KEY POINTS:
New Zealand sank deeper into debt to the rest of the world over the first three months of the year as the current account deficit widened again.
In spite of the most favourable terms of trade since 1974, the quarterly deficit, seasonally adjusted, worsened by $410 million to
$3.5 billion, the near-record levels it has been stuck at for five of the past six quarters.
The deficit measures the gap between what New Zealand earns from the rest of the world through trade and investment and what the world earns from us.
Over the year ended March it was $13.8 billion, equivalent to 7.8 per cent of gross domestic product.
While that is an improvement from 7.9 per cent for the December 2007 year and better than the 9.2 per cent recorded in the first half of 2006, it remains a very high ratio by international standards.
As a result, New Zealand's international net debtor position at $137 billion is $14 billion higher than a year ago, at a time when credit has become more expensive and harder to come by. Including equity, the net liabilities position is $153 billion or 86 per cent of GDP.
ANZ National Bank economist Philip Borkin said although it was moving in the right direction, the size of the current account deficit left the country vulnerable in a tough credit environment.
"A slowing economy, falling house prices, less fiscal headroom given announced tax cuts, and a stubbornly high external deficit is not a great mix in that environment."
Bank of New Zealand economist Craig Ebert said so far foreigners had been content to lend "great wads of money" to New Zealand on the view the economy was in fundamentally good shape.
"But we do wonder how tolerant the international financial community will be when confirmation of a contracting economy becomes the rage, the Reserve Bank starts to trim its present extreme official cash rate of 8.25 per cent and the exchange rate starts to look like a marshmallow approaching a campfire."
The current account deficit remained worryingly high, Ebert said, in spite of extraordinary gains in dairy prices and oil exports from the new Tui field.
"It's yet another sign that stronger forces of correction are in the pipeline for the economy, interest rates and, especially, the currency," he said.
In the March quarter, the balance on goods, seasonally adjusted, was a $158 million deficit, compared with a $19 million deficit in December, as rising oil prices swamped higher dairy prices and exports from the Tui oil field. New Zealand exported a barrel of oil for every 1.4 barrels it imported during the quarter.
The big negative in the balance of payments was the net investment income deficit. It was $3.58 billion in the latest quarter, $315 million more than in December, reflecting a fall in returns from New Zealand investment abroad while foreign investments here largely held their own.
"Somewhat surprisingly, the income foreign direct investors earned from their New Zealand subsidiaries actually rose over the quarter from $1.9 billion in December to $2.07 billion," Borkin said.
"This is despite the slowing domestic economy and intense cost pressures on margins. Interestingly, though, this profit was more than fully paid out in dividends, to the tune of $2.23 billion, implying a withdrawal of investment from New Zealand companies by foreign direct investors of $159 million."
For the year ended March, the investment income deficit was $13.1 billion or 7.4 per cent of GDP.
In effect 27 days' output in that year was needed to pay interest on net overseas debt and provide a return to offshore owners of New Zealand companies.
Westpac economist Michael Gordon expects that to improve as KiwiSaver schemes and the New Zealand Superannuation Fund invest more overseas.
"The overall trend will depend on New Zealanders' saving behaviour and in that regard reduced growth in borrowing should improve the investment income deficit over the next couple of years."
A sad story
* The balance of payments on goods and services in the March quarter was $127 million in the red, which combined with:
* A net deficit of $3.4 billion on investment income and transfers made for:
* A current account deficit of $3.53 billion.
* New Zealand's international liabilities of $285 billion far outweighed offshore assets of $132 billion, to leave:
* Net liabilities of $153 billion or $35,000 for every man, women and child in the country.