensive, New Zealand's large external deficit leaves it vulnerable to a change in investor sentiment," said ANZ National Bank chief economist Cameron Bagrie. "Rating agencies are likely to continue to voice concern at the the size of the current account deficit. However, with a Government that continues to record strong operating surpluses, these concerns are likely to be mitigated for now."
The balance on goods was a deficit of $790 million seasonally adjusted in the quarter, in line with the previous two quarters, making a deficit of $3.2 billion for the year.
That was despite the terms of trade - the relative prices of the kinds of things we export compared with the kind of things we import - being the most favourable for 33 years.
"One can't go past a persistently high New Zealand dollar reducing competitiveness overseas as well as making imports more affordable," Bagrie said.
Exports were boosted by oil starting to flow from the Tui field, but higher dairy prices were more than offset by a drop in dairy volumes.
ASB chief economist Nick Tuffley said that although the current account deficit is past its peak [which was in the first half of last year], the rate at which it is narrowing has slowed.
"The deficit remains substantial, highlighting New Zealand's reliance on foreign savings at a time when global credit markets are still skittish.
"Going forward, we do expect to close a bit more markedly over 2008 as dairy earnings step up and import growth moderates - but the structural deficit will remain."
Bank of New Zealand economist Craig Ebert also expects the external accounts to improve.
"We could easily see an extra $3.5 billion worth of dairy exports for the full year to June 2008. That would knock about 2 percentage points of the current account's ratio to GDP," he said.
Deeper in debt - we owe the world $151b
Another quarter older and deeper in debt. Our net liabilities to the rest of the world rose by $2.4 billion over the September quarter to $151.1 billion.
It is $35,000 for every man, woman and child in the country and 11 per cent higher than it was a year ago.
Measured against the size of the economy it is 88 per cent, a very high ratio by international standards.
It represents the difference between $280 billion worth of foreign claims on the New Zealand economy (of which $73 billion is equity and $207 billion debt) and the $129 billion New Zealanders have invested abroad ($55 billion in equity and $74 billion in debt).
It is the cumulative effect of decades of running current account deficits.
Goodman Sachs JB Were economist Shamubeel Eaqub said the widening deficits and mounting foreign debt of recent years reflected unbalanced economic growth, where a boom in the residential property has been financed through offshore borrowing by banks.
"Given this investment has been into a non-productive asset class, residential property, the capital has not been deployed in manner that increases the country's ability to repay this debt in the future," Eaqub said.
The net debt figure is about half as large again as is sustainable for a country with the demographics, public sector debt and national income New Zealand has, he said.
"The required response has to be through improved savings behaviour and a period of sustained New Zealand dollar depreciation."