Record $100b net debt

By BRIAN FALLOW economics editor

The gap between what New Zealand earns internationally and what it spends continued to widen in the December quarter, helping push our net debt to the rest of the world over $100 billion for the first time.

The debt now equates to around $25,000 for every man, woman and child.

The deficit in the current account of the balance of payments has been widening for the past three quarters, driven by deteriorating trade figures as a robust domestic economy sucks in imports while exporters struggle with weak world demand and falling export prices.

At $3.95 billion for the 2002 year, the current account deficit is the largest it has been since June last year both in dollar terms and as a percentage of gross domestic product (an estimated 3.1 per cent).

Westpac economist Nick Tuffley expects the deficit to continue to widen, peaking at around 5.5 per cent of GDP by the end of the year.

But such a peak would be down from the past two peaks of around 7 per cent of GDP and not much worse than the average of 4.7 per cent over the past 10 years.

In the latest quarter, trade in services enjoyed the normal seasonal lift, boosted by America's Cup-related tourism on the inbound side, offset by more New Zealanders travelling overseas and staying away longer.

Associated with the strength of net immigration, migrants' transfers totalled $347 million in the latest quarter and $1.6 billion for the year.

ANZ economists said that as in the mid-1990s that inflow of capital provided an important underpinning of economic activity, especially in the housing market.

Net immigration reached 42,000 in the year ended February suggesting that the associated capital inflows would remain strong this year as well, they said.

Statistics NZ said that over last year the investment income deficit was $6.8 billion, down from $7.4 billion in 2001, an improvement primarily due to better returns from New Zealand investment abroad.

A major component of the investment income deficit was $4.4 billion in profits earned on foreign direct investment in New Zealand.

Of that, $2.3 billion or 53 per cent was paid out in dividends, the rest reinvested in the enterprises.

By contrast, the dividend payout ratio over the previous five years averaged 93 per cent.

Just as an individual who spends more than he earns has to fund the difference by running up debt or selling assets, so does the country.

The cumulative effect of decades of current account deficits is reflected in the international investment position, also released yesterday, which shows New Zealand's international liabilities exceed its overseas assets by $100.7 billion.

In the latest quarter, the net debtor position worsened by $1.6 billion as the value of New Zealand-owned assets abroad fell $3.2 billion while its liabilities fell $1.6 billion.