Quake money reduces deficit

Philip Borkin. Photo / Supplied

Inflows of reinsurance money from last September's earthquake have narrowed the annual current account deficit to 10-year lows, but the underlying picture is of a widening gap between what the country earns intentionally and what it spends.

The account was $2.8 billion in deficit in the December quarter, seasonally adjusted, after a $1.7 billion surplus in the September quarter which incorporated $3.6 billion in reinsurance claims on foreign reinsurers.

For the year to December, the deficit was $4.4 billion or 2.3 per cent of gross domestic product, up from a revised $4.2 billion or 2.2 per cent of GDP in the year ended September. This is the smallest headline annual deficit since 2001.

Statistics New Zealand said when reinsurance and another one-off - the settlement of a tax dispute involving the big four banks - are stripped out, the deficit has been deteriorating since March last year and is now $7.9 billion or 4.1 per cent of GDP.

Reinsurance related to last month's earthquake - ANZ expects $6 billion - will have a big effect on the March quarter's current account.

"It is highly likely that New Zealand will, uncharacteristically, experience current account surpluses over 2011, as a result," Goldman Sachs economist Philip Borkin said.

For the December quarter the $2.8 billion deficit was bigger than the $2.2 billion the market had expected, and $1 billion wider than in the previous quarter (excluding reinsurance).

The investment income deficit at $3.1 billion was $700 million wider than the September quarter, mainly due to higher earnings for foreign-owned companies, but they were mostly retained in the companies concerned.

The goods surplus fell $200 million to $600 million, mainly due to higher imports which were swollen by the importation of ships and aircraft.

Despite the latest deficit the net international investment position at the end of the year improved, reflecting valuation gains on New Zealand investments abroad.

At $159 billion or 82 per cent of GDP, the country's net external liabilities are down from $160.3 billion or 84 per cent of GDP in September.

While that is an improvement on the 90 per cent of GDP net international liabilities hit in March 2009 it remains very high by international standards, economists warn, and will keep New Zealand on credit ratings agencies' watchlists.

"The possibility of a downgrade due to the increased pressure on the Government's books due to the costs of the earthquake is real," Borkin said.