Current account deficit hits 3.9 per cent of GDP

By BRIAN FALLOW

The gap between what New Zealand earns by trade and investment from the rest of the world and what it spends continued to widen in the March quarter, but analysts do not expect the gap to stop the kiwi dollar getting stronger in the short term.

Statistics New Zealand said the current account of the balance of payments was a deficit of $4.9 billion in the year ended March, equivalent to 3.9 per cent of gross domestic product.

That is $240 million worse than the deficit for the year to December 2002, which equated to a revised 3.7 per cent of GDP.

Economists expect the current account deficit to continue to widen to around 5 or 5.5 per cent of GDP by the end of the year, still well short of the 7 per cent level it hit in 1997.

The legacy of decades of current account deficits - which have been funded by accumulating debt, selling assets and to a much lesser extent by attracting greenfields foreign investment - is a net debt position of $101.5 billion in relation to the rest of the world. That equates to around 81 per cent of GDP.

"However, the magnitude of our net liability is nothing new and it at least looks very stable," BNZ economists said in a note on the data.

"Moreover at this stage New Zealand's current account imbalance pales by comparison to that of the United States, or Australia for that matter. Consequently we do not believe the increasing deficit will be sufficient to prevent further appreciation of the New Zealand dollar in the short term."

ANZ chief economist David Drage said the effect on the exchange rate depended on how the current account deficit was funded.

To the extent it was funded by debt, especially through the banking system, it tended to create no net demand for the New Zealand dollar because the debt was hedged against foreign exchange risk, creating an offsetting outflow.

Equity investors, by contrast, were generally taking a position on the country as well as the particular investment involved and were inclined not to hedge.

The recovery in net equity inflows, driven primarily by less New Zealand money flowing into overseas equities, had been a factor underpinning the kiwi dollar, Drage said.

But he said that the rising current account deficit, against the background of New Zealand's already large net debtor position, could increasingly limit the extent the kiwi dollar rose from here.

While that might be no bad thing, it could be accompanied by a higher country risk premium in longer-term interest rates, Drage said.

The deficit has been growing for the past year mainly because of worsening terms of trade, the quantity of imports which can be funded by a fixed quantity of exports.

That trend of import prices rising faster than export prices might be coming to an end, however, said Westpac chief economist Brendan O'Donovan, noting that the terms of trade improved 1.7 per cent in the March quarter.

In the year to March the goods balance was a surplus of $802 million. It has been shrinking since its peak of $3.7 billion 18 months ago.

In the latest quarter it was boosted by some bringing forward of livestock slaughtering because of dry conditions in some parts of the country.

By contrast the services balance (tourism, air travel, foreign students) goes from strength to strength. The $1.2 billion surplus for the March year caps a five-year rising trend.