Ratings agency warns wide current account deficit is NZ’s ‘key credit risk’

The current account deficit was worse than S&P expected in the year to March. Photo / Alex Cairns

S&P Global Ratings warns New Zealand’s near-record trade deficit remains the country’s “key credit risk”.

The current account deficit narrowed to $33 billion in the year to March. This was equivalent to 8.5 per cent of gross domestic product (GDP).

At 9 per cent of GDP in the year to December 2022, the deficit was the deepest it had been since the Stats NZ series began in 1988. It was also well above the historic average of 4 per cent.

A current account deficit reflects the fact New Zealand households, businesses and the Government are spending more than they are earning overseas.

S&P analyst Martin Foo said that while the improvement in the March quarter was positive, the deficit was deeper than the credit rating agency expected it to be.

“We still anticipate that the current account deficit will narrow over the next few years,” Foo said.

“This should occur as the overheated domestic economy begins to cool, which will push down demand for imports.

“However, the somewhat expansionary May 2023 Budget could hamper this improvement, as could damage from Cyclone Gabrielle to agricultural production and higher-for-longer global interest rates.

“A combination of higher fiscal and current account deficits, if they were to eventuate, could lead to downward pressure on New Zealand’s ‘AA+’ foreign-currency rating.”

ANZ senior economist Miles Workman explained that running a current account deficit isn’t necessarily bad if the foreign capital is put to productive use to grow the economy.

“But when the deficit widens, as it has in the wake of the pandemic, there is a greater risk that foreign capital is allocated less efficiently than otherwise,” he said.

“Should something go wrong, and foreign creditors reassess the risks, New Zealand may find itself needing to live within its means very quickly, or face potentially unsustainable borrowing costs.”

Workman said the size of the deficit underlined the importance of the Reserve Bank keeping the OCR elevated to dampen domestic demand.

It also hinted at the need for a weak New Zealand dollar, which makes New Zealand exports relatively attractive.

Taking a closer look at the numbers, goods imports increased by 18 per cent to $87b in the year to March, driven by petrol, machinery and transport equipment.

Meanwhile, goods exports rose by 11 per cent to $73b, driven by dairy products, including milk powder, butter and cheese.

Workman noted exports were hampered by bad weather and labour shortages, meanwhile imports were bolstered by the end of domestic fuel refining and higher fuel prices.

Services imports increased by 40 per cent to $29b, and exports lifted 57 per cent to $22b, as travel in and out of New Zealand picked up again following Covid-19 restrictions being lifted.

“The recovery in international tourism and education is progressing well,” Workman said, cautioning it may be a while before the services balance gets back in surplus (as it was pre-Covid).

A number of bank economists concluded the figures showed New Zealanders were continuing to live beyond their means following the Government and Reserve Bank providing the economy with a lot of support in 2020 and 2021.

“There are limited avenues for boosting our export earnings from here, so bringing the current account deficit back to levels that are more sustainable over the long term will require a reduction in our spending on imports,” Westpac senior economist Michael Gordon concluded.

While the current account deficit wasn’t as deep in the year to March as some economists expected, the New Zealand dollar hardly moved in response to the data release.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.