Imbalances in New Zealand’s external accounts are a key credit risk for the country, S&P Global Ratings said after the release of balance of payments data.
The agency also said a combination of higher fiscal and current account deficits, if they were to eventuate, could lead to downward pressure on New Zealand’s AA Plus foreign-currency credit rating.
The country’s balance of payments current account deficit widened to $29.7 billion - 7.9 per cent of GDP - in the September year, according to Stats NZ. This was $13.3b wider than in the September 2021 year.
The largest annual current account deficit prior to Covid was $14.7b (7.8 per cent of GDP) in the December 2008 year, during the global financial crisis.
S&P, in comments supplied to the Herald, said the historically large current account deficit was tracking at least one percentage point of GDP higher than the agency had previously anticipated.
However, S&P, and some economists, say the large current account deficit is partly due to temporary factors that will naturally unwind.
“For instance, the closure of international borders until recently has weighed on New Zealand’s exports of tourism and education,” Martin Foo, an analyst at S&P Global Ratings, said.
“Rising import prices and strong domestic demand are also driving up the goods deficit,” he said.
“We see the current account deficit narrowing significantly over the next few years, particularly as the domestic economy slows, which will push down demand for imports.”
Any significant escalation in Government spending could also boost imports.
“A combination of higher fiscal and current account deficits, if they were to eventuate, could lead to downward pressure on New Zealand’s AA Plus foreign-currency rating,” Foo said.
In its release, Stats NZ said the widening in the annual current account deficit was mainly due to a $10.2b expansion in the goods and services deficit.
Total imports of goods and services were $104.6b, up $21.5b from the previous year - largely driven by petrol, diesel and aviation gas, and machinery equipment.
“Rising prices for some imported commodities like petrol, a falling exchange rate, and higher shipping costs all contributed to the annual increase in imports,” Stats NZ’s institutional sectors senior manager Paul Pascoe said.
Westpac NZ’s acting chief economist Michael Gordon said the current account deficit was a symptom of overheating in the domestic economy.
“We are, for now, living beyond our means - we have not adjusted our spending patterns to either the loss of export income or the cost-induced surge in our import bill,” he said.
However Gordon said he expected the deficit to narrow from here on, returning to a more sustainable level of around 3-4 per cent in 2024.
“The year ahead will be a different story. Visitor numbers should continue to pick up from here, judging by the trends in Northern Hemisphere travel,” he said.
“And more importantly, the conditions for a slowdown in domestic spending are already in place.”
Gordon said the data was broadly in line with market forecasts but now exceeds the peaks reached in the years before the Global Financial Crisis.
Separately, the Treasury - in a fiscal update - said the Government’s operating deficit was forecast to shrink further this year and expected to be close to a balance position in 2023/24, and return to surplus in 2024/25.
S&P’s Foo said the fiscal trajectory was tracking in line with the agency’s previous expectations.
“We still expect the residual cash deficit to narrow significantly by the middle of the decade, and trend towards balance,” Foo said.
“This will help to stabilise Government debt.”
The sound fiscal outlook was in stark contrast to the economic outlook.
Foo noted the Treasury is now tipping a recession in 2023.
S&P said the budget policy statement acknowledged a “fine balance” between returning Government spending to normal levels and supporting households with cost-of-living pressures.
“We agree that this will be a delicate balancing act, and one that many sovereign governments around the world are struggling with,” Foo said.
“Government ministers are currently trying to re-prioritise some spending.
“This is to create space for new initiatives and inflationary cost pressures.
“We will watch this effort closely, as there will be political demands for new spending heading into a likely general election in late 2023.”